Lulu's Fashion Lounge Holdings, Inc.
Q4 2023 Earnings Call Transcript

Published: 6 Mar 2024

[Operator:]

Good afternoon, and welcome to Lulu's Fourth Quarter and Fiscal Year 2023 earnings conference call. Today's call is being recorded, and we have allocated one hour for 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-Straus. Thank you. You may begin.

[Naomi Beckman-Straus:]

Good afternoon, everyone, and thank you for joining us to discuss Lulu's fourth quarter and fiscal year 2023 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 on our business of the macroeconomic environment, consumer demand and return rates, our future expectations regarding financial results, references to fiscal year ending December 31, 2024, including our financial outlook for full-year 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 in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with 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 cash, 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 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. Joining me on the call today are our CEO, Crystal Landsem; our CFO, Tiffany Smith; and our President and CIO, Mark Vos. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

[Crystal Landsem:]

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Looking back at 2023, I'm proud of the strides we made to adjust our business quickly to a highly dynamic consumer and macroeconomic landscape. The initiatives we have implemented in recent quarters and the early progress we've made against them to reinforce our position as one of the most beloved women's brands for attainable luxury fashion through curated exclusive products, superior customer service, and a personalized shopping experience, supporting our customers through all of life's moments. In 2023, our primary focus was on the following

[Mark Vos:]

Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. Although our active customer accounts experienced a decline year-over-year, we are optimistic about our positive quarter-over-quarter LTM repeat customer counts, signaling improved customer stickiness. Additionally, in Q4, we saw year-over-year increases in units per transaction and average unit retail together driving a higher average order value coupled with increased merchandise margins in the quarter. Earlier in 2023, we removed various roadblocks for our international customers. And last quarter, we reported that various countries had shown double-digits growth in unit sales year-over-year. That trend continued in Q4 of 2023, and we believe that we can grow international revenue into a meaningful part of our revenue mix by 2026 by optimizing our current business model of shipping from the United States with selective investments in brand activation. Similarly, on the wholesale side, we see encouraging signals that both department stores as well as retailers are interested in augmenting their physical retail and online assortment with the Lulu's brand. In 2024, we will continue to make strategic investments in people, process and platforms to further enable this channel and also grow wholesale into a meaningful part of our consolidated revenue mix. As Crystal mentioned, there are three core areas of focus for us in 2024

[Tiffany Smith:]

Thanks, Mark, and good afternoon, everyone. Our net revenue for the fourth quarter was approximately $75 million down 18% year-over-year, which was in line with our expectations for the quarter. Our fourth quarter adjusted EBITDA loss of $2 million fell short of our Q4 guidance expectation. While we were encouraged to see occasion wear resonate strongly with our customer and comprised a larger part of our sales mix in Q4, we saw higher return rates due to the sales mix shift toward these products with higher return rates, which increased our return related costs. We also saw a higher concentration of expedited orders, which drove up our outbound shipping costs. Lastly, marketing costs as a percentage of net revenue skewed higher due to the impact of higher return rates, but this was offset by disciplined management of general and administrative expenses. Moving on to the Q4 P&L line comparisons to last year. The 18% decline in net revenue year-over-year was driven by a decrease in total orders of 22%, compared to the prior year, coupled with an increase in return rates that was offset by higher AOVs this quarter. As our customers' preferences in Q4 leaned more toward newness and novelty and in particular occasion wear, the resulting product mix and lower final sale ratios drove our overall return rate in the fourth quarter above that of the prior year. However, return rates were lower on a sequential basis in line with typical trends from Q3 to Q4. Gross margin ended the quarter at 39.1%, an increase of 180 basis points compared to the same period last year, driven by higher margin product mix as newness, novelty and our occasion wear continue to resonate very well with our customers. Moving down the P&L, to give some insights into expense line items. Q4 2023 selling and marketing expenses were $15.3 million down about $1.1 million from Q4 2022 due to lower performance marketing spend and merchant processing fees, partially offset by higher brand awareness investments, including activation spend for the Melrose store opening. As noted, we have increased our investments in more top of funnel brand marketing, including our influencer and ambassador programs. General and administrative expenses decreased by about $1.7 million to $21.8 million a 7% decline compared to Q4 2022. The decrease was primarily driven by a reduction in variable labor costs, driven by the impact of lower sales volume and increased operational efficiencies as well as lower professional services and insurance costs, partly offset by higher stock-based compensation expense, software expenses and costs associated with our newly opened Melrose store. Adjusted EBITDA loss for the fourth quarter was approximately $2 million compared to Q4 2022's adjusted EBITDA loss of $1 million. Our Q4 adjusted EBITDA margin was negative 2.6% compared to negative 1.1% in the same period last year. Interest expense for the quarter was approximately $337,000 compared to $409,000 in Q4 2022. For the quarter, we reported a diluted loss per share of $0.18, which is a decrease of $0.04 compared to a diluted loss per share of $0.14 in the fourth quarter of 2022. Throughout the fourth quarter of 2023, our balance sheet remained resilient, positioning us to execute our long-term growth plans with agility, while adeptly navigating any new or lingering macroeconomic headwinds. Our net cash used in operating activities for the quarter improved by $4.4 million on a year-over-year basis with $5.7 million of net cash used in operating activities in Q4 of 2023 compared to $10.1 million used in Q4 of 2022. Similarly, free cash flow for the quarter improved by $4.7 million on a year-over-year basis. We repaid $17 million of our revolver during 2023 and plan to continue to pay it down. We ended the year with cash of about $2.5 million and total debt position of $8 million which was the amount drawn on our revolver, resulting in a net debt balance of $5.5 million. Our inventory balance at year end was $35.5 million down about $7.7 million from the same period last year, bringing our fourth quarter inventory decrease in direct alignment with our sales. As always, our goal is to remain disciplined in our inventory management approach and we strive to enhance efficiency in optimizing inventory levels, balancing markdown risk and prioritizing customer experience. Upholding brand integrity and preserving gross margin levels remain our top priorities as we build upon an already successful buying model. Moving on to guidance. We are expecting full year 2024 net revenue to be between $350 million and $370 million. Our baseline guidance anticipates that our core customer who is heavily positioned within the $50,000 to $150,000 income range will continue to face macro headwinds throughout 2024. With that in mind, the lower end of our net revenue guidance range contemplates a slight year-over-year decline in net revenue, which is reflective of our returns initiatives in 2024 potentially taking longer to materialize with our customer base and return rates remaining elevated compared to our guidance midpoint. Continued efforts to actively rebalance our product offering to restore pre-pandemic revenue allocations across new and reorder products potentially taking more time than expected, which could impede our top-line growth and initiatives to grow top-line by diversifying product category mix, including separates and casual wear not materializing by the second half of the year as anticipated. The midpoint of our net revenue guidance range assumes, a healthier inventory position coming into 2024 allows us to focus on improving margins and profitability without replicating the same levels of sales driven through markdowns and promos observed in 2023. Current trends in purchasing behavior across a wider price point range, including higher AUR items, continues throughout the year, partly the result of higher dress concentration persisting in the first half. Returns initiatives result in a deceleration in year-over-year return rate increases by the second half of 2024. Wedding and wedding-related events recover back to pre-pandemic levels and top-line growth stemming from product category diversification efforts to grow casual wear and separates transpires in the back half of the year. The high end of our guidance range assumes, awareness and brand marketing return on investment as a shorter lead time for top-of-funnel traffic and conversion than conservatively modeled in our guidance. Top line growth for casual wear and separates recovers more quickly than anticipated and returns initiatives drive more significant improvement in return rates and potentially earlier in the year. When modeling revenue for our business, seasonality of demand plays an important role. In a normalized year, our net revenue typically peaks in the second and third fiscal quarters driven by heightened demand for event dressing, with Q4 typically representing the lowest net revenue and profit quarter of our fiscal year. Adjusted EBITDA is expected to be between $5 million and $8 million. This equates to an adjusted EBITDA margin of between 1.5% and 2.2%, a modest improvement compared to 2023, as we make progress on our previously highlighted initiatives including

[Crystal Landsem:]

Thank you, Tiffany. Before we turn it to questions, I want to emphasize our confidence in our ability to return to profitable growth. We firmly believe that our fresh, not fast D2C business model coupled with our adeptness in testing, learning and optimizing within the dynamic retail landscape and a healthy balance sheet positions us well to navigate the near-term stability and trends. Thank you to our brand fans, the LuCrew and shareholders for supporting us in our mission to deliver attainable luxury to our customers, and we look forward to updating you all on our next earnings call. With that, I'll turn it over to questions now.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brooke Roach with Goldman Sachs. Please proceed with your question.

[Brooke Roach:]

I was hoping you could elaborate on the most important drivers and your confidence in returning the Lulu's brand to growth in 2024. What contribution from new channels such as international, wholesale and physical retail are you expecting within this outlook versus like-for-like growth in the direct online business? And then perhaps for Tiffany, can you help to provide some guardrails on how you're thinking about the cadencing of that revenue growth throughout the year?

[Crystal Landsem:]

Hi, Brooke. Thanks for the question. As it relates to wholesale and international, as we indicated previously, it's just very small segment of our business and not ready to guide yet. The growth has been positive and we are excited about the momentum, it's still not meaningful to guide on big numbers on small basis. We are though optimistic about the early traction that we're seeing and the product of interest just through these channels and the opportunity to engage and convert with new and existing Lulu's brand fans has been very encouraging. It's significant white space ahead of us, but we're going to be tempering expectations in the near-term, while these are still small numbers in comparison to our total base. Our guidance is contemplating more of a normalization to our D2C business and momentum that we're seeing within the new side that will eventually return the reorder side of the business to grow.

[Brooke Roach:]

And then, Tiffany, any guardrails that you can provide on how you're thinking about cadencing the revenue throughout the year, perhaps in concert with the comments that you provided on the upward sequential momentum with improvement in the first two months of 2024?

[Tiffany Smith:]

Sure. Yes. Sorry, Brooke. I thought your question was regarding wholesale and international, but just revenue more broadly. I would say, for the guidance that we've put out there, I think I can kind of talk to some of the cadencing that we've seen to date and kind of just give you a sense of how it looks to progress through the balance of this year. One of the things that we saw during Q4 that was particularly encouraging is revenues did start to pace with comps improving each month, particularly in the back half of Q4. We've continued to see top-line transacted revenue, so pre-returns in January, February continuing to improve. On a post return basis though, we are a little bit more tempered there in our expectations, just because we have seen so much prominence in the mix around special occasion wear, which typically is our higher return rate product. But with that said, we are still seeing improvements in the rev comps moving from the end of Q4 into the first two months of Q1 of this year. We are expecting to see the comps steadily improve, as we progress through the year, I would say the comps start to move into more like positive comp territory towards mid to late Q2 and then beyond into Q3 and Q4.

[Operator:]

Our next question is from Janine Stichter with BTIG. Please proceed with your question.

[Janine Stichter:]

I wanted to ask a bit about the expansion into casual sportswear. Love your thoughts on how big this could be and what the timing might look like, and just kind of what drove you to expand into these categories? Is this something your customer has been asking for? And then on the return rates, how you think about potential for expansion to casual to drive down the return rate percentages since I would assume that's a lower return rate category versus the dress category?

[Crystal Landsem:]

Thanks for the question, Janine. We do absolutely see a lot of opportunity in the casual and sportswear. And what our customer has shown us over time is that does typically have a lower return rate than our dresses and specifically into our event wear that we're very much known for. So, we're very enthusiastic about the addition of Laura to our team. She comes with a wealth of knowledge in the separate area that I think we've been lacking. And just for guidance and oversight in that area is going to be, I think, an accelerator within those product classes. To that end, what we've seen in our store is a lot more resonance in our separates with our customers in a bricks-and-mortar setting. And that's giving us confidence not only in actual performance, but also doubles with the feedback we get online and their desire to see more of our novelty and unique to Lulu, separates and core wear. So, we're actually really excited about that opportunity. It is where we suffered candidly most in Q4 in terms of concentration of business, where our consumer is a little bit more pressured economically and is really focusing their spend on just the newness got to have a novelty. We're being very cautious about how we guide towards future separate growth, but we're optimistic about what we're seeing specifically in the positive growth in our newness that we've been introducing.

[Janine Stichter:]

Okay, great. And then just one more question on some of the INU benefits that you've been seeing. It sounds like you're starting to see those benefits. Any more color on just how meaningful that could be and how we should think about it flowing through over the next several quarters?

[Mark Vos:]

Yes. So, we started the enhancements from a costing perspective towards the second half of last year and we saw initial improvements there. As it relates to for this year, various activities there are going to be deployed mostly around vendor consolidation and increasing our pencil with each individual vendor so that we can be in a better position to negotiate, but also to orchestrate I think about from a fabric perspective or otherwise. And so, we have some moderate improvements are part of the guidance. I really think that we will be punching through deeper so to say into 2025 and beyond because these efforts are not immediately reflective of the existing inventory that we have or the time it takes to get additional inventory in. That will just be rolling through the rest of the year into 2025.

[Operator:]

Our next question is from Dana Telsey with Telsey Advisory Group. Please proceed with your question.

[Dana Telsey:]

As you think about the AOV, which ticked up from the Q3, ticked up from last year, with the new category that you're putting in, how do you think about the AOV and what it could look like? And then on the return rate with the categories that you're introducing, what's your forecast for return rates or what should be a new normal in terms of return? And then just a follow-up.

[Tiffany Smith:]

Great questions, Dana. This is Tiffany. So, with regards to the AOV question, we do expect to see AOV continue to grow throughout 2024, on a full year basis relative to 2023. However, there's expected to be kind of typical seasonality around AOV where it's typically more dress oriented, occasion wear is more heavily concentrated in the middle two quarters of the year. So, typically that's where the AOBs will be at their highest point. But sort of sprinkled out throughout the whole year, AOV expectation is the assumption that we're coming into this year with an even healthier inventory position, which is going to mean lower markdowns and discounts for us throughout the balance of the year. Overall, expectations around AOV are that they'll continue to increase, but we do like to also maintain some flexibility in our assumptions, just assuming whether or not we do more shipping related promotions or other things just because shipping rev is a component of our AOV. As it relates to return rates, we have spoken to quite a few things on the call, but one of the factors that's baked into the guidance is that, we expect our return rates to start to improve a bit in the back half of the year. We expect to see sort of decelerating year-over-year growth in the return rate, as we progress into Q3 and Q4 of this. And as you noted that, a lot of that is potentially category specific drivers, meaning less dresses, getting more penetration on separates is one of the key areas where we could see mix shift start to benefit the return rate. Also keep in mind, we've highlighted a few initiatives on the call Mark spoke to in-depth around fit and fit consistency basically, we'll call it. And that's one of the factors that is also beneficial to return rate as we move through the year and we're expecting that to have a positive benefit.

[Mark Vos:]

Yes. And then adding on to that, we're very excited about our ability because we have so much data essentially from our customers around their fit experience with our products is to really turn that into something that customers can use and better tailor for basically to make better fit decisions. And so, we're working on not just how to present that and how to service that but also how to intelligently consume that through AI and other methods to really give that advice. And so that is I think it's very exciting opportunity there in front of us that will over time hone itself more accurate and help our customers and subsequently hopefully also our return rate.

[Dana Telsey:]

Got it. Just one thing on active customers, how are you thinking about active customers given the reduced level of active customers? What's happening on that customer churn rate? And in terms of the new products, are you getting new customers also? What's the profile now and how has it changed basically?

[Mark Vos:]

Yes, great question. Although our active customer accounts experienced a decline year-over-year as quarters with pent-up demand fall off the comparisons. What we do see and are very optimistic about is that, for example quarter-over-quarter our LTM repeat customers improved which points to that stickiness. Also, the other part where we already spoken to is the increase not just from AUR perspective but also from a UPT perspective, those are signals that still speaks to that customer engagement. If we could then add in to that what we will be doing this year from a new customer engagement and marketing perspective then I think that if you put that all together that those efforts will support a stabilization if not a return to customer growth in 2024.

[Operator:]

Our next question is from Ryan [indiscernible] with Jefferies. Please proceed with your question.

[Unidentified Analyst:]

As it relates to rebalancing the product portfolio, I'm just curious kind of what the portfolio mix is currently across novelty, new and core reorder products and kind of how that compares to prior years and where you would like to get this mix moving forward?

[Crystal Landsem:]

Our goal is to get our mix between new novelty and core reorder back towards where it was pre-pandemic. I would say that our buying during the pandemic was guided very much by consumer demand that outpaced demand for our core reorder products, specifically our aging reorder products. Our goal is to get that mix back towards pre-pandemic levels. Candidly, it varies by product class and overtime, it also varies. We had given information previously around 70% to 75% of our reorders drive our business and pre pandemic, it was sub 60%. The right balance though is going to be driven based on consumer demand and how the enduring styles that we introduce, how long they last and how much volume we can drive. I'm hesitant to give any clear guidance around that number or that target. What we do know is, reverting back some more newness and novelty is what she's looking for today. And over time that will ebb-and-flow across new and reorder and across each of our product classes.

[Operator:]

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.