Lulu's Fashion Lounge Holdings, Inc.

Good afternoon and welcome to Lulu's first quarter 2025 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.

Naomi Beckman- Good afternoon, everyone, and thank you for joining us to discuss Lulu's first quarter fiscal 2025 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 positive adjusted EBITDA in the coming quarter, 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, buying strategies, product launches, view management, the use of AI for enhancing product discovery and personalized shopping, 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. and our quarterly report on Form 10-Q for the fiscal quarter ended March 30, 2025, 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 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 the description 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 gross margin, average order value, and total orders placed. The description of these metrics can also be found in this afternoon's press release and in our SEC filings. Joining with 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 the first quarter, we saw steady monthly improvement in our year-over-year net revenue comparisons and sales momentum remained strong in occasion dresses, particularly in our bridesmaid category. At the same time, performance in our casual wear and footwear remained under pressure. Efforts to reposition these categories to better align with our strengths and event-focused apparel are underway, with more curated collections and casual and separates launching this quarter. We entered the year with a clear focus on strengthening our financial foundation, and in the first quarter we exceeded our expectations for both cash flow and net debt reduction. These improvements to our balance sheet, combined with our streamlined cost structure, positioned us well for the year, allowing us to continue key brand investments, growing our wholesale presence, and product margin optimization. Operationally, our strategic priorities remain in focus. which aim to drive cost efficiency, optimize our business, and broaden our customer base. Mark will talk through our Q1 progress against these efforts shortly. Before that, I'll highlight our key positive developments in the first quarter. Our special occasion and bridesmaids categories continued their positive momentum in the first quarter, driving healthy year-over-year net sales growth and contributing to another strong quarter for these categories, reaffirming that Lulu's is a go-to dress destination. First time reorders of new products saw sequential and year over year growth, indicating that our reorder funnel continues to work with our refined strategy and new product investments driving demand. Inventory management remained in focus during the quarter, resulting in a 4% year over year inventory reduction through measured markdowns and promotions to maintain these healthy levels of inventory. Product margins increased sequentially for the second consecutive quarter and also increased 100 basis points versus the prior year period. Gross margin also saw a sequential increase to 40.3% in Q1 2025 versus 37.9% in Q4 2024, resulting in $900,000 gross margin growth quarter over quarter. Return rates improved by 170 basis points, our third consecutive quarter of improvement after eight quarters of year-over-year increases, giving us continued confidence that our improvements in fit and quality are paying off. On the brand front, we executed a number of successful campaigns, partnerships, and activations in the first quarter that drove measurable improvements in customer engagement and brand awareness. In addition to the We Are Lulu's brand campaign that we highlighted on our last call, We hit a new record for influencer collaborations driving significant traffic, reach, and discovery, hosted our first-ever prom event, and delivered unique content tied to seasonal moments, all resulting in our highest brand equity score to date, which we are on pace to beat in Q2. In wholesale, Q1 revenue had triple-digit year-over-year growth driven by continued growth among major partners and strong momentum in specialty retail. 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 continued wholesale growth throughout 2025. Now shifting to a few of our challenges during the quarter. Our shoes and separates businesses continue to be a drag on overall results, accounting for most of the year-over-year decline in net sales. In response, we've taken deliberate steps over the last several quarters to refine our merchandise strategy, which is well underway, moving away from broader casual offerings and instead leaning into our brand's core identity and occasion wear. By narrowing our assortment and reducing skew complexity, we aim to deliver a more cohesive and elevated experience that improves brand alignment and supports profitability. To that end, and as I alluded to earlier, starting in the second quarter, we are launching a more curated casual and separate collections, which reflect the actions we've taken to streamline our assortments in these categories. In shoes, we are closely reviewing our sourcing and merchandising strategies to address the continued soft sales we see in this category. Profitability also remained pressured during the quarter related to the timing of consolidation of our California distribution centers and related one-time costs in January and February as expected, However, we saw a marked improvement in March, supporting our expectations for a return to positive adjusted EBITDA in the second quarter this year. Turning to our cost reduction initiatives, as a reminder, in the second half of 2024, we implemented targeted cost reduction measures alongside our strategic initiatives in an effort to improve profitability and position the company for sustainable growth. With the implementation of these cost initiatives now behind us, following the completion of our consolidation of our West Coast distribution centers in Q1, we are seeing the benefits in our operating expenses. OPEX declined 12% year over year in the first quarter, in spite of the non-recurring DC consolidation costs, with fixed costs down 16%. We expect this improvement will continue, reflecting ongoing efficiencies, while also strengthening profitability and supporting our operating model performance. In light of the uncertain and highly dynamic macroeconomic environment and potential for unstable consumer sentiment and demand as a result of current international trade policies and related tariffs, we are taking additional steps to rationalize our cost structure, doubling down on our efforts to support cash generation and bolster our balance sheet. On the product side, a key focus area is SKU management. We continue to be focused on shifting our buying strategy back towards deeper buys on a narrower, more curated SKU set, supported by data insights, which we believe will allow us to buy more efficiently, leading to improved margins, reduced excess inventory, and cost savings. With the recent escalation of international trade disputes and tariffs imposed by the US and other governments, we are thoughtfully accelerating our efforts around direct sourcing, evaluating our geographic mix, and taking other proactive mitigating actions. As a reminder, most of our buys for the first half of the year have already been finalized, which largely insulates us from tariff exposure through Q2. China remains a key sourcing market for us today, and we continue to have conviction in our direct sourcing strategy in that market for a subset of our assortment. Direct sourcing presents significant upside given less than 5% of our sales come from products sourced directly from factories today. We expect our percent of sales from directly sourced products to double by Q4 of 2025 and continue to grow in 2026. That said, we are simultaneously working to reduce our reliance on China and other areas of our supply chain and are actively evaluating our sourcing plans to diversify our supply base. Despite the recent pause on U.S.-China reciprocal tariffs, we maintain our conviction around our supply chain diversification and direct sourcing strategies, which better position our business for the long term. We are also taking a proactive approach managing any incremental tariff effects, as we have successfully done in the past, through a combination of vendor collaboration, strategic pricing, and assortment optimization. Our team remains focused and agile, monitoring developments closely, and executing on mitigation strategies that balance cost efficiency and customer value. In summary, we believe we are well positioned to navigate the current landscape, all while keeping our long-term growth strategy firmly in view. Despite these macro headwinds, we remain firmly committed to maintaining positive cash flow, protecting brand integrity, and investing in our long-term objectives to support our return to 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?