Lulu's Fashion Lounge Holdings, Inc.

Ladies and gentlemen, good afternoon and welcome to Lulu's first quarter 2024 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 did 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 first quarter 2024 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 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 31st, 2023, and our quarterly report on Form 10-Q for the first quarter ended March 31st, 2024, 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 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 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. Jumping into results from the first quarter, net revenue was 77.3 million, a 15% decline from Q1 of last year, attributed to top line pressure and ongoing elevated return rates. Initial momentum with our new and novelty products remains promising, and we've seen sequential improvement in many of our reorder categories as well, both of which contributed to a 250 basis point sequential net revenue comp improvement from the fourth quarter. This positive trend supports our reorder pipeline conviction, contributing to positive sales comparisons and favorable margin performance in several of our high volume categories. Consistent with recent trends, event dresses continue to drive sales with positive year-over-year comps in both categories. Gross margins saw a 60 basis point improvement year-over-year propelled by lower markdown sales and a shift towards higher margin product classes. Notably, markdown sales have decreased by more than 20% year-to-date, attributed to our healthy inventory position and normalization of inventory turns. Our new and first-time reorder product continues to stimulate demand, presenting an opportunity for us to further increase the depth of our buys and optimize our ability to capitalize on upside demand. We experience top-line challenges stemming from customer demand outpacing the depth of our buys, resulting in more frequent stock-outs and size incompleteness. We are proactively working to mitigate these issues supported by technology platform investments around pre-sale orders to capture customer demand and mitigate the negative impact of product stock outs. With the rollout of this technology at the beginning of the year, we expect to see more meaningful improvements by June and beyond. Adjusted EBITDA of a 2.7 million loss was closely in line with expectations despite revenue coming in slightly below our projections. and was mostly impacted by the lower top line and mitigated by modest adjustments in operating expenses. Inventory levels decreased by 20% to $41.3 million for Q1 2024, which exceeded our net revenue decline year over year, reflecting the agility of our data-driven buying model and enduring relevance of our core reorder products. We are strategically positioned within our current inventory levels and have resumed chase mode for several of our product categories. Additionally, we continue to generate liquidity and maintain our strong balance sheet, supporting our ongoing strategic initiatives that will catalyze our return to growth. We reduced our revolver by $2 million during the quarter, while our cash balance increased by $3 million. Free cash flow was $6 million in the period, an improvement of $3.4 million over Q1 2023. We started this year with clear targets in mind, including Continued refinement of our assortment to align with evolving customer preferences, expanding both depth and breadth to approach pre-pandemic levels. Focus on product margin expansion and better leveraging our supply chain and differentiated buying model to further expand merchandise margins. Expansion of brand awareness through a more diversified marketing approach to strengthen our relationship with our customers and ensure we are top of mind for her year-round fashion needs. Investment in technology and advancement of our existing AI tools to support future growth and expansion into new and better ways to connect with our customers both online and in real life. Maintaining a cash flow positive year while still investing in strategic priorities that support future growth. Starting with our continued product assortment optimization and margin expansion efforts. As we touched on last quarter, we are diligently adapting to more meaningful trend changes while maintaining the enduring quality that defines our brand. We're excited about the tangible value our new product and merchandising team members are bringing and will continue to bring in the near term and long term based on the early progress we've already seen. We continue to test and adjust pricing strategies in an effort to broaden our customer reach and better address the top and bottom ends of our socioeconomic spectrum. To that end, we have begun to expand our product offering across a broader range of price points, spanning from entry level to more aspirational and our more mature product categories. These calculated adjustments continue to contribute to our year-over-year gross margin expansion, and we believe will result in meaningful future benefits and customer file expansion. We also took steps in Q1 to further diversify our product sourcing network to mitigate risks stemming from geopolitical and external uncertainties and to strengthen the resilience of our supply chain. While still early, we are encouraged by the quality, margin, and speed of our new vendor partners are able to bring us while decreasing our exposure to China over time. In an effort to temper elevated return rates, we rolled out several initiatives including website optimization and return policy changes to drive a more holistic approach to our customer shopping journey while also driving more profitable outcomes, which Mark will go into in more depth. Turning to our next priority, we are making investments in brand initiatives and activations that support customer acquisition and retention, as well as reinforcing brand differentiation. As we noted on our last call, in the latter half of January, we opened our first ever bridal boutique within the Melrose Lulu's location. The opening event was a huge success, eliciting positive customer sentiment and engagement online and noticeably higher foot traffic, creating a palpable buzz around the store. We are excited about the brand activations we have planned in 2024 to further leverage our space on Melrose and drive brand engagement in support of our e-commerce strategy. Beginning in Q4 and throughout the first quarter, we have been increasing the number of influencers and creators we partner with, while also launching our first of many influencer edits of 2024, which have garnered exceptional traction and successfully drove customer engagement in Q1. On the wholesale front, we continue to host active discussions with several wholesale partners to introduce our brand to new audiences across various omnichannel settings, with in-store wholesale partnerships expected to continue to grow in the second half of this year. Most recently, in early Q2, we launched our first major multi-channel brand campaign, ushering in a new era for the Lulu's brand with out-of-home advertising, creative social and influencer activations, and experiential marketing across LA, New York, Chicago, Nashville, and beyond. The launch is an opportunity to further differentiate Lulu's from competitors and underscores our unique role as a brand that's there through all of life's moments. Through the campaign, we expect to build excitement and loyalty among existing customers, while also bringing in new customers that we can grow with over time. We believe our test and learn approach and data driven culture allows us to quickly gauge the impact of new marketing channels, enabling us to optimize spending and strategically allocate resources in our long term marketing mix based on our learnings. Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels. In the first quarter, we rolled out a complete restyling of our website with various enhancements around product assortment and discovery that has driven positive engagement. We began testing several platforms to enhance our predictive capabilities and responsiveness to changes in demand which we believe will help refine our buying model and strengthen our ability to navigate future fluctuations in consumer buying patterns more effectively. In the first week of Q2, we simplified our return policy, which now includes a restocking fee to encourage purchasing behavior with intent to keep the product and support better unit economics and profitability. Lastly, we are maintaining a cash flow positive year while preserving our commitment to growth. We are doubling down on our focus on profitable orders and gross margin expansion, prioritizing sustainable growth over short-term gains, including parting ways with excessive returning and unprofitable customers. Our dedication to long-term growth stems from the continued optimization of our buying model. We're enhancing initial buy depths to accelerate the reorder funnel, embracing newness and novelty further without sacrificing the benefits of our established reorder strategies, while mitigating inventory risk in an increasingly dynamic consumer landscape. Our cash flow generative model will allow us to invest in our future growth, as well as opportunistically repurchase Lulu stock. As some of you may have already seen, our board recently authorized a stock repurchase program of up to 2.5 million of Lulu's common stock. Tiffany will provide further insights on this matter in her remarks. We consider our common stock to be an attractive investment, and this demonstrates our confidence in the business. As we work towards becoming one of the most beloved women's brands for attainable luxury fashion, I'm optimistic about the advancements we've made in Q1 and the continued momentum we are seeing in the second quarter. We are passionate about supporting our customers through all of life's moments and remain focused on driving these initiatives forward and continuing to strategically invest in our brand. We believe the steps we are taking now will position us for strong growth and profitability which will be further accelerated once consumer and inflationary headwinds ease. With that, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. He will share some updates on our progress against 2024 priorities. Mark?