Lulu's Fashion Lounge Holdings, Inc.

Good afternoon and welcome to Lula's third 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 Lula'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 fiscal third quarter 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 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, References to the fiscal year ending December 28, 2025, including our financial outlook for fourth quarter and fiscal year 2025. Market opportunities, buying strategies, product launches, SKU management, our technology enablement initiative, 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 reports on Form 10-Q for the fiscal quarters ended March 30, 2025, and June 29, 2025, 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 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 me on the call today are our CEO, Crystal Lansom, our fractional CFO, Heidi Crane, 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 third quarter results reflect the meaningful progress we are making strengthening and optimizing key areas of the business through consistent execution of our strategic priorities and an eye towards more occasionally focused assortment. We believe we are on a solid path with another quarter of material sequential improvement in our quarterly year-over-year net revenue comparisons and another consecutive quarter of positive adjusted EBITDA in line with our expectations. Special occasion and bridesmaids categories continue to outperform giving us confidence in our event attire strategy and reinforcing the strength of our attainable luxury value proposition. The outperformance in special occasion was offset by continued weaker performance in casual wear and footwear assortments, which we are actively realigning towards a more curated event-focused assortment. Importantly, we entered into a credit agreement with White Oak Commercial Finance in the third quarter, which strengthens our liquidity position and significantly improves our financial flexibility. Combined with another quarter of positive adjusted EBITDA performance, a more efficient cost structure, and a healthier balance sheet with the closing of our new ABL facility, we believe we are well positioned to continue executing against our strategic priorities, which are geared towards strengthening our foundation, driving customer engagement, and setting us up for sustainable long-term growth. I'd like to highlight a number of key positive developments from the quarter which showcase the continued momentum we're seeing across the business as a result of our strong execution against our strategic initiatives. Special occasion continues to lead out performance with formal and bridesmaids categories driving ongoing year-over-year net sales growth on top of a double-digit comparison in the prior year period. Our continued strong performance in event dressing gives us increased confidence in our assortment strategy and value proposition and further supports our conviction that we are a leading destination for getting dressed up for under $200. Worth noting, these product classes year-to-date had a three-year CAGR of 6.7% and in Q3 2025 had a three-year CAGR of 9.5%, showing the growth acceleration throughout 2025. First-time reorders of new products once again saw sequential and year-over-year growth. A refined reorder and merchandising strategies are working and we are investing in areas of our new product assortment where there is demand to build upon in our successes in these areas. Total reorder business inflected a positive in the back half of the quarter, led by success across our reorder and debut reorder event dress businesses, and validating our strategy to lean in to optimizing fewer SKUs with color additions and fabrication ads to build out our winning programs that customers tell us they love. Product margins improved for the fourth consecutive quarter. This is reflected in approximately 500 basis point increase compared to the prior year period and 25 basis points higher than our pre-pandemic third quarter merchandise margin high point, illustrating the gap we've closed from a margin recovery perspective. The improvement highlights the continued consumer demand for our higher margin product categories, further supported by our pricing and margin enhancement initiatives and fewer markdown sales, which we remain focused on to drive steady margin improvement going forward. Gross margins expanded 450 basis points to 42.6% over the prior year period with monthly sequential improvement through the quarter. Our focus on selling profitably and at higher margins is yielding results, and we remain focused on continuing to optimize gross margins through a mix of skew optimization, sourcing, price, and cost efficiencies. Return rates improved 110 basis points from 2Q underscoring the ongoing impact of our improved fit and quality efforts and measured return policy adjustments. Brand momentum continues to build as we lean further into visibility initiatives to drive discovery and relevance. During the third quarter, we launched our first fall brand campaign and leveraged editorial and influencer engagement around cultural moments and through talent partnerships. Our brand equity score has remained strong throughout the year, reflecting growing brand recognition and connection despite a more competitive market. Our wholesale business is ramping up with vigor, with an exciting pipeline of interest and several new major partners and boutiques added during the third quarter, resulting in our in-store and online wholesale presence expanding to six major retailers and Q3. As a result, we have achieved triple-digit, seven-figure year-over-year growth in wholesale revenue year-to-date. The strong engagement we're seeing in this channel reaffirms the meaningful opportunity we see in the near and long term as we expand our footprint with existing partners and add brand accretive majors and boutiques to drive profitable wholesale volume and put Lulu's products in the hands of more consumers nationwide. And last, we sustained positive adjusted EBITDA in the third quarter consistent with our expectations. Our leaner cost structure and improved product margins supported our performance, resulting from our team's discipline and focus around streamlining operations and strengthening our bottom line. I'm incredibly proud of our consistent improvements in business performance over the last several quarters as we optimize our core business while also navigating a dynamic macro environment. We are keenly focused on addressing areas of our business that remain under pressure, namely our shoes and casual apparel businesses, which have continued to weigh on top-line performance. As we have discussed on prior calls, we are actively resetting our merchandising strategy in casual apparel and shoes to stabilize these categories and reposition them for growth. By reducing SKU count and pulling back on inventory receipts near term to improve turns, while also leaning into more elevated dressier styles, we believe we are able to rebuild with a more focused and productive assortment that better aligns with consumer demand and margin goals. As we work through inventory, we expect top line pressure from these categories to moderate towards the end of Q2 2026, allowing us to see more meaningful improvements in our revenue performance. To further support our realignment efforts, we made the strategic decision to optimize our team structure, including narrowing our team, eliminating the chief merchandising officer role, and streamlining our operations to leverage the success we have seen with our occasionware buying. As we look ahead, we remain committed to evaluating all options to enhance performance and drive sustained, profitable, long-term growth, focusing on process optimization and operational efficiency, and positioning the brand as a key destination for special occasions and dressing up. Shifting to our cost reduction initiatives, we continue to reap the benefits of our cost-saving actions initiated last year. In the third quarter, OPEX declined 11% year-over-year and within that, fixed costs were down 18%, enabling another quarter of positive adjusted EBITDA performance. We expect to continue to benefit from our leaner cost structure and the additional actions we're taking to drive operational efficiency, optimized performance, and sustained profitability. More recently, in response to heightened macro uncertainty related to trade policy actions in the first half of the year, we took action to further promote cash generation and fortify our balance sheet through skew rationalization. Our SKU rationalization initiative is bearing fruit with improved efficiencies and margins, reduced excess inventory, and incremental cost savings through a more curated assortment. As it relates to direct sourcing, we are on track with our direct from factory approach for select, mostly entry price point product category segments. In parallel, we are optimizing and diversifying our supply chain through reducing supply chain costs and close collaboration with our longstanding vendor partnerships. Furthermore, we are leveraging price strategy and assortment optimizations as incremental mitigation levers. On the home office front, I'm very excited to formally welcome Heidi Crane to our team as our fractional CFO. Heidi brings a wealth of experience leading financial strategy for high-growth consumer companies, which will be tremendously valuable to our team as we position for sustainable long-term profitable 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 our strategic priorities.