Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to the Lulu second 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'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 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, our ability to realize the intended impact of cost reduction measures, references to the fiscal year ending December 29, 2024, including our financial outlook for 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, and our quarterly report on Form 10-Q for the second quarter ended June 30, 2024, filed with the SEC this afternoon, all of which can be found on our website at investors.luluz.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 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, 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. Our second quarter results were in line with the expectations laid out in our preliminary results with net revenue of $92 million, 13% lower than the prior year period, and adjusted EBITDA of $0.2 million losses, $4.4 million below the prior year period. First quarter headwinds, including declines in markdown sales and higher return rates due to strong sales and high margin occasion wear, combined with slower adoption of our new return policy contributed to the softer than expected results for the quarter. Despite progress on margin goals and reduced operating expenses, profitability was limited by fixed costs against lower than expected net revenue base. As with many direct-to-consumer companies, we are navigating a range of external challenges, putting pressure on top-line and bottom-line results. However, we view these obstacles as temporary and are tightly managing expenses to withstand the short-term headwinds. To that end, we remain committed to our long-term growth initiatives, which reinforce our competitive strengths and that will enable us to endure near-term volatility and position us for sustainable growth. These include continued evolution and optimization of our data-driven merchandising model, with customer data and insights to drive value to our brand fans through our robust reorder algorithm and an improved and evolving assortment. amplifying our unique brand DNA and community-focused culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement, and delivering excellent customer service to drive increased word-of-mouth introductions. By capitalizing on these strengths, we're confident that we can reach a broad base of potential customers and steadily increase our market share over time. Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually drive better decisioning, higher engagements, and increased efficiencies. We are confident in our competitive strengths and are encouraged by the steady improvements these focused initiatives have yielded across our core competencies. So with that, I'd like to highlight some of the positive outcomes from the quarter. Our special occasion and bridesmaids net sales grew by over 30% year-over-year and surpassed our pre-pandemic peak, marking a record quarter for these product categories and reinforcing Lulu's brand position as the go-to destination for all of life's moments. Gross margin improved in the second quarter with an 80 basis point expansion year-over-year due to lower markdown sales and a shift toward higher margin product classes. Markdown sales decreased by approximately 30% compared to the prior year, thanks to our healthier inventory position. Inventory levels declined by 19% from Q2 2023, driven by further tightening of our weeks of supply in our reorder business, surpassing the year-over-year net revenue decline, and showcasing the agility of our data-driven buying model. Additionally, inventory mix across new, novelty, and reorder products continues to improve, driving further confidence in the future reorder funnel. Our new return policy boosted restocking fee revenue and led to an improvement in customer return behavior towards the end of the quarter, even as we extended exceptions to the previous policy, which resulted in some top line pressure. We are seeing continued progress on our net revenue comps, which improved sequentially in the quarter, with early third quarter sales showing a continuation of positive trends, suggesting improving traction within our strategic initiatives. Our third-party brand and influencer collaborations this quarter have proven highly effective, driving increased media interest, social traffic, and purchase intent. Notable partnerships with Levi's, Vans, and the D'Amelio sisters have not only strengthened our brand equity, but also catalyzed prospective partnership opportunities. In Q2, we renewed our strategy on third-party partnerships, recognizing their value and enhancing product visibility and desirability for both new and existing customers. We believe returning to pre-pandemic third-party merchandise allocations enhances our offerings, lowers the entry barrier for new customers, and creates significant growth opportunities for synergistic brand partnerships. We also saw continued strong demand for new and novelty products supporting our reorder pipeline and driving positive sales and favorable margins performance in key high volume categories. As discussed in prior quarters, we are actively adapting to significant trend shifts while upholding the enduring quality that defines our brand. We anticipate sustained momentum with third quarter receipts reflecting our merchandising team's fresh vision. I'm excited about the tangible value our new products and merchandising efforts are generating. Finally, our wholesale business is progressing steadily, highlighted by the introduction of more cohesive collections and new developments based on our best-selling items, streamlined fulfillment processes, and reinvigorated partnership with a long-standing major in the second half. Looking ahead to Q3 and Q4, we are working toward further expanding partnerships, enhancing IMUs for both Lulu's and our wholesale partners, further optimizing our product strategy, and offering in-season and chase opportunities, which will drive meaningful wholesale growth in the back half of the year. We remain focused on growth with our department store partners and have open distribution with three new major retailers. Turning to the less favorable aspects about the quarter. Our casual business was disproportionately challenged during the quarter, driving the majority of the year-over-year declines in net sales. Returns continued to pressure results, driven partially by mixed shifts into higher return rate products, a higher concentration of full price sales, and consumer behavior favoring larger orders to accommodate bringing the dressing room home. That said, we are encouraged by the downward trend in return rates across most product classes towards the end of the quarter. Profitability was pressured due to higher fixed costs on a lower than anticipated net revenue base. Due to these softer results and continued macroeconomic pressures and uncertainty, we are swiftly implementing cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth. These cost reductions will include the following. An approximate 10 to 15% reduction in operating expenses for the second half of 2024 compared to the first half, including a reduction in fixed payroll costs coming from reduced headcount, and pay cuts to the executive and management team, as well as tightening a fixed and variable cost to better align with the anticipated slower sales recovery. Capital expenditure estimates for the year are expected to decrease by one and a half to two and a half million, and we are now projecting approximately 3.5 million in CapEx for the fiscal year. We anticipate realizing savings from these actions in the third and fourth quarter of 2024, extending through 2025. We believe these actions will allow us to achieve our growth and profitability goals more efficiently while still maintaining a strong operating model that can meet our strategic objectives, deliver positive cash flow, and ultimately provide a runway for long-term sustainable growth. We continue to make progress against our 2024 strategic initiatives of product assortment and supply chain optimization, brand awareness efforts, investments in technology, and remaining cash flow positive. As we enter into the second half of the year, I'm confident that our cost reductions alongside our strategic initiatives and brand awareness and customer engagement will drive long-term sustainable growth, expand profitability, and enhance our customer base over time. That said, with a slower than expected recovery amidst persistent macroeconomic pressures weighing on consumer demand, we are withdrawing our full-year net revenue and adjusted EBITDA outlook and providing quarterly guidance as we assess the immediate impacts of our cost-saving measures and other initiatives. We remain optimistic about our sales recovery and business turnaround and are encouraged by improving month-to-month trends in our business. 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 progress against 2024 priorities. Mark?