Lulu's Fashion Lounge Holdings, Inc.

Good afternoon and welcome to Lulu's third 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 third 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, our ability to pursue alternative debt financing options, references to the fiscal year ending December 29th, 2024, including our financial outlook for the fiscal quarter and year ending December 29, 2024 as applicable, market opportunities, product launches, and other initiatives, and our growth. These forward-looking statements are subject to various risks, uncertainties, assumptions, and other important factors, which could cause our actual results, performance, or achievements to differ materially from results, performance, or achievements expressed or implied by these forward-looking 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 December 31, 2023, our quarterly report on Form 10-Q for the second quarter ended June 30, 2024, and our quarterly report on Form 10-Q for the third quarter ended September 29, 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 Lantham, 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. In Q3, we achieved record growth in our special occasion and bridesmaid dress categories, boosting overall dress sales, which returned to positive year-over-year growth in the quarter, and affirming our market leadership in event attire. Softness in our casual wear segment posed challenges, prompting us to reassess this category to better align with our core strengths in event-focused apparel, and take action on right-sizing the cost structure for these categories. Last quarter, we outlined strategic initiatives and cost reduction efforts, which remain in full force. Additionally, we are actively pursuing alternative debt financing options that provide Lulu's more flexibility than the current revolving credit facility. This is a top priority, and we will share updates as soon as we are able to do so. Net revenue was $81 million, 3% lower than the prior period, and adjusted EBITDA was a $3.6 million loss, compared to $1 million in the prior year period. This quarter, we proactively managed inventory, leveraging markdowns and promotions to optimize our inventory position for future growth, and achieved a 7% reduction in inventory balances over last year, outpacing our 3% net revenue decline. While higher markdowns affected margins due to weaker performance in our separates and shoe business, We are confident that our strategic and cost reduction efforts will leverage our strengths, address near-term liquidity needs, and set the stage for sustainable growth. As a reminder, our strategic growth initiatives include continued evolution and optimization of our data-driven merchandising model with customer data and insights to drive value to our brand fans through a 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. Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually drive better decisioning, higher customer engagement, and increased efficiencies. We are encouraged by the positive momentum from these initiatives and remain committed to leveraging our core strengths to best serve our customers and drive sustainable growth. Turning to some of the positive developments in the third quarter, our special occasion and bridesmaids business categories delivered outstanding results with net sales growing nearly 40% year over year, marking another record quarter. These strong results reaffirm Lulu's brand position as the go-to destination for attainable luxury and event apparel for all of life's occasions. Total dress sales for the quarter increased by 6% over Q3 2023, reinforcing our position in the market as a dress destination. New and novelty also continued to perform well, increasing reorder revenue for same year styles by 55% compared to last year's Q3. Our merchandising team's fresh vision is resonating with our customers. The stronger new product funnel, driven by newly introduced styles, colors, and in-season adjustments helped narrow the year-over-year decline in reorder sales from 12% in Q2 to 4% in Q3. Based on these trends, we expect that reorder sales will comp to positive by the end of the first quarter 2025, with reorders typically making up 60% to 70% of total sales. Inventory levels were well managed in the third quarter, down 7% from the prior year, and outperforming the year-over-year net revenue decline of 3%. Return rates also showed improvement in the quarter compared to last year, a positive inflection point after eight consecutive quarters of year-over-year increases in return rates, highlighting a positive impact from our updated return policy, and more importantly, improvements in fit and quality. Net revenue comps improved for the fourth quarter, with negative single-digit comps expected in the fourth quarter. Regarding our strategic brand initiatives, We launched impactful third-party brand and influencer collaborations in the third quarter, highlighting our commitment to brand building and customer engagement, which Mark will discuss in more detail shortly. The success of these partnerships and strategy is reflected in increased engagement, social traffic, media interest, and purchase intent. Interestingly, in Q3, we saw positive year-over-year reacquisition of lapsed customers across all full price and markdown segments. an early but clear sign our brand initiatives are gaining traction. Finally, in the third quarter, we expanded our wholesale business by strengthening partnerships with several major retailers. In Q3, wholesale gross revenue increased 28% compared to Q3 last year. Notably, in September, we announced a strategic collaboration with Dillard's, one of the nation's largest fashion retailers, to bring Lulu's latest special occasion and event collections to more than 30 Dillard stores nationwide. This partnership strengthens our presence in key markets, reaching new audiences, and showcasing our product quality in person, strategically timed with key shopping moments like homecoming and the holiday season. We anticipate strong wholesale growth continuing through year end and into 2025. Turning to the less favorable aspects about the quarter, our separates and shoe business remains challenged, driving the majority of the year-over-year declines in net sales. While shoes improved sequentially in Q3, demand was impacted by underperforming summer styles and seasonal programs turning on late for fall. In response, we are re-evaluating our strategy to better align with our strengths in special occasion and event wear by shifting our assortment towards dressier separates and shoes, options for date nights, social events, vacations, and workwear, key areas where our customers already seek us out for. We have strong conviction that leaning towards a more focused, curated assortment centered on our dressier aesthetic that we are already loved for will meaningfully improve the customer's shopping journey. To that end, as part of our merchandising optimization initiatives, we are reducing and refining SKU count to improve profitability through lower product onboarding costs. We're excited to implement this refined vision going forward and are confident our strong position in occasion wear will drive demand and support bottom line expansion in both shoes and separates. Growth margin decreased 220 basis points in the third quarter versus prior year due to higher markdown sales resulting from our efforts to reset inventory in underperforming categories and accelerate a reset in our product assortment vision in shoes and separates. Damages are up compared to Q3 2023 due to abusive customer behavior also contributing to the gross margin compression during the quarter. Profitability was also pressured due to the higher markdowns in the quarter to maintain our healthy inventory position combined with deleveraging fixed costs on a smaller net revenue base. As we discussed last quarter, we implemented cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth. In the third quarter, the following actions were taken. As part of our commitment to a 10% to 15% reduction in operating expenses for the second half of 2024, we undertook a reduction in headcount and implemented executive and management pay cuts, which reduced our fixed payroll costs to better align with our slower than anticipated sales recovery. We further reduced costs by renegotiating or canceling select vendor contracts and service agreements. And lastly, we made targeted reductions in our top of funnel marketing spend. Additionally, we reduced the size of our board from 11 to 6 members to further reduce costs and enable more agile decision-making to support an accelerated turnaround. We further reduced our capital expenditure expectations for the year from $3.5 million to $3.2 million. We began realizing savings from these actions in the third quarter, which will continue through year-end and into early 2025, and we will continue to execute on other cost-saving initiatives in Q4 into 2025 to streamline operations and optimize the business for a return to profitability. We believe these measures will allow us to achieve our growth and profitability goals more efficiently while still maintaining a robust operating model that supports our strategic objectives, generates positive cash flow, protects the brand, and paves the way for long-term sustainable growth. Our path forward is clear, Prudently manage liquidity in Q4, the smallest quarter of our year, through disciplined inventory and expense control. For 2025, we're prioritizing our strength in dresses and event wear to attract more new customers, re-engage existing brand fans, and drive sales. By taking the same approach to separates as we do with our event wear and optimizing costs, we are positioning the company for near-term profitability and long-term growth. As we approach year-end, we have confidence in our business improvements and ability to return to growth. 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?