Lulu's Fashion Lounge Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good afternoon, and welcome to Lulu's First Quarter 2024 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for the prepared remarks and Q and A. At this time, I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary, Naomi Beckman Strauss. Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and thank you for joining us to discuss Lulu's 1st 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 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, references to the fiscal year ending December 29, 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 our filings with the SEC, including our annual report on Form 10 ks for the fiscal year ended December 31, 2023, and our quarterly report on Form 10 Q for the Q1 ended March 31, 2024 filed with the SEC this afternoon, all of which can be found on our website at investors.

Speaker 1

Lulu's.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 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.

Speaker 1

The presentation of the 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 Lansom our CFO, Tiffany Smith and our President and CIO, Mark Voss. Following our prepared remarks, we'll open the call for your questions.

Speaker 1

With that, I'll turn the call over to Crystal.

Speaker 2

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Jumping into results from the quarter, net revenue was $77,300,000 a 15% decline from Q1 of last year attributed to top line pressure and ongoing elevated return rates. Initial momentum with our new and novelty products remains promising and we've seen sequential improvement in many of our reorder categories as well, both of which contributed to a 250 basis point sequential net revenue comp improvement from the 4th quarter. This positive trend supports our reorder pipeline conviction contributing to positive sales comparisons and favorable margin performance in several of our high volume categories.

Speaker 2

Consistent with recent trends, event dress has continued to drive sales with positive year over year comps in both categories. Gross margin saw a 60 basis point improvement year over year propelled by lower markdown sales and a shift towards higher margin product classes. Notably, markdown sales have decreased by more than 20% year to date attributed to our healthy inventory position and normalization of inventory turns. Our new and first time reorder product continues to stimulate demand, presenting an opportunity for us to further increase the depth of our buys and optimize our ability to capitalize on upside demand. We experienced top line challenges stemming from customer demand outpacing the depth of our buys, resulting in more frequent stock outs and size and completeness.

Speaker 2

We are proactively working to mitigate these issues supported by With the rollout of this technology at the beginning of

Operator

the year, we expect to With the rollout

Speaker 2

of this technology at the beginning of the year, we expect to see more meaningful improvements by June and beyond. Adjusted EBITDA of a $2,700,000 loss was closely in line with expectations despite revenue coming in slightly below our projections and was mostly impacted by the lower top line and mitigated by modest adjustments in operating expenses. Inventory levels decreased by 20% to $41,300,000 for Q1 2024, which exceeded our net revenue decline year over year, reflecting the agility of our data driven buying model and enduring relevance of our core reorder products. We are strategically positioned within current inventory levels and have resumed chase mode for several of our product categories. Additionally, we continue to generate liquidity and maintain our strong balance sheet, supporting our ongoing strategic initiatives that will catalyze our return to growth.

Speaker 2

We reduced our revolver by $2,000,000 during the quarter, while our cash balance increased by $3,000,000 Free cash flow was $6,000,000 in the period, an improvement of $3,400,000 over Q1 2023. We started this year with clear targets in mind, including continued refinement of our assortment to align with evolving customer preferences, expanding both depth and breadth to approach pre pandemic levels, focus on product margin expansion and better leveraging our supply chain and differentiated buying model to further expand merchandise margins Expansion of brand awareness through a more diversified marketing approach to strengthen our relationship with our customers and ensure we are top of mind for her year round fashion needs. Investment in technology and advancement of our existing AI tools to support future growth and expansion into new and better ways to connect with our customers both online and in real life. Maintaining a cash flow positive year while still investing in strategic priorities that support future growth. Starting with our continued product assortment optimization and margin expansion efforts.

Speaker 2

As we touched on last quarter, we are diligently adapting some more meaningful trend changes while maintaining the enduring quality that defines our brand. We're excited about the tangible value merchandising team members are bringing and will continue to bring in the near term and long term based on the early progress we've already seen. We continue to test and adjust pricing strategies in an effort to broaden our customer reach and better address the top and bottom ends of our socioeconomic spectrum. To that end, we have begun to expand our product offering across a broader range of price points spanning from entry level to more aspirational and our more mature product categories. These calculated adjustments continue to contribute to our year over year gross margin expansion and we believe will result in meaningful future benefits and customer file expansion.

Speaker 2

We also took steps in Q1 to further product sourcing network to mitigate risks stemming from geopolitical and external uncertainties and to strengthen the resilience of our supply chain. While still early, we are encouraged by the quality, margin and speed of our new vendor partners are able to bring us while decreasing our exposure to China over time. In an effort to temper elevated return rates, we rolled out several initiatives including website optimization and return policy changes to drive a more holistic approach to our customer shopping journey, while also driving more profitable outcomes, which Mark will go into in more depth. Turning to our next priority, we are making investments in brand initiatives and activations that support customer acquisition and retention, as well as reinforcing brand differentiation. As we noted on our last call, in the latter half of January, we opened our first ever bridal boutique within the Melrose Lulu's location.

Speaker 2

The opening event was a huge success, eliciting positive customer sentiment and engagement online and noticeably higher foot traffic creating a palpable buzz around the store. We are excited about the brand activations we have planned in 2024 to further leverage our space on Melrose and drive brand engagement in support of our e commerce strategy. Beginning in Q4 and throughout the first quarter, we have been increasing the number of influencers and creators we partner with, while also launching our first of many influencer edits of 2020 4, which have garnered exceptional traction and successfully drove customer engagement in Q1. On the wholesale front, we continue to host active discussions with several wholesale partners to introduce our brand to new audiences across various omni channel settings, with in store wholesale partnerships expected to continue to grow in the second half of this year. Most recently in early Q2, we launched our 1st major multi channel brand campaign, ushering in a new era for the Lulus brand with out of home advertising, creative social and influencer activations and experiential marketing across LA, New York, Chicago, Nashville and beyond.

Speaker 2

The launch is an opportunity to further differentiate Lulus from competitors and underscores our unique role as a brand that's there through all of life's moments. Through the campaign, we expect to build excitement and loyalty among existing customers, while also bringing in new customers that we can grow with over time. We believe our test and learn approach and data driven culture allows us to quickly gauge the impact of new marketing channels, enabling us to optimize spending and strategically allocate resources in our long term marketing mix based on our learnings. Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels. In the Q1, we rolled out a complete restyling of our website with various enhancements around product assortment and discovery that has driven positive engagement.

Speaker 2

We began testing several platforms to enhance our predictive capabilities and responsiveness to changes in demand, which we believe will help refine our buying model and strengthen our ability to navigate future fluctuations and consumer buying patterns more effectively. In the 1st week of Q2, we simplified our return policy, which now includes a restocking fee to encourage purchasing behavior with intent to keep the product and support better unit economics and profitability. Lastly, we are maintaining a cash flow positive year while preserving our commitment to growth. We are doubling down on our focus on profitable orders and gross margin expansion, prioritizing sustainable growth over short term gains, including parting ways with excessive returning and unprofitable customers. Our dedication to long term growth stems from the continued optimization of our buying model.

Speaker 2

We're enhancing initial buy depth to accelerate the reorder funnel, embracing newness and novelty further without sacrificing the benefits of our established reorder strategies, while mitigating inventory risk in an increasingly dynamic consumer landscape. Our cash flow generative model will allow us to invest in our future growth as well as opportunistically repurchase Lulu stock. As some of you may have already seen, our board recently authorized a stock repurchase program of up to $2,500,000 of Lulu's common stock. Tiffany will provide further insights on this matter in her remarks. We consider our common stock to be an attractive investment and this demonstrates our confidence in the business.

Speaker 2

As we work towards becoming one of the most beloved women's brands for attainable luxury fashion, I'm optimistic about the advancements we've made in Q1 and the continued momentum we are seeing in the Q2. We are passionate about supporting our customers through all of life's moments and remain focused on driving these initiatives forward and continuing to strategically invest in our brand. We believe the steps we are taking now will position us for strong growth and profitability, which will be further accelerated once consumer and inflationary headwinds ease. With that, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. He will share some updates on our progress against 2024 priorities.

Speaker 2

Mark?

Speaker 3

Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. Despite a year over year decline in active customer counts, we are encouraged by the increase in penetration of active customers that are repeating on a quarter over quarter basis, indicating continued strong customer loyalty. Compared to Q1 2023, we also grew the number of new loyalty program entrants, total loyalty program membership and saw more customers upgrade to our top 3 member tiers, which are all strong indicators of Lulu's brand loyalty and future revenue opportunity. Due to reduced availability of markdown inventory on the one hand and a general lack of depth in new and novelty full price products to meet the demand on the other hand, we have seen impacts to our new customer acquisition rate.

Speaker 3

The buying and merchandising teams are working hard to improve our inventory position in new and novelty products and subsequently improve our new customer acquisition. The investments we are making in Lulu's brand awareness will further support our new customer acquisition growth over time. Additionally, in Q1, we saw a year over year increase in average unit retail, driving a higher average order value coupled with increased merchandise margins in the quarter. Reviewing purchase behavior by customer household income segments shows stable trends across our core segments, dollars 50,000 to $150,000 annual income, both from a new customer acquisition as well as repeat customer perspective. A micro trend we have observed in Q1 2024 is that high income segments outside and above our core segments on a Q1 year over year basis outperformed from a new customer acquisition, order counts and net revenue perspective, and that they did so with higher discount usage.

Speaker 3

We expect that these segments will continue to gravitate towards Luz supported by our expanded price ranges and new and novelty product offering. While international sales still remain a very small percentage of our total company sales, in the Q1, we saw in Q1 year over year unit sold comp of 50% in our top 15 countries outside the U. S. Given the positive early trends we've seen in international markets, we are confident that we can grow ex U. S.

Speaker 3

Revenue into a meaningful part of our revenue mix by 2026. By optimizing our current business model of shipping from the U. S. With selective investments in brand activation. Christel briefly recapped some of the progress against our 2024 priorities, but I'll drill down a bit more to share some additional detail around the specific actions we're taking.

Speaker 3

Number 1, product assortment optimization. We are well underway in diversifying our product range to include more new and novelty as well as casual and sportswear. The strategic move we believe will fuel our long term growth. The merchandising and buying teams are firing on all cylinders, evolving and refining our assortments to best meet the changing preferences of our core Lulus customer. As part of this process, we've made investments in advanced machine learning and predictive AI modeling to more effectively forecast demand and better navigate trend cycles.

Speaker 3

With the demand volatility we have experienced in recent years, we see an opportunity to further enrich our demand forecasting algorithms with external data sources like trends, weather, geographic and other macro data to detect earlier and more accurately changes in demand patterns and volume. We look forward to incorporating the new forecast capabilities into our buying algorithms starting in Q2 of 2024 for products arriving in Q3 and later. As previously discussed last quarter, several initiatives are currently in progress to support our assortment optimization and reduce risk related to sourcing, geopolitics and returns. Our goal is to improve on the modest margin expansion contemplated in our 2024 guidance in 2025 and beyond. We continue to see ongoing product margin improvements driven by our fortified product costing team and we expect to see additional margin expansion in 2024.

Speaker 3

Our efforts to consolidate our vendor network are progressing as we focus on improving product cost by balancing purchasing power per vendor, diversifying geographical product sourcing to reduce dependencies on certain countries of origin and improving consistency in our fabrics and fit. As Christal mentioned, in the 1st week of Q2 2024, we implemented return policy changes to stabilize our return rates and reduce the financial impact of returns to our net contribution margin. The changes added a modest restocking fee to all returns as well as tightened return window. Preliminary data suggests that our policy changes are yielding favorable outcomes in attracting customers with a stronger inclination to retain products. We will continue to monitor, evaluate and enhance our return policy to further discourage excessive return behavior and minimize unprofitable customers.

Speaker 3

On the fit front, we're striving to reduce fit related returns by implementing a holistic approach that enhances the overall shopping journey for our customers while optimizing our bottom line. We've improved our collaboration and communication channels with key vendors to streamline fit communication and to refine products with improved fit to flexibility and consistency, while preserving the LULU's fit expression. The anticipated benefits from these enhancements are expected to affect our assortment by late Q2 of 2024. We're also exploring utilizing real customer feedback to enhance fit information on the Lewis platforms, empowering shoppers to make more informed sizing decisions. Number 2, continued investments in the lulz brand.

Speaker 3

Building on the success of our brand activations at Lulus on Melrose, we are promoting the Lulus brand in new and exciting ways with a number of in person activations, including through experientials and pop ups. Our first major multi channel brand campaign, Friends for Life, launched in early Q2 and is a key example of how Lulus is working hard to reinvigorate our core customers and cultivate a new era for LULU's where we can reinforce our differentiated brand image. The Friends for Life campaign, which centers on a group of 4 women during a pivotal year in their lives, underscores how Lulus is here there for women during all of life's moments, from the everyday to the extraordinary. We're testing new out of home opportunities, designing experiential events that celebrate community and bring the brands to life, activating new social and influencer initiatives and exploring strategic partnerships that align with the Lulu's customer. For example, we have launched a Bestie's death brunch series, where we meet our customers for brunch across several cities in the U.

Speaker 3

S. And effectively bring the URL and the IRL brand hug together. We are focused on driving partnerships, influencer edits and social content creation volume and amplifying impact and reach through earned media, brand relationships and other channels. Our first influencer edit of 2024 with Kennedy Lyons saw great success in February. The edit garnered close to 5,000,000 video views, over 1,000,000 impressions and was successful in driving new visitors to Lulu's platforms.

Speaker 3

We are very encouraged by the strong return on these types of collaborations and we are looking forward to launching several additional influencer edits in the coming months in addition to growing our overall creator count per month. We also received significant exposure in the first quarter on Los Angeles KTLA News and the Kelly Clarkson Show, which featured Lulus on air and offered nearly 200 guests in the audience gift cards. To date, we've seen high double digit redemptions resulting from our appearance on the latter, with the majority redemptions coming from new customers. We are very excited about the high conversion rate we are seeing through these placements and promotions and we will continue to seek these opportunities. We've undertaken a strategic approach to media, 3rd party brand partnerships and creator content aimed at maximizing impacts and amplification of our content and campaigns.

Speaker 3

3rd party brand partnerships is a major initiative for us this year in our efforts to expand our customer reach and leverage other brands' platforms to increase awareness for the Lulus brand. For example, recently we collaborated with footwear brand, Teva, for our Desert Disco Festival showroom event, where we hosted more than 100 influencers and secured media coverage of the event in consumer lifestyle publications. Additionally, this year, we've achieved notable publicity milestones, including expanding our relationships with media, hosting successful press briefings and fostering discussions with several brand franchises and studio productions for potential partnerships. We are encouraged by this strategy's impact and reach as well as the increased interest from various media outlets we are receiving. We are building a foundation and are very excited about our packed roster of upcoming influencer edits and branded media partnerships that we will expect to continue to build the momentum of the Louis brand, Louis awareness and ultimately revenue.

Speaker 3

Number 3, technology enablement. In the Q1, we rolled out a complete restyling of our website with various enhancements around product discovery that has driven positive engagement. Product detail pages show large photography and video where available. We have added video to an increasing number of our products to provide our customers with a better perspective on how the garments look and flow with Mufin. The website redesign provides for a clean shopping experience distinction between Lulus and Lulus Weddings such that each is better tailored to its specific product discovery needs.

Speaker 3

Our product listing pages have been enriched with additional content elements, including video to support our customers in their product discovery within and across product categories. We are standing up various technology platform enhancements to better capture customer demand. At the end of January, we launched presale order technology which allows customers to place preorders on products that are out of stock or have limited size availability at the point of sale. We saw successful pre sale conversion during testing and we have since initiated a broader rollout of this tool to support the customer shopping journey and mitigate potential for lost sales. We continue to improve our operational efficiency with strategic investments in automation and robotics in our distribution centers.

Speaker 3

In Q2, we will be adding additional automation in our largest fulfillment center in Eastern Pennsylvania, which we expect will improve order accuracy, reduce our cycle time and improve our unit economics in that facility. We are excited about the many initiatives we have in place to get the right products into the hands of customers that connect with the Lulu's brand beyond the transaction. We are focused on executing against these opportunities and the positive impact we expect it will have on Lulule's customers, the LUKRU and our investors going forward. And now I'll hand you over to Tiffany Smith, Lulu's Chief Financial Officer to provide more color on our financials.

Speaker 4

Thanks, Mark, and good afternoon, everyone. Our net revenue for the Q1 was approximately $77,300,000 down 15% year over year, Driven by the net revenue miss to our plan, partly offset by disciplined levels of operating expenses, our first quarter adjusted EBITDA loss of $2,700,000 fell slightly below our Q1 expectations. We continue to observe a promising upward trend in occasion wear purchases with the sales mix of these categories increasing sequentially from Q4 and from Q1 of last year. This trend aligns with a sales mix shift toward higher return rate products, amplifying return related costs for the quarter. We also saw a higher concentration of expedited orders for part of the quarter, resulting in increased outbound shipping expenses, partially offset by a full quarter of savings from shipping carrier diversification when compared to Q1 of last year.

Speaker 4

Lastly, selling and marketing costs as well as general and administrative expenses were substantially lower on a dollar basis, though slightly higher on a percentage of net revenue basis attributed to the higher return rates. Moving on to the Q1 P and L line item comparisons to the same period last year. The 15% decline in net revenue year over year stemmed primarily from higher return rates as well as lower markdown sales during the period. As our customers' preferences in Q1 continued to lean toward newness, novelty and occasion wear, the resulting product mix and lower final sell ratios drove our overall return rate in the Q1 above that of the prior year. With return rates continuing to compress our sales growth and the cost of returns impacting our profitability through Q1, we implemented return policy changes in early Q2.

Speaker 4

These policy changes, while aimed at directly improving our profitability by reducing return rates and partially offsetting the cost of returns, are designed to work alongside other site enhancements and fit improvements to arm our customer with better information, increasing confidence in her purchases so that she can shop with greater intent to keep more of her purchases. Our early Q2 reads since the return policy change suggests that while our gross demand is down year over year, primarily driven by lower UPTs, an indication that our customers are being more selective about their purchases, we expect lower return rates and higher contribution margins. Our expectation is that net revenue comparisons to last year trend toward negative high single digits in April, we expect continued sequential improvements on net revenue trends. Gross margin ended the quarter at 42.3%, an increase of 60 basis points compared to the same period last year, driven by lower markdown sales as well as higher margin product mix as newness, novelty and occasion wear continue to resonate with our customers. Building on the margin improvements observed in Q1, along with benefits of the return policy changes implemented in Q2, we are also seeing improvement in our April gross profit dollars, which are expected to be down mid single digits compared to the same period last year.

Speaker 4

Moving down the P and L to give some insights into expense line items. Q1 2024 selling and marketing expenses were $17,700,000 down about $1,800,000 from Q1 2023 due to lower marketing spend and merchant processing fees in the period. As we've highlighted in the past, we manage our marketing spend in conjunction with markdowns and discounts. And in the Q1, we maintained the combination of these items within our typical range as a percentage of revenue. General and administrative expenses decreased by about $3,200,000 to $21,100,000 a 13.3% decline compared to Q1 2023.

Speaker 4

The decrease was primarily driven by a reduction in stock based compensation expenses due to a one time reversal of previously accrued expenses coupled with lower variable labor costs driven by lower sales volume as well as lower insurance costs. Our net loss of $5,700,000 was in line with a net loss of $5,600,000 in the same period last year. Our adjusted EBITDA loss for the quarter was approximately $2,700,000 compared to Q1 2023's adjusted EBITDA gain of $16,000 Our adjusted EBITDA margin for Q1 was negative 3.4% compared to 0% in the same period last year. Interest expense for the quarter was approximately $383,000 compared to $523,000 in Q1 2023. For the quarter, we reported a diluted loss per share of $0.15 which is a decrease of $0.01 compared to a diluted loss per share of $0.14 in the Q1 of 2023.

Speaker 4

Throughout the Q1 of 2024, 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 provided by operating activities for the quarter improved by $3,200,000 or 88% on a year over year basis with $6,900,000 of net cash provided by operating activities in Q1 of 2024 compared to $3,700,000 of net cash provided by operating activities in Q1 of 2023. Similarly, free cash flow for the quarter improved by $3,400,000 or 127 percent on a year over year basis. We repaid $2,000,000 of the revolver during Q1 2024 and plan to continue to pay it down. We ended the quarter with cash of about $5,500,000 and a total debt position of $6,000,000 which was the amount drawn on our revolver, resulting in a net debt balance of $500,000 Also, we are pleased with the announcement of our newly authorized stock repurchase program of up to $2,500,000 of Lulu's common stock, which enables us to utilize our strong liquidity and cash flow position to opportunistically repurchase shares of Lulu's stock, while continuing to support organic growth objectives to drive shareholder value.

Speaker 4

We will continue to take a holistic view on evaluating how we allocate capital on a quarterly basis to ensure we are getting the highest return on our investments, while also maintaining a healthy financial position. Our inventory balance at quarter end was $41,300,000 down about $10,600,000 from the same period last year. This 20% inventory decrease year over year exceeded our 15% year over year sales decrease, which reflects our ability to manage inventory in challenging macro environments. Our primary focus is on maintaining brand integrity and preserving gross margin levels as we strengthen our buying model. Moving on to guidance.

Speaker 4

Due to our softer Q1 sales as well as the impacts of our new return policy and our conviction in seeking more profitable customers, we are slightly revising our expectations for full year 2024 net revenue to be between $350,000,000 $360,000,000 a $10,000,000 reduction from the previous range of $350,000,000 to $370,000,000 We believe our return policy changes will encourage customers to purchase with greater intent to keep and discourage excessive returning behavior. Additionally, given our inventory health and return to chase mode for many of our product classes, we anticipate more difficult comparisons related to markdown sales that will not be anniversaried. As a result, we expect to see less upside in net revenue this year, but improved gross margins as our updated return policy will drive more profitable unit economics. We anticipate 180 to 200 basis points of year over year gross margin expansion throughout the balance of the year. As such, we are raising the low end of our adjusted EBITDA range to reflect an updated full year adjusted EBITDA range of $6,000,000 to $8,000,000 compared to our previous range of $5,000,000 to $8,000,000 This equates to an adjusted EBITDA margin of between 1.7% 2.2%, a modest improvement compared to 2023 as we make progress on our previously highlighted initiatives.

Speaker 4

These updates to our sales and profitability outlook for 2024 emphasize our focus on profitable orders and gross margin expansion, even if it comes with a more tempered top line outlook in the short term. As a reminder, our baseline guidance anticipates that our core customer, who is heavily positioned within the $50,000 to $150,000 income range, we'll continue to face macro headwinds throughout 2024. 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 quarters, driven by heightened demand for event dressing, with fiscal Q4 and Q1 typically representing the lowest net revenue and profit quarters of our fiscal year. In fiscal 2024, we anticipate that Q1 will be our lowest sales and profit quarter of the year.

Speaker 4

We expect our net revenue comps to increase sequentially each quarter this year with the most significant step ups in Q2 and Q3 and a more modest step up in Q4. Also, given our updated return policy, we expect to see slightly lower average order values driven by lower units per transaction. However, we anticipate net units per transaction kept after returns will remain relatively flat. 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. With respect to the previously cited year over year gross margin expansion of 180 to 200 basis points, we expect the most significant gains to occur in Q2 and Q3.

Speaker 4

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 continue to anticipate interest expense for the full year 2024 to be approximately $600,000 We continue to 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 40,000,000 shares. Moving on to capital expenditures. We continue to expect between $5,000,000 $6,000,000 for the full year, which includes capital expenditures for technology enablement that supports customer engagement and customer experience across multiple channels as well as additional automation capabilities in our distribution centers. We believe investing in future growth opportunities, driving efficiencies and enhancing the customer experience are key to our long term success.

Speaker 4

And with that, I will pass it back to Crystal for closing remarks.

Speaker 2

Thank you, Tiffany. We are confident in the resilience of our fresh, not fast, direct to consumer business model, coupled with the adeptness in testing, learning and optimizing within the dynamic retail landscape. With a healthy balance sheet and heightened focus on gross margin expansion, we believe we are well equipped to navigate the near term instability and trends. Thank you to our brand fans, BlueCrew and shareholders for supporting us in our mission to deliver attainable luxury to our customers and we look forward to updating you on our next earnings call. With that, I'll turn it over to questions

Operator

will now be conducting a question and answer Our first question is from the line of Brook Roche with Goldman Sachs. Please go ahead.

Speaker 5

Good afternoon and thank you for taking our question. Crystal, I was hoping you could elaborate on factors that give you confidence in a return to strong healthy mid single digit growth for the rest of the year. What assumptions are underpinning that improvement as you think about active customer count, customer acquisition between high income customers and lower income customers that might be under a little bit more macro pressure and order values? Thank you.

Speaker 2

Hey, Brooke. Thanks for the question. I would say there's several factors that are giving us confidence. Just to tick off a few, we have a lot of brand activations, partnerships and influencer partnerships that have been so far reading really positive for our business and we continue we're going to continue to invest in that throughout the rest of the year. From an assortment perspective, the depths of our buys are increasing and we have more and more confidence in our reorder model and some of the changes that we've made towards buying with more depth and more confidence in our second purchases.

Speaker 2

From a casual and sportswear perspective, we anticipate seeing much more momentum there, especially with our new merchandising team adds. So highly confident around just returning to a more normalized non event wear business. From a fit consistency perspective, Mark has spoken to some of the efforts that we have around just giving our customers a better experience and more bit consistency across product classes, which should in turn bring lower return rates and just a higher net keep rate throughout the rest of

Speaker 6

the year.

Speaker 2

And lastly, just from a price extension perspective, we are testing and seeing quite positive results around more entry level price points as well as more aspirational price point testing to capture a much broader customer range. That said, we do anticipate some continued pressure on our active customer file counts. We spoke a few quarters ago around a return policy change around pushing back on more excessive returning customers and walking away from less profitable customers. So we do anticipate that there is some pressure in terms of comps year over year. But again, the story here is more gross margin expansion over seeking unprofitable growth.

Speaker 2

So highly optimistic on our side, our merch is getting better and better every day and very optimistic around the step up that we talked about.

Speaker 5

Great. And then maybe a follow-up for Tiffany. You raised the low end of the EBITDA guide despite some softer revenues in the Q1 versus expectations. Can you help quantify the impact of the return policy change to your profit forecast for both gross profit and adjusted EBITDA on a dollar basis relative to other changes that may have happened in the quarter? Thank you.

Speaker 6

Sure. Good question, Brook. So our previous guidance the original guidance that we put out for the year actually already contemplated benefits to improving return rates, particularly a bit more heavily in the back half of the year, seeing some year over year improvement there. That was really already contemplated. We did pull forward the changes to the policy earlier in the year, which is contemplated in the updated guidance and the updated the raise of the low end of the EBITDA range, essentially reflecting just an earlier rollout of the policy changes, which we expect to help improve the unit economics overall and lead to more profitability overall just because of lower return processing costs, return shipping costs, etcetera, that will help our profitability sooner in the year than what we originally anticipated.

Speaker 2

The only thing that I would add to that is our lower anticipated sales being driven from markdowns is also going to have a net positive benefit to our EBITDA flow through. So that's also contemplated.

Speaker 5

Great. Thanks so much. I'll pass it on.

Speaker 6

Thanks, Buck. Thank you.

Operator

Thank you. Our next question is from the line of Janine Stichter with BTIG. Please go ahead.

Speaker 7

Hey, everyone. You got Ethan on the line for Janine. First question, could you just provide some more color on the gross margin initiatives in place that get you to that 180 to 200 bps of expansion for the year and how they're progressing so far?

Speaker 6

Sure. Hi, Ethan. This is Tiffany. So there's a couple of things happening there. We spoke to on the call around impacts that we saw in Q1 and Crystal just mentioned it on the previous response around markdown sales being lower than what we anticipated.

Speaker 6

So seeing more strength from our reg price selling is certainly going to enhance gross margin that we alluded to, as well as just the sort of new and novelty, new products that we're seeing resonating very well with our customer. And as we Crystal spoke to on the first response, just increasing the depth of our buys, getting more new product into our product funnel, I think, is going to overall help bring up our product margins. And then the return policy changes also we expect, although this is still very new and very recently rolled out, we do expect there to be some margin enhancement coming from that in the form of things like less shipping costs, less damaged product coming back to us, etcetera, from the return rate. And just to elaborate on the return policy changes, we've got about a month since it's been rolled out. And one of the promising factors that we're seeing is there is UPTs coming down at a growth level, which to us is indicating the customer shopping with greater intent.

Speaker 6

But we're seeing our net UPTs kept holding a similar a similar keep rate as far as what was prior to the policy change, which all in all kind of helps to build out a more profitable unit economics

Speaker 2

for us. We'd also be remiss to not mention our production team being fully functional and up and running at this point and we are starting to see some benefits while very gradual and will still take time to mature over the next couple of years. They've done a great job in increasing our margins on our buys.

Speaker 7

Got it. That's really helpful. And then just another one for me. I think you mentioned a little bit. I would love to hear some more about your plans on growing active and casual wear into the assortment, how that's progressing as well?

Speaker 2

Yes. So it's progressing great. Of course, we just added a new CMO who is going to take us to the next level and it will take time and our buying model is very much driven by testing, learning and repeating. So we're going to do it cautiously, but also investing in where we believe our customer would shop us in these other categories. So that will evolve over the next several quarters.

Operator

All right. Thanks. That's it for me. Thank you. Thank you.

Operator

Our next question is from the line of Dina Telsey with Telsey Advisory Group. Please go ahead.

Speaker 8

Hi, good afternoon, everyone. As you think about reorder categories and you talked about encouraging trends, what did you see there? How do you think of dresses and event dressing versus some of the reorder categories and the margin impact going forward? How are you planning? And then was there any cadence to the quarter in terms of what you saw?

Speaker 8

And then your store plans, given you mentioned Melrose has been a success, anything you're learning about your customer there versus online, what they buy there, what the average transaction is versus online? Thank you.

Speaker 6

Thanks, Dana. I'll kind of touch on the non or the dress category business and product category highlights. We did see our growth rates in special occasion and bridal remaining strong due to the enhancements that we've made in our assortment, mostly around novelty and newness. And we think the what we've done on the dress front demonstrates the opportunity that we have also to grow our non dress business, which we've spoken to again with our new CMO and our new merchandising leadership really having a strong hold on what's going to be developing there on the nondress categories. But we continue to be really encouraged by what we see on the event dressing front of the business overall.

Speaker 2

From a store plans perspective, we're thrilled with progress that we've made around utilizing our Melrose store, not only for brand credibility online, which is helping marketing efficiency there, but also for influencer activations, customer activations like our 100 dresses for 100 brides or our desert festival activation has been a really great opportunity for us to showcase the quality of our product and also take it to a digital space across social and having customers and influencers like connect with it. That said, we're going to continue to be very calculated around future store plans. I think the future for Lulu's is absolutely omni, but for 2024, we're focusing on rebalancing our assortment across new novelty and reorder, and we'll be looking into next year and years forward from an extension of our omni footprint.

Speaker 6

Cadence of what we saw during the quarter

Speaker 8

and the exit rate going yes, exactly.

Speaker 6

So just generally speaking, in terms of the Q1 cadence, after we had our earnings call towards the back half of March, we did see softness on the sales side, which alluded to before was really driven by quite a bit higher markdown or a drop off in markdown sales relative to last year that we didn't comp this year. Similarly, we're seeing improvements in profitability from a gross margin perspective as a result of not comping those markdown sales. So that was a notable change that we saw. We saw markdown sales in general down throughout the quarter, but it dropped off pretty substantially towards the back half of March and we're continuing to see markdown sales comping way down into early Q2 as well. But again encouraged by the effect that that's having on margins overall.

Speaker 3

And of course, it's also a good indicator for the health of our inventory as we have it today.

Speaker 2

And also contemplated in our narrowing of our range in our guidance.

Speaker 8

Got it. Thank you very much.

Speaker 6

Thanks, Lena.

Operator

Thank you. Ladies and gentlemen, as there are no further questions, that concludes the conference of Lulu Fashion Lounge Holdings. Thank you for your participation. You may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
Lulu's Fashion Lounge Q1 2024
00:00 / 00:00