Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's fourth quarter and fiscal year 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 fourth quarter and fiscal year 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, Opportunities for growth and a return to profitability in the coming quarters. The long-term growth trajectory of our business. Our expectations around the continued impact of the macroeconomic environment, including as a result of the imposition of tariffs, 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 28, 2025, including our financial outlook for fiscal year 2025, market opportunities, product launches, and other initiatives. 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 our filings with the SEC, including our annual report on Form 10-K for the fiscal year ended December 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 are 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 descriptions, limitations, and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. We also use certain key operating metrics, including growth margin, average order value, and total orders placed. The description of these metrics 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. In a year defined by challenging consumer backdrop and rapidly evolving macro environment, we made meaningful progress identifying underperforming areas of the business and executing strategic realignments to position Lulu's for long-term success. In 2024, we sharpened our focus on our core strengths, our unique position as a premier destination for occasion dresses, while optimizing our cost structure to align with our current business needs. Simultaneously, we refocused our commitment to three initiatives designed to enhance brand strength, elevate market positioning, and drive sustainable, profitable growth. As a reminder, these initiatives include continued product assortment optimization to support margin expansion, continued investment in brand initiatives to fortify customer engagement and brand differentiation, and investments in our proprietary stack and analytics programs to drive technology enablement, including improved decisioning, efficiencies, and customer experience. Throughout the year, we made measurable progress against these strategic initiatives, paving the way for us to accelerate momentum in the years ahead and as the macro and consumer backdrop begins to stabilize. Sitting where we are today, with our cost rationalization and reduction measures nearly complete and behind us, we are focused on continuing to drive these key initiatives into 2025. We expect our vision for a more curated and focused assortment to positively impact our separates and shoe categories in the coming quarters. We believe our wholesale channel is gaining momentum, supported by targeted expansions and strong brand partnerships that are driving increased visibility and reach. At the same time, We expect continued investments in our tech stack and AI capabilities to fuel operational optimization and deeper personalization, enhancing the customer experience, improving retention, and supporting long-term profitable growth. Importantly, we remain disciplined in our approach to financial management, prioritizing a planned refinancing of our revolver into a more flexible ABL, supporting our commitment to improving liquidity, driving sustainable profitability, and generating positive cash flow. While we continue to see macro uncertainty in 2025, we are working diligently to best position our business for success in the years ahead. As it relates to tariffs, we do expect tariff impact on the business in 2025. Our full-year guidance contemplates the known tariffs as well as our proactive mitigation efforts. While we've taken steps to decrease our exposure to China over the last year, China continues to be one of our primary sourcing locations today. Importantly, our buys for the first half of the year are generally locked in from a pricing perspective, alleviating tariff exposure through mid-June. In the second half of the year, we plan to have a larger portion of our receipts directly sourced from factories across multiple geographies, which is intended to mitigate tariff pressures as they are outlined today. We are actively working to accelerate our direct sourcing efforts through year end and into 2026, which we expect will continue to support margin expansion over the long term, given less than 5% of our sales are currently driven from products sourced directly from factories. In addition to these efforts, we are closely managing the incremental impact of tariffs, as we've done successfully in the past, by sharing the impact across vendors, customers, and our own margins. We continue to closely monitor the evolving situation, and our teams remained highly focused on executing our mitigation efforts of calculated sourcing, pricing adjustments, and leaning on our strong vendor partnerships. In summary, we believe we are positioned to navigate these challenges while maintaining flexibility, and our focus remains on executing with discipline and driving long-term growth. Shifting now to our performance in the fourth quarter, We continue to deliver positive double-digit sales growth in our special occasion, bridesmaids, and bridal categories, reinforcing our leadership in event dressing, even amid a seasonally softer sales period. However, these gains are offset by continued softness in our casual wear segment, which we are actively repositioning to better align with our core focus on event attire. We continue to make strong progress against our strategic initiatives and have implemented the majority of our cost reduction efforts, including the successful consolidation of our West Coast distribution facilities in late February 2025. Additionally, securing alternative debt financing remains a top priority. I'll start by sharing some of our key positive developments in the fourth quarter. Our special occasion and bridesmaids categories continue to deliver excellent performance in Q4, delivering positive mid-teens year-over-year net sales growth and contributing to another standout quarter for these categories. Seasonal demand remained strong, particularly winter and holiday assortments, reinforcing Lulu's position in the market as a go-to dress destination. Growth was further fueled by first-time reorders of new products, increasing 24% versus last year's Q4, showing positive momentum in our reorder funnel. Purposeful color additions, style introductions, and in-season adjustments helped to narrow the year-over-year decline in reorder sales in 2024 from 12% in Q2 to 4% in Q3 and 4% in Q4. We maintained a disciplined inventory management in the fourth quarter, reducing inventory by 4% year-over-year through calculated markdowns and promotions to maintain healthy levels of inventory. Return rates improved for the second consecutive quarter after eight quarters of year-over-year increases, with an improvement of 150 basis points, highlighting the material improvements we have made in fit and quality. On the brand front, we launched several successful campaigns and collaborations in the fourth quarter, driving higher reach, engagement, and media interest, which Mark will share more details around shortly. Earlier this month, we launched a new brand campaign, We Are Lulu's, to further solidify our position as a go-to dress destination and deepen brand affinity, engagement, and loyalty. In wholesale, we made meaningful progress with key retailers while expanding into new collaborations. Q4 wholesale revenue grew 76% year over year, driven by high double-digit gains among major partners and strong momentum in specialty retail. Notably, this February, we announced our new partnerships with Nuuly, Poshmark, and Van Mar. We also deepened our presence with Dillard and Nordstrom's while expanding third-party brand collaborations with Hunter, Reebok, and Dingo 1969, to name a few. These growing partnerships reflect our focus on reaching customers across diverse shopping channels while maintaining an efficient, scalable growth model. Given our strong momentum, we expect robust wholesale growth to continue through 2025. Now addressing the challenges in Q4. Our separates and shoe categories continue to weigh on performance, driving the majority of the year-over-year net sales declines. As outlined last quarter, we have re-evaluated our assortment strategy to better align with our core strength in occasion wear, shifting our separates and footwear assortment towards dressier options more focused around date nights, social events, vacations, and workwear, key occasions that our customers already engage with us. This strategic realignment is underway, and we are optimistic that a more curated assortment and reduced SKU count will enhance the customer experience while also improving profitability. Our teams are executing on a refined vision of a dressier aesthetic, with these changes expected to take place over the next few quarters. Gross margin declined 120 basis points for the quarter and 50 basis points for the full year compared to the prior year periods. impacted by higher markdown sales and increased promotional activity to maintain inventory health in response to softer-than-anticipated sales leading up to and following the election cycle. Additionally, profitability remained under pressure due to elevated markdown activity aimed at maintaining a healthy inventory position, the deleveraging of fixed costs on a smaller net revenue base, and the initial one-time costs related to the consolidation of our Northern California Distribution Center with associated impacts expected to continue through part of Q1 2025. In the second half of 2024, we implemented targeted cost reduction measures alongside our high impact initiatives with the goal to improve profitability and position the company for sustainable growth. In Q4, we began realizing the benefits of Q3 cost reductions related to payroll, capital expenditures, and a smaller board of directors, aligning our cost structure more closely with sales. Notably, we outperformed our expectations of 10% to 15% operating expense reductions, achieving 19% in reductions in the second half of 2024 compared to the first half of 2024. We believe these collective measures will drive ongoing efficiencies, strengthen profitability, and support long-term objectives, all while maintaining a robust operating model that fuels our priorities, generates positive cash flow, protects brand integrity, and paves the way for long-term sustainable growth. With that, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. Mark will provide updates around progress we are seeing against strategic priorities. Mark?