Good afternoon and welcome to the Lulu's Second Quarter 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-Straus. Thank you. You may begin..

Good afternoon, everyone and thank you for joining us to discuss Lulu's second quarter 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, our expectations around the continued impact of the macroeconomic environment, 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 29, 2024 including our financial outlook for 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 our filings with the SEC including our annual report on Form 10-K for the fiscal year ended December 31, 2023 and our Quarterly Report on Form 10-Q for the second quarter ended June 30, 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 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. 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..

an approximate 10% to 15% reduction in operating expenses for the second half of 2024 compared to the first half, including a reduction in fixed payroll costs coming from reduced headcount and pay cuts to the executive and management team as well as tightening of fixed and variable costs to better align with the anticipated slower sales recovery.

Capital expenditure estimates for the year are expected to decrease by $1.5 million to $2.5 million and we are now projecting approximately $3.5 million in CapEx for the fiscal year. We anticipate realizing savings from these actions in the third and fourth quarter of 2024 extending through 2025.

We believe these actions will allow us to achieve our growth and profitability goals more efficiently, while still maintaining a strong operating model that can meet our strategic objectives, deliver positive cash flow and ultimately provide a runway for long-term sustainable growth.

We continue to make progress against our 2024 strategic initiatives of product assortment and supply chain optimization, brand awareness efforts, investments in technology and remaining cash flow positive.

As we enter into the second half of the year, I'm confident that our cost reductions alongside our strategic initiatives and brand awareness and customer engagement will drive long-term sustainable growth, expand profitability and enhance our customer base over time.

That said, with a slower-than-expected recovery, amidst persistent macroeconomic pressures weighing on consumer demand, we are withdrawing our full year net revenue and adjusted EBITDA outlook and providing quarterly guidance as we assess the immediate impacts of our cost-saving measures and other initiatives.

We remain optimistic about our sales recovery and business turnaround and are encouraged by improving month-to-month trends in our business. With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. He will share some updates on progress against 2024 priorities.

Mark?.

Original Sin edit curated by the hit show's wardrobe stylists and featured on the show's web page leveraging a collaborative media post and giveaway reaching the show's 12 million followers in addition to ours.

Our media expansion and publicity efforts gained significant momentum this quarter doubling press coverage in Q2 and securing placements in top-tier retail, financial and consumer publications. This boost increased users on Lulu's channels and grew inbound interest from various media outlets.

We believe in the strategic value of our brands and customer acquisition initiatives and are confident in maximizing our reach and impact despite broader cost reduction efforts in Q3. We anticipate continuing to build momentum for the Lulu's brand increasing awareness and driving revenue as we execute on our strategies.

Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels. We are encouraged by increasing usage of the Lulu's app and its growing share of overall revenue. Year-over-year Q2 saw a healthy growth in app users and improved conversion rates.

Additionally, our investment in driving more paid traffic towards Lulu's app is yielding strong returns. The website redesign featuring larger and more prominent product images and expanded video use has led to the increased engagement on our website higher conversion rates and an increase in account registrations.

Our engineering and continuous revenue optimization teams have an exciting road map to further enhance the shopping experience and product discovery. We are enhancing operational efficiency with strategic investments in automation and robotics in our distribution centers.

As mentioned on the last call, in Q2, we added automation to our largest distribution center in Eastern Pennsylvania and early feedback shows improvements in order accuracy reduced cycle times and better unit economics.

As you've heard, we continue to make good progress on our strategic initiatives maximizing our impact in a thoughtful and cost efficient manner. I'm excited about the team we have in place and their dedication to delivering the right products to our customers.

And now I'll hand you over to Tiffany Smith, Lulu's Chief Financial Officer to provide more color on our financials.

Tiffany?.

Thanks, Mark, and good afternoon everyone. Our net revenue for the second quarter was approximately $92 million, a 13% decrease year-over-year, driven by a 14% decrease in total orders placed with increased return rates partially offset by higher average order value.

Markdown sales were down approximately 32%, compared to the second quarter of 2023 contributing to the overall net revenue decline and gross margin improvement. We also saw notable declines in our casual business during the quarter.

As a result of the implementation of our new return policy, we saw an increase in restocking fee revenue and some improvement in customer return behavior despite our decision to honor exceptions to the previous return policy through part of Q2 to ease customers into the changes, which resulted in some top line pressure.

Gross margin ended the quarter at 45.5%, an increase of 80 basis points compared to the same period last year driven by lower markdowns and a shift toward higher-margin product categories. Moving down the P&L, to give some insights into expense line items.

Q2 2024, selling and marketing expenses were $24.9 million, up about $200,000 from Q2 2023 due to increased brand marketing initiatives, including the first brand campaign launch since 2021 to drive brand awareness and customer engagement. We expect the value generation from this incremental marketing spend to materialize over multiple quarters.

General and administrative expenses decreased by about $3 million to $21.4 million, a 12% decline from Q2 2023. This reduction was primarily driven by lower stock comp expenses as well as lower variable labor and benefits costs, which were lower with decreased sales volumes and increased operational efficiencies.

Quarterly G&A expenses included a $423,000 accrual for a pending legal matter. Excluding this non-routine item, we achieved some leverage in the quarter on our G&A costs resulting in a 14% decline in the remaining G&A expenses compared to the 13% decline in net revenue.

Our net loss of $10.8 million worsened by $8.2 million compared to the same period last year.

The net loss was impacted by a noncash expense increasing our income tax provision by $5.4 million related to the establishment of a valuation allowance on our deferred tax assets during the second quarter, as well as the previously noted $423,000 non-routine accrual for a legal matter included in G&A expenses.

Adjusted EBITDA loss for the second quarter was approximately $200,000 compared to Q2 2023's adjusted EBITDA gain of $4.2 million due to elevated fixed costs and net reduced revenue. Our Q2 adjusted EBITDA margin was negative 0.2% compared to 4% in the same period last year.

Interest expense for the quarter was approximately $270,000 compared to $426,000 in Q2 2023. For the quarter, we reported a diluted loss per share of $0.26, which is a decrease of $0.19 compared to a diluted loss per share of $0.07 in the second quarter of 2023. Turning to our balance sheet and liquidity.

On July 22nd, we finalized the amendment to extend our revolving credit agreement with Bank of America, which was originally set to mature on November 15th of this year. The amended agreement now matures on August 15, 2025 and reduces our revolving facility from $50 million to $15 million, with a future reduction to $10 million on March 31, 2025.

The original $50 million borrowing capacity was partly intended to repay prior debt at our 2021 IPO. We believe the reduced borrowing capacity is sufficient in the short-term while we actively work toward a longer term source of financing.

At the end of the second quarter 2024, we remained in compliance with all applicable financial covenants under the amended credit agreement. In the second quarter 2024, our business continued to generate cash with $3.7 million of net cash provided by operating activities, a decrease of $900,000 on a year-over-year basis.

Similarly, we generated $3 million of free cash flow for the quarter representing a $900,000 decrease on a year-over-year basis. During the second quarter, we paid off our revolving line of credit balance ending the quarter in a net cash position of $1.8 million.

As announced last quarter, our Board of Directors authorized a stock repurchase program to repurchase up to $2.5 million of our common stock. In the second quarter, we repurchased approximately $87,000 worth or about 48,000 shares of stock.

We will, continue to take a holistic view to allocate capital on a quarterly basis, driving for the highest return on our investments while maintaining a healthy liquidity position. Our inventory balance at quarter end was $37.7 million, down about $8.6 million from the same period last year.

This 19% inventory decrease year-over-year exceeded our 13% year-over-year net revenue decline, as we continue to reduce the lease of supply in our reorder business. Moving on to guidance.

Given the uncertainty driven by ongoing macroeconomic headwinds and persisting consumer pressures, we are withdrawing the previously issued full year net revenue and adjusted EBITDA outlook. We would like to provide some insight into our sales expectations for the third quarter.

Our preliminary results for the month of July reflect a net revenue year-over-year comparison in the negative low-single-digits with sequential improvement in net revenue comps.

We expect slightly more challenging August comps due to last year's promotions and the earlier seasonal clearance this July with a projected return to negative single-digits in September.

For the third quarter, we anticipate net revenue to be between approximately $75 million and $79 million compared to $83.1 million in the same period last year, reflecting a year-over-year decline of between 5% and 10%.

As a result of continued macroeconomic pressures and uncertainty, we are in the process of implementing cost reduction measures to improve our profitability and to better align our current business needs with current sales growth trends.

The cost reduction measures include an approximate 10% to 15% reduction in operating expenses for the second half of 2024 compared to the first half, better aligned with the anticipated slower sales recovery.

This includes a decrease in fixed payroll costs resulting from reduced fixed headcount combined with pay cuts for our executives and certain members of the management team.

In light of the uncertain macroeconomic environment as we carefully manage the timing and execution of our cost reduction measures, we are refraining from providing an updated outlook on margins and profitability for the third quarter.

Lastly, as part of our cost reduction efforts, we are reducing our capital expenditure plan for the year by between 30% and 40%. We now project capital expenditures for the full year to be approximately $3.5 million compared to the previous expectation of $5 million to $6 million. And with that, I'll pass it back to Crystal for closing remarks..

Thank you, Tiffany. We are confident that our strategic initiatives in enhancing brand awareness and customer engagement, coupled with our diligent cost reduction efforts, position us for sustainable growth and improve profitability in the coming year. Our commitment to operational excellence will serve us well amidst ongoing macro volatility.

Thank you to our dedicated brand fans, Lulu crew and shareholders for your unwavering support as we continue to deliver attainable luxury to our customers. We look forward to updating you on our next earnings call. With that, I'll turn it over to questions now..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Dana Telsey with Telsey Advisory Group. Please go ahead..

Hi. Good afternoon, everyone..

Hi, Dana..

Crystal, as you think about -- hi.

As you think about the core health of the consumer and what you're seeing out there and the competitive landscape with promotions, what's changing in your business whether pricing you mentioned some of the categories and how you're planning for the back half of the year in addition to -- you gave out sales for the third quarter but not any adjusted EBITDA.

Any framework you could provide there? Thank you..

Thanks for the question, Dana. I think at a high level, we believe our customer continues to be under pressure due to just various macroeconomic pressures that we've discussed over the last several quarters and is also reflected in withdrawing our full year guidance for EBITDA and also, just the conservatism in general of our third quarter guidance.

All that being said we're still focusing on opportunities where we can drive engagement and growth and profitability, especially in this more challenging and volatile environment. What's been really great for us to see is our business does continue to recover.

And going into July, we've seen an inflection to roughly flat customer -- active customers within the month. So we're really encouraged by that. I think the high level takeaway is that our recovery is well underway. It's just taking longer than we had anticipated because of the consumer backdrop..

Got it.

And then, on the adjusted EBITDA in terms of any framework?.

Yes. Hi Dana, I'll jump in. This is Tiffany. So we gave the revenue guidance, because I think we have more confidence obviously in the third quarter revenue pacing that we've seen to-date. But given -- as we announced -- we're working through some cost reductions, we announced that during the call.

Some of those things are going to have more immediate benefits. Some will have longer-term benefits. We're still working through sort of all of the puts and takes around that. And as we work through this we want to maintain as much flexibility as possible on the timing of these changes.

I also want to make sure that we're reading the business and the macro properly to ensure that we've made sufficient adjustments, to adjust our cost structure, to better align with our slower sales -- slower-than expected sales recovery.

But at the same time, because of all the momentum Crystal noted, that we're seeing in the business I want to be careful not to pull back too hard on cost reductions and push too hard there and jeopardize the momentum that we're seeing building in the business..

Just to add to that. I think the way to look at it is our goal is to continue to nurture the areas in our business where we're seeing all the grass issues and the positive momentum, but also managing our cash flow prudently in anticipation of a potentially choppier consumer in the back half..

Got it. Thank you..

The next question will come from Brooke Roach with Goldman Sachs. Please go ahead..

Good afternoon and thank you for taking my question.

Crystal, I was hoping you could dive a little bit deeper on the plans that you have to drive engagement in the back half and continue the momentum on the sequential recovery in sales? How are you planning selling and marketing expenses in the back half? And are there fixed versus variable expenses that we should consider within that line item going forward?.

Yeah. It's a good question. For us and typically in the third and fourth quarter when there's more pressure on performance marketing we tend to pull levers across markdowns discounts and paid marketing spend.

And really it's an optimization in the moment based on where the consumer is and where we're getting the best use of our cash for that marketing spend.

I think the way to think about this for us is we're continuing to invest but prudently, on the brand, because we are seeing positive momentum in brand equity and just momentum in general from how our customers are interacting with the brand.

But that said, we have to be very cautious about where we're spending and making sure that the payoff is as much for the near-term as it is for the long-term.

So I would expect to see puts and takes throughout the back half of the year across markdowns discounts and marketing spend the way that we've done it in the past which is truly reactionary to the macro and where we're seeing the best bang for the buck..

As a follow-up, can you talk a little bit about the levers that you can pull to reduce costs and defend profitability in both the near-and-medium-term beyond the 10% to 15% second half operating expense cuts that were announced today? How are you thinking about the range of outcomes on profit margins and free cash flow generation for the business should the time line of recovery continue to elongate versus your current expectations?.

Yeah. Good question, Brooke. I think for -- at the current time free cash flow -- maintaining positive cash flow is really a big priority for us. And so I think there are as you said potentially other levers that we could pull as needed. The ones that we disclosed on the call were largely headcount in nature.

We have done some headcount reductions in certain areas where we felt we could continue to grow without certain individuals. But I think for the most part the executive pay cuts have been implemented.

A lot of the levers there pulled around headcount are probably pretty limited in terms of what we can continue to do given we are a fairly lean team already and have been running pretty lean in most areas. There may be a little bit more there but I doubt it.

I think it's going to be more considering other types of G&A spend other areas where we can make more meaningful reductions. But I don't have specifics that I think we want to share at this point given it's a bit fluid..

And just as a reminder our cost structure is highly variable. So if sales were to worsen from our expectations then our cost structure would also be reduced proportionately..

Yeah..

Thank you very much. I'll pass it on..

The next question comes from Janine Stichter with BTIG. Please go ahead..

Hi everyone. You got Ethan Saghi on for Janine. I was just wondering in terms of category trends I know you highlighted the casual business is seeing some softness. I was just wondering if you could give some more color on what's not working as well in the assortment and the strategies you have in place to address those issues? Thanks..

Yeah. It's a good question. So I mean we had a really robust and record-breaking special occasion in bridesmaids business in the second quarter which is just a testament to customers leaning on us for their special moment which was great to see. The most pressure that we experienced was more in the casual space.

And we're continuing to invest in the recovery of that business. That said, the new site is comping just fine to last year. But we're taking a little bit longer to rebuild the reorder funnel in that space just given the competitive nature as well as the consumer pressure that we've been seeing with our customer set.

Say it differently that's going to continue to improve overtime, but it's taking longer than we had anticipated..

Got it. That's helpful. Thank you..

This will conclude our question-and-answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines. And have a wonderful day..