Lulu’s Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) Q4 2023 Earnings Call Transcript
Lulu's Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) Q4 2023 Earnings Call Transcript March 6, 2024
Lulu's Fashion Lounge Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.1. Lulu's Fashion Lounge Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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: Rebalancing inventory assortment between newness, novelty and core reorder product; improving internal processes through optimization and automation leading to reduced operational expenses; establishing a foundation for accelerating brand awareness through new marketing initiatives and product distribution channels; and maintaining a cash flow positive year while not sacrificing on investments in strategic initiatives that support future growth, combined with revolver balance reductions to further position the Company for success.
We believe we've executed well on all of our key focus areas in 2023, positioning us for strong growth and profitability, once inflationary pressures abate and consumer spending normalizes. Our strategy has been and continues to be focused on customers who seek out quality over quantity and enduring styles that last beyond a moment in time, allowing us to optimize inventory without the same obsolescence risk that other retailers face. Additionally, traction with broader price ranges, including higher priced items in our legacy categories throughout Q4 reinforce this. As reflected in our Q4 gross margin expansion of 180 basis points combined with an 18% year-over-year reduction of inventory balances. As a business focused on enduring quality versus relying on predicting trends, it can take a few quarters to adapt to more meaningful trend changes.
As a result, while we expect to continue rebuilding our assortment in 2024, we believe we will benefit from early assortment updates during the year. We have already seen encouraging sequential upward revenue momentum building at the end of 2023 with further improvements into the first two months of 2024. I'll now briefly touch on our fourth quarter results before discussing the full year in more detail, followed by our 2024 priorities. As our business is not driven by seasonal gifting, Q4 results were consistent with seasonal trends for Lulu's, which is typically our smallest quarter in terms of both sales and profits. Our special occasions segment continued to be a steadfast driver of sales, constituting a large component of our diversified product mix.
We saw positive performance in our new and reorder dresses with notable success in special fabrications and new holiday silhouettes. Occasion dresses have continued to outperform other categories with particularly strong demand for new and novelty dresses and is historically a leading indicator of future growth momentum. With shoppers craving more out-of-home experiences, the December opening of our first retail location in decades is a start towards bridging the gap between URL and IRL. Our Melrose Avenue location in Los Angeles underscores our presence among premium retailers and helps to position us as a quality-first attainable luxury brand. To that end, in the latter half of January, we opened our first ever bridal boutique within the Lulu's on Melrose location, rounding out a full end-to-end shopping experience.
Positive customer response to the bridal-store launch, instilled confidence in the brand activation potential for 2024. Furthermore, Lulu's Melrose has affirmed the opportunity for new customer engagement and marketing strategies with potential to drive interesting new growth prospects. We will continue to take a disciplined and calculated approach to physical retail, applying our test, learn and optimize philosophy to the Lulu's on Melrose store to seamlessly integrate our D2C e-com customer experience across all sales channels and optimize how we apply our industry-leading inventory turns in a physical space. The Melrose store opening has also been a great catalyst for momentum in our potential wholesale partnership opportunities. Major retailers, both international as well as domestic, have proactively expressed interest in carrying Lulu's products in store and online.
We expect interest to lead to long-term growth opportunities, brand awareness and broader customer reach via these omnichannel opportunities. Next are a few of the areas where we saw positive momentum throughout 2023. We saw strong customer demand for our new and novelty products, resulting in positive double-digits year-over-year growth in our post return second half merchandise sales for new products, a leading indicator for our future reorder product funnel. As a reminder, our reorder products have consistently contributed over 70% of our net revenue in recent years. We're actively rebalancing our product offerings, new and reorder alike, to restore revenue allocation across new and reorder to pre pandemic levels and align with evolving yet enduring customer trend changes.
Yearend inventory balance was down 18% over year end fiscal 2022, down $7.7 million, underscoring the agility of our data driven business model and enduring quality of our reorder products. We believe our 5x inventory turns for the year continue to be industry-leading, reflecting how our strategic and informed approach to product selection is aligned with market demand. As we enter 2024, our overall inventory position is notably healthier and back into chase mode for several of our dress product categories. Continued investments in process automation and robotics contributed to a 15% decrease in variable payroll expenses, on a volume-adjusted basis compared to fiscal 2022. Our business continued to generate liquidity and our balance sheet remains strong, enabling us to maintain our investments in strategic initiatives and positioning us for a return to growth.
Free cash flow for the year was $11.5 million an improvement of $10.3 million over fiscal 2022. We successfully implemented technology to better scale both international and wholesale growth, as well as opened our first physical retail store to serve as a testing ground for potential future retail opportunities. The progress we've made on our initiatives over the fourth quarter and full year supported by the strategic addition of talent to our team are starting to show positive signs as we enter 2024. As noted last quarter, as we see our sales volumes recover, we expect to see reciprocal improvement in profit margins as our fixed costs begin to leverage. A few things worth noting on trends we saw in 2023 and into the first quarter. New product introductions continue to perform well, supporting our strategy to increase newness and novelty penetration back to pre-pandemic levels in preparation for retiring aging reorder products sooner and beginning to capitalize on the changing fashion cycles within our customers' closets.
We are concurrently focused on diversifying product assortment and conversion in our smaller and more under-penetrated categories. With this in mind, in January, we welcomed industry veteran Laura Deady as our new Chief Merchandising Officer and under her stewardship, we anticipate to enhance performance of all product categories and an acceleration of rebuilding newness in our reordering product funnel. On the wholesale partnership front, we're continuing to lay the groundwork for these relationships as a way to deepen our connections with existing customers and introduce our brand to new audiences in an omnichannel setting, ultimately enhancing our online presence. We are being opportunistic about brand-enhancing wholesale partnerships to profitably boost awareness and in-person product experiences, while also leveraging existing infrastructure to maximize cost efficiency and build synergy between digital and physical channels.
Wholesale partnerships are typically on a longer lead time calendar and booking much further out in the year than Lulu's e-commerce buying calendar. We believe that much of the progress we've made so far will positively impact future quarters into 2024 and beyond. We look forward to sharing more on our progress throughout the year. Now turning to 2024 recent macro trends and our priorities for the year. As we position for the year ahead, a few industry trends come into focus. Firstly, for D2C brands like Lulu's, a digital presence extends beyond direct sales and also captures added benefits of improved margins and broader brand value. As a brand that has spent 25 plus years supporting women during pivotal moments in their lives, we believe Lulu's has a competitive edge over fast fashion retailers over the long-term who are less loyalty driven and have more transactional relationships with customers.
Secondly, the volume of engagements special events in 2024 are increasing as is the average cost of weddings. Special occasion and bridal categories continue to be areas of opportunity for Lulu's. As events become more prevalent and consumers become more discerning about their spending, Lulu's has an opportunity to take market share within this environment. Lastly, there is heightened industry-wide emphasis on more effectively managing return rates, a focus that aligns with our ongoing strategic initiatives, which Mark will dive into more in his prepared remarks. In 2024, we remain focused on closely managing costs and driving efficiencies across our operations to extend our momentum. We are seeing early traction with our optimizations and new customer engagement initiatives that we believe will benefit our brand long-term.
This year, our primary focus will be on continued product assortment optimization, including initiatives that support margin expansion, product category diversification, geographical diversification and product sourcing to further reduce potential impacts of external factors related to geopolitical and other uncertainties that could impact our supply chain and return rate stabilization through product set optimizations and financial impact mitigation tactics. Continued investments in brand initiatives and activations that support customer acquisition and retention as well as reinforcing brand differentiation and lastly, further technology enablement that supports customer engagement and customer experience across multiple channels. As the year progresses, we expect to stay laser-focused on adapting to the dynamic market changes, building the Lulu's brand, driving cost efficiencies to meet our near-term targets and positioning ourselves for return to positive growth.
I'm confident in our 2024 initiatives and I'm further bolstered by our talented and experienced team, which has adeptly navigated the ebbs and flow of our business for the past several years. With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. He will share an update on customer engagement and a deeper dive into our 2024 priorities. Mark?
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: Priority, product assortment, optimization. I'd first define our product assortment into casual and sportswear is a key growth strategy in Lulu's long-term plan. We believe deeper penetration in these product categories will fortify the relationship with our customers through increased purchase frequency, improved loyalty incentives and broader customer appeal.
Additionally, we are excited about the people investments we have made, including the recent appointment of Chief Merchandising Officer, Laura Deady, as well as investments in tooling and insights to further support product category expansion. Currently, we are actively refining our test, learn and reorder model by incorporating advanced machine learning and predictive AI modeling. This integration combines diverse external data sources with our product and customer data, improving our ability to predict demand, optimize inventory levels and better navigate trend cycles. On previous quarterly calls, we have spoken about our investments in the product costing team, which have resulted in initial product margin improvements to date. We anticipate additional margin expansion in 2024, which is contemplated in our guidance.
Additionally, we are consolidating our vendor network to balance our purchasing power per vendor for improved product costs, diversified geographical product sourcing to reduce dependencies on one or more countries of origin and improve consistency in our fabrics and fit. Our goal is to improve on the modest margin expansion in 2024 guidance in 2025 and beyond. Strategic investments will be made to stabilize our return rates and reduce the financial impact of returns to our net contribution margin. On the fit front, we are seeking to reduce fit related returns by implementing a holistic approach that optimizes the customer shopping experience as well as our bottom-line. We have streamlined our product fit collaboration and communication process with major vendors to reduce potential fit discrepancies and design products with enhanced fit tolerance while preserving Lulu's fit expression.
Additionally, we have rolled out enhanced fit specifications to our vendors to further increase the fit consistency of Lulu's apparel and we expect the benefits of these enhancements to begin arriving in Q2 of 2024. We are also excited about potential opportunities to use predictive and generative AI and customer community feedback to improve the fit communication to our customers, as they shop on Lulu's platforms, enabling them to make more informed decisions regarding sizing. We also continue to monitor, evaluate and enhance our return policy including the excessive return policy to further reduce abusive return behavior and minimize unprofitable customers. Priority, continued investments in the Lulu's brand. With the opening of the Lulu's on Melrose store, the brand comes to life for new and existing customers alike, providing an exceptional venue for in person brand activations.
In the last few months, we have hosted various in-store events including the bridal boutique open house and our first ever 100 dresses for 100 brides giveaway, which led to long lines of customers around the block and many influencers and customers sharing their love and excitement for the brand on social media. In fact, December 2023 had the highest earned media value generation in recent Lulu’s history. Building on the success of our brand activations at Lulu’s on Melrose, we are considering additional ways to activate the Lulu's brand in person including the possibility of pop-ups. The people investments we have made in 2023 with SVP of Brand Marketing, Patrick Buchanan; and VP of Communications, Abbygail Reyes have already led to higher levels of consistency in our brand communication.
In 2024, we look to further refine the Lulu's brand in a holistic way, developing a deeper connection between our customers, our product end users, packaging and diverse range of price points. The goal is for Lulu's imagery, messaging or products to be instantly recognizable as Lulu's, fostering a profound understanding and appreciation for the brand. By building on Lulu's strong brand foundation, we can differentiate ourselves from other brands, including various domestic and foreign transactional shopping experiences and improve the efficiency and effectiveness of our performance marketing program. Priority: technology enablement. As Lulu's activates across multiple channels, including retail, wholesale and other activation points, in 2024, our platform capabilities need to be enhanced in order to provide the Lulu's brand hug across these various consumer channels.
As usual, make, buy and rent decisions will be driven by the time to market, return on investments, first party data insights and competitive advantage development. As I already mentioned, we will also expand our investments in predictive and generative AI to drive operational efficiencies, scale creative assets creation, improve accuracy of demand predictions and further enhance our proprietary reorder data models and algorithms. We also intend to implement various customer experience enhancements in our web and app shopping platforms, with the goals to improve product discovery, create additional ways customers can interact with each other and to foster Lulu's community interactions including about how our products fit. We are very excited about executing on these opportunities and the positive impact we expect it will have on Lulu's customers, the LuCrew and our investors going forward.
And now, I'll hand you over to Tiffany Smith, Lulu's' Chief Financial Officer to deep dive into our financials.
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: Continued product assortment optimization in support of margin expansion, product category diversification, return rate stabilization and product sourcing diversification. Our guidance range assumes benefits resulting from our product costing initiatives and rebalancing of inventory to support more full price sales.
As noted previously, our guidance also anticipates a deceleration in the year-over-year increase in return rates by the second half of the year. Secondly, our guidance considers continued investments in brand initiatives and activations that support customer acquisitions and retention as well as reinforcing brand differentiation. Also contemplated are increases in performance marketing ad spend due to the election year, partly resulting in approximately a 20-basis point increase over 2023 levels in total marketing expense as a percentage of net revenue. Modest investments in creative are being made to support our brand initiatives as well as testing various elements to improve our site and shopping experience. Lastly, our guidance includes investments to support our technology enablement.
As such, our general and administrative expense guidance anticipates higher technology spend compared to 2023. As a result, to the technology investments as well as general and administrative expenses more broadly, we will continue to prudently manage these expenses and we further expect these costs to leverage over time as our sales increase. In order to set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations as our net revenues and will likely fluctuate above or below our full year guidance rate, depending on the quarter. We incur modest levels of interest expense associated with our operating revolver and equipment leases for our distribution facilities. With the impact of lower expected revolver balances, we expect interest expense for the full year 2024 to be approximately $600,000.
We expect our stock-based compensation expense in 2024 to be roughly half of what it was in fiscal 2023 and our weighted average fully diluted share count at the end of 2024 is expected to be approximately 40 million shares. Moving on to capital expenditures. We expect between $5 million and $6 million for the year, which includes capital expenditures for technology enablement that supports customer engagement, customer experience across multiple channels, as well as additional automation capabilities in our distribution centers. We believe investing in our future growth opportunities, driving efficiencies and enhancing the customer experience are key to our long-term success. With that, I'll pass it back to Crystal for closing remarks.
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.
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