Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's fourth quarter and fiscal year 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 fourth quarter and fiscal year 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 on our business of the macroeconomic environment, consumer demand, and return rates. Our future expectations regarding financial results. References to the fiscal year ending December 29, 2024, including our financial outlook for full year 2024. 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 December 31, 2023. filed with the SEC this afternoon, 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 Lansom, our CFO, Tiffany Smith, and our 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 Crystal.

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Looking back at 2023, I'm proud of the strides we made to adjust our business quickly to a highly dynamic consumer and macroeconomic landscape. initiatives we have implemented in recent quarters and the early progress we've made against them to reinforce our position as one of the most beloved women's brands for attainable luxury fashion through curated exclusive products superior customer service and a personalized shopping experience supporting our customers through all of life's moments in 2023 our primary focus was on the following rebalancing inventory assortment between newness novelty and core reorder products improving internal processes through optimization and automation, leading to reduced operational expenses, establishing a foundation for accelerating brand awareness through new marketing initiatives and product distribution channels, and maintaining a cash flow positive year while not sacrificing on investments in strategic initiatives that support future growth, combined with revolver balance reductions to further position the company for success. We believe we've executed well on all of our key focus areas in 2023, positioning us for strong growth and profitability once inflationary pressures abate and consumer spending normalizes. Our strategy has been and continues to be focused on customers who seek out quality over quantity and enduring styles that last beyond a moment in time, allowing us to optimize inventory without the same obsolescence risk that other retailers face. Additionally, Traction with broader price ranges, including higher-priced items in our legacy categories throughout Q4, reinforced this, as reflected in our Q4 gross margin expansion of 180 basis points, combined with an 18% year-over-year reduction of inventory balances. As a business focused on enduring quality versus relying on predicting trends, it can take a few quarters to adapt to more meaningful trend changes. As a result, while we expect to continue rebuilding our assortment in 2024, we believe we will benefit from early assortment updates during the year. We have already seen encouraging sequential upward revenue momentum building at the end of 2023 with further improvements into the first two months of 2024. I'll now briefly touch on our fourth quarter results before discussing the full year in more detail, followed by our 2024 priorities. As our business is not driven by seasonal gifting, Q4 results were consistent with seasonal trends for Lulu's, which is typically our smallest quarter in terms of both sales and profits. Our special occasion segment continued to be a steadfast driver of sales, constituting a large component of our diversified product mix. We saw positive performance in our new and reorder dresses with notable success in special fabrications and new holiday silhouettes. Occasion dresses have continued to outperform other categories with particularly strong demand for new and novelty dresses and is historically a leading indicator of future growth momentum. With shoppers craving more out-of-home experiences, the December opening of our first retail location in decades is a start towards bridging the gap between URL and IRL. Our Melrose Avenue location in Los Angeles underscores our presence among premium retailers and helps position us as a quality-first, attainable luxury brand. To that end, In the latter half of January, we opened our first-ever bridal boutique within the Lulu's on Melrose location, rounding out a full end-to-end shopping experience. Positive customer response to the bridal store launch instills confidence in the brand activation potential for 2024. Furthermore, Lulu's on Melrose has affirmed the opportunity for new customer engagement and marketing strategies with potential to drive interesting new growth prospects. We will continue to take a disciplined and calculated approach to physical retail, applying our test, learn, and optimize philosophy to the Lulu's on Melrose store to seamlessly integrate our D to C e-comm customer experience across all sales channels and optimize how we apply our industry leading inventory turns in a physical space. The Melrose store opening has also been a great catalyst for momentum and our potential wholesale partnership opportunities. Major retailers, both international as well as domestic, have proactively expressed interest in carrying Lulu's products in-store and online. We expect interest to lead to long-term growth opportunities, brand awareness, and broader customer reach via these omnichannel opportunities. Next are a few of the areas where we saw positive momentum throughout 2023. We saw strong customer demand for our new and novelty products, resulting in positive double digit year over year growth in our post-return second half merchandise sales for new products, a leading indicator for our future reorder product funnel. As a reminder, our reorder products have consistently contributed over 70% of our net revenue in recent years. We're actively rebalancing our product offerings, new and reorder alike, to restore revenue allocation across new and reorder to pre-pandemic levels and align with evolving, yet enduring customer trend changes. Year-end inventory balance was down 18% over year-end fiscal 2022, down 7.7 million, underscoring the agility of our data-driven business model and enduring quality of our reorder products. We believe our five times inventory turns for the year continue to be industry-leading, reflecting how our strategic and informed approach to product selection is aligned with market demand. As we enter 2024, Our overall inventory position is notably healthier and back into chase mode for several of our dress product categories. Continued investments in process automation and robotics contributed to a 15% decrease in variable payroll expenses on a volume-adjusted basis compared to fiscal 22. Our business continued to generate liquidity and our balance sheet remained strong, enabling us to maintain our investments in strategic initiatives and positioning us for a return to growth. Free cash flow for the year was $11.5 million, an improvement of $10.3 million over fiscal 22. We successfully implemented technology to better scale both international and wholesale growth, as well as opened our first physical retail store to serve as a testing ground for potential future retail opportunities. The progress we've made on our initiatives over the fourth quarter and full year, supported by the strategic addition of talent to our team, are starting to show positive signs as we enter 2024. 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. A few things worth noting on trends we saw in 2023 and into the first quarter. New product introductions continue to perform well supporting our strategy to increase newness and novelty penetration back to pre-pandemic levels in preparation for retiring aging reorder products sooner and beginning to capitalize on the changing fashion cycles within our customers' closets. We are concurrently focused on diversifying product assortment and conversion in our smaller and more under-penetrated categories. With this in mind, in January, we welcomed industry veteran Lauren Dede as our new Chief Merchandising Officer And under her stewardship, we anticipate enhanced performance across all product categories and an acceleration of rebuilding newness in our reorder product funnel. On the wholesale partnership front, we're continuing to lay the groundwork for these relationships as a way to deepen our connections with existing customers and introduce our brand to new audiences in an omnichannel setting, ultimately enhancing our online presence. We are being opportunistic about brand enhancing wholesale partnerships to profitably boost awareness and in-person product experiences while also leveraging existing infrastructure to maximize cost efficiency and build synergy between digital and physical channels. Wholesale partnerships are typically on a longer lead time calendar and booking much further out in the year than Lulu's e-commerce buying calendar. We believe that much of the progress we've made so far will positively impact future quarters into 2024 and beyond. We look forward to sharing more on our progress throughout the year. Now turning to 2024 recent macro trends and our priorities for the year. As we position for the year ahead, a few industry trends come into focus. Firstly, for D2C brands like Lulu's, a digital presence extends beyond direct sales and also captures added benefits of improved margins and broader brand value. As a brand that has spent 25 plus years supporting women during pivotal moments in their lives, we believe Lulu's has a competitive edge over fast fashion retailers over the long term who are less loyalty driven and have more transactional relationships with customers. Secondly, the volume of engagements and special events in 2024 are increasing as is the average cost of weddings. Special occasion and bridal categories continue to be areas of opportunity for Lulu's. As events become more prevalent and consumers become more discerning about their spending, Lulu's has an opportunity to take market share within this environment. Lastly, there is heightened industry-wide emphasis on more effectively managing return rates, a focus that aligns with our ongoing strategic initiatives, which Mark will dive into more in his prepared remarks. In 2024, we remain focused on closely managing costs and driving efficiencies across our operations to extend our momentum. We are seeing early traction with our optimizations and new customer engagement initiatives that we believe will benefit our brand long term. This year, our primary focus will be on continued product assortment optimization, including initiatives that support margin expansion, product category diversification, geographical diversification and product sourcing, to further reduce potential impacts of external factors related to geopolitical and other uncertainties that could impact our supply chain, and return rate stabilization through product fit optimizations and financial impact mitigation tactics. Continued investments in brand initiatives and activations that support customer acquisition and retention, as well as reinforcing brand differentiation. And lastly, further technology enablement that supports customer engagement and customer experience across multiple channels. As the year progresses, we expect to stay laser-focused on adapting to the dynamic market changes, building the Lulu's brand, driving cost efficiencies to meet our near-term targets, and positioning ourselves for return to positive growth. I'm confident in our 2024 initiatives and I'm further bolstered by our talented and experienced team, which has adeptly navigated the ebbs and flow of our business for the past several years. With that, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. He will share an update on customer engagement and a deeper dive into our 2024 priorities. Mark?