Lulu's Fashion Lounge Q4 2024 Earnings Call Transcript

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March 27, 2025

There are 5 speakers on the call.

Operator

Good afternoon, and welcome to Lulu's Fourth Quarter and Fiscal Year twenty twenty four Earnings Conference Call. Today's call is being recorded and we have allocated one 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 Beckenstrauss. Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and thank you for joining us to discuss Lulu's fourth quarter and fiscal year twenty twenty four results. Before we begin, we would like to remind you that this conference call will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward looking statements, including but not limited to statements regarding management's expectations, plans, strategies, goals and objectives and their implementation, opportunities for growth and a return to profitability in the coming quarters, the long term growth trajectory of our business, our expectations around the continued impact of the macroeconomic environment, including as a result of the imposition of tariffs, consumer demand and return rates on our business, our future expectations regarding financial results our ability to realize the intended impact of cost reduction measures our ability to pursue alternative debt financing options references to the fiscal year ending 12/28/2025, including our financial outlook for fiscal year twenty twenty five, market opportunities, product launches and other initiatives. These forward looking statements are subject to various risks, uncertainties, assumptions and other important factors, which could cause our actual results, performance or achievements to differ materially from results, performance or achievements expressed or implied by these forward looking statements.

Speaker 1

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 12/29/2024, filed with the SEC this afternoon, all of which can be found on our website at investors.lulu.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 are more accurately represent the true operational performance and underlying results of our business.

Speaker 1

The presentation of this non GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non GAAP measures may be different from non GAAP measures used by other companies. Reconciliation of GAAP to non GAAP measures as well as the description, limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. We also use certainty operating metrics, including gross margin, average order value and total orders placed. A description of these metrics can be found in this afternoon's press release and in our SEC filings.

Speaker 1

Joining me on the call today are our CEO, Crystal Intham our CFO, Tiffany Smith and our President and CIO, Mark Voss. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Speaker 2

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. In a year defined by challenging consumer backdrop and rapidly evolving macro environment, we made meaningful progress identifying underperforming areas of the business and executing strategic realignment to position Lulu's for long term success. In 2024, we sharpened our focus on our core strength, our unique position as a premier destination for occasion dresses, while optimizing our cost structure to align with our current business needs. Simultaneously, we refocused our commitment to three initiatives designed to enhance brand strength, elevate market positioning and drive sustainable profitable growth.

Speaker 2

As a reminder, these initiatives include continued product assortment optimization to support margin expansion, continued investment in brand initiatives to fortify customer engagement and brand differentiation, and investments in our proprietary stack and analytics programs to drive technology enablement, including improved decisioning, efficiencies and customer experience. Throughout the year, we made measurable progress against these strategic initiatives, paving the way for us to accelerate momentum in the years ahead and as the macro and consumer backdrop begins to stabilize. Sitting where we are today, with our cost rationalization and reduction measures nearly complete and behind us, we are focused on continuing to drive these key initiatives into 2025. We expect our vision for a more curated and focused assortment to positively impact our separates and shoe categories in the coming quarters. We believe our wholesale channel is gaining momentum supported by targeted expansions and strong brand partnerships that are driving increased visibility and reach.

Speaker 2

At the same time, we expect continued investments in our tech stack and AI capabilities to fuel operational optimization and deeper personalization, enhancing the customer experience, improving retention and supporting long term profitable growth. Importantly, we remain disciplined in our approach to financial management, prioritizing a planned refinancing of our revolver into a more flexible ABL, supporting our commitment to improving liquidity, driving sustainable profitability and generating positive cash flow. While we continue to see macro uncertainty in 2025, we are working diligently to best position our business for success in the years ahead. As it relates to tariffs, we do expect tariff impact on the business in 2025. Our full year guidance contemplates the known tariffs as well as our proactive mitigation efforts.

Speaker 2

While we've taken steps to decrease our exposure to China over the last year, China continues to be one of our primary sourcing locations today. Importantly, our buys for the first half of the year are generally locked in from a pricing perspective, alleviating tariff exposure through mid June. In the second half of the year, we plan to have a larger portion of our receipts directly sourced from factories across multiple geographies, which is intended to mitigate tariff pressures as they are outlined today. We are actively working to accelerate our direct sourcing efforts through year end and into 2026, which we expect will continue to support margin expansion over the long term given less than 5% of our sales are currently driven from products sourced directly from factories. In addition to these efforts, we are closely managing the incremental impact of tariffs as we've done successfully in the past by sharing the impact across vendors, customers and our own margins.

Speaker 2

We continue to closely monitor the evolving situation and our teams remain highly focused on executing our mitigation efforts of calculated sourcing, pricing adjustments and leaning on our strong vendor partnerships. In summary, we believe we are positioned to navigate these challenges while maintaining flexibility and our focus remains on executing with discipline and driving long term growth. Shifting now to our performance in the fourth quarter, we continue to deliver positive double digit sales growth in our special occasion, bridesmaids and bridal categories, reinforcing our leadership in event dressing, even amid a seasonally softer sales period. However, these gains were offset by continued softness in our casualwear segment, which we are actively repositioning to better align with our core focus on event attire. We continue to make strong progress against our strategic initiatives and have implemented the majority of our cost reduction efforts, including the successful consolidation of our West Coast distribution facilities in late February twenty twenty five.

Speaker 2

Additionally, securing alternative debt financing remains a top priority.

Speaker 3

I'll start by sharing some

Speaker 2

of our key positive developments in the fourth quarter. Our Special Occasion and Bridesmaids categories continue to deliver excellent performance in Q4, delivering positive mid teens year over year net sales growth and contributing to another standout quarter for these categories. Seasonal demand remains strong, particularly winter and holiday assortments reinforcing Lulu's position in the market as a go to dress destination. Growth was further fueled by first time reorders of new products, increasing 24% versus last year's Q4, showing positive momentum in our reorder funnel. Purposeful color additions, style introductions and in season adjustments helped to narrow the year over year decline in reorder sales in 2024 from 12% in Q2 to 4% in Q3 and 4% in Q4.

Speaker 2

We maintained a disciplined inventory management in the fourth quarter, reducing inventory by 4% year over year through calculated markdowns and promotions to maintain healthy levels of inventory. Return rates improved for the second consecutive quarter after eight quarters of year over year increases with an improvement of 150 basis points highlighting the material improvements we have made in fit and quality. On the brand front, we launched several successful campaigns and collaborations in the fourth quarter driving higher reach, engagement and media interest, which Mark will share more details around shortly. Earlier this month, we launched a new brand campaign, We Are Lulus, to further solidify our position as a go to dress destination and deepen brand affinity, engagement and loyalty. In wholesale, we made meaningful progress with key retailers while expanding into new collaborations.

Speaker 2

Q4 wholesale revenue grew 76% year over year, driven by high double digit gains among major partners and strong momentum in specialty retail. Notably, this February, we announced our new partnerships with Nuuly, Poshmark and Vanmar. We also deepened our presence with Dillard and Nordstrom's, while expanding third party brand collaborations with Hunter, Reebok and Dingo nineteen sixty nine to name a few. These growing partnerships reflect our focus on reaching customers across diverse shopping channels while maintaining an efficient, scalable growth model. Given our strong momentum, we expect robust wholesale growth to continue through 2025.

Speaker 2

Now addressing the challenges in Q4. Our separates and shoe categories continue to weigh on performance, driving the majority of the year over year net sales declines. As outlined last quarter, we have reevaluated our assortment strategy to better align with our core strength in occasion wear, shifting our separates and footwear assortment towards dressier options more focused around date nights, social events, vacations, and work wear. Key occasions that our customers already engage with us. This strategic realignment is underway and we are optimistic that a more curated assortment and reduced SKU count will enhance the customer experience while also improving profitability.

Speaker 2

Our teams are executing on a refined vision of address your aesthetic with these changes expected to take place over the next few quarters. Gross margin declined 120 basis points for the quarter and 50 basis points for the full year compared to the prior year periods, impacted by higher markdown sales and increased promotional activity to maintain inventory health in response to softer than anticipated sales leading up to and following the election cycle. Additionally, profitability remained under pressure due to elevated markdown activity aimed at maintaining a healthy deleveraging of fixed costs on the smaller net revenue base and the initial one time costs related to the consolidation of our Northern California distribution center with associated impacts expected to continue through part of Q1 twenty twenty five. In the second half of twenty twenty four, we implemented targeted cost reduction measures alongside our high impact initiatives with the goal to improve profitability and position the company for sustainable growth. In Q4, we began realizing the benefits of Q3 cost reductions related to payroll, capital expenditures and the smaller Board of Directors, aligning our cost structure more closely with sales.

Speaker 2

Notably, we outperformed our expectations of 10% to 15% operating expense reductions, achieving 19% reductions in the second half of twenty twenty four compared to the first half of twenty twenty four. We believe these collective measures will drive ongoing efficiencies, strengthen profitability and support long term objectives, all while maintaining a robust operating model that fuels our priorities, generates positive cash flow, protects brand integrity and paves the way for long term sustainable growth. With that, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. Mark will provide updates around progress we are seeing against strategic priorities. Mark?

Speaker 4

Thank you, Crystal. Active customer accounts remained stable through year end, holding flat quarter over quarter despite a year over year decline. New customer loyalty adoption rates continued to gain momentum, while our Love Rewards membership saw another quarter of double digit growth, driving an overall increase in total membership. We are encouraged by the consistent quarterly improvements in these key metrics, which we believe reflect the strength of our targeted focus on brand, assortment and customer engagement. We continued to successfully reactivate lapsed customers at a higher rate than Q4 twenty twenty three and at a similar rate as Q3 twenty twenty four with many customers returning after a twelve month lapse for high performing categories like Bridesmaid, special occasion and day event dresses.

Speaker 4

While our international presence is still in its early stages, it continued to show strong year over year growth in Q4, making fiscal year twenty twenty four a high double digit international growth year. We will continue optimizing our U. S. Based international shipping model, improving our net international sale margins and intentionally building brand awareness in select markets. I'll now share some progress updates around our strategic initiatives during the quarter.

Speaker 4

Starting with our product assortment optimization and related margin expansion efforts. Alongside key year end campaigns like Heritage Prep, Holiday and La Dolce Vita, we leveraged AI driven site merchandising to enhance product discovery and better connect with our customer. In many cases, driving strong engagement and purchase intent. We continue to explore AI capabilities to further optimize displaying our new and existing assortment to our customers in a data driven and where possible personalized way. Our fit enhancement efforts continue to deliver results with return rates improving for the second consecutive quarter.

Speaker 4

Our holistic approach focused on fit flexibility and consistency across key categories remains a priority as we work to further reduce fit related returns. Following the rollout of our new return policy in Q2 twenty twenty four, we saw an uptick in reported damages in Q4 twenty twenty four. To address this, we realigned our policy in Q1 of twenty twenty five to a flat fee rather than a per unit return fee, a move we expect will curb fraudulent claims while maintaining positive return rate trends. The rollout of size XXL is progressing as planned and initial reads continue to show that return rates across sizes XL and XXL combined

Operator

have

Speaker 4

improved. Additionally, we also see an encouraging start of new customer acquisition based on size XXL and expect that the addition of this size over time will contribute to expanding our customer base. We're also adding double XX sizing two or more products resulting in a broad sizing range from double XX to double XL across various product classes and additional extended sizing from 1x to 3x in predominantly bridesmaid dresses. This full size range supports the notion that luus is the dress destination for all of life's moments and the healthy sell through we see underscores the demand across our customer base. While we've made progress diversifying our sourcing out of China, a significant portion of our products are manufactured there.

Speaker 4

As we discussed last quarter, we are confident in our ability to largely mitigate the impact of recent tariffs using tactics successfully deployed in prior years, distributing costs across vendors, customers and our own margins. In the near term, we believe the value and quality of our Lulus products allow for sufficient price elasticity to absorb a portion of the impact through surgical price adjustments. Over the medium to long term, our direct sourcing initiatives and country of origin diversification position us to offset tariff related pressures while maintaining product quality and a competitive pricing structure. Turning to our investments in strengthening brand awareness and customer engagement. We continue to elevate the Lulu's brand through calculated investments in awareness, engagement and customer loyalty.

Speaker 4

In the fourth quarter, we launched high impact third party and influencer partnerships, brand campaigns and feasibility programs and substantially grew our ambassador program by more than 50%, driving increased social engagement by 33% quarter over quarter. These efforts helped deliver new customers, lowered acquisition costs and created strong momentum. We activated the Lulu's brand around key pop cultural moments showing up where it matters most to our customers. Highlights include attending Sabrina Carpenter's Short and Suites tour and taking advantage of fall formal season featuring partnerships with collegiate sororities nationwide. For curated events and content with our ambassador and influencer network, we drove strong reach and elevated brand impressions.

Speaker 4

Additionally, as Crystal mentioned, we launched this March our new out of home brand campaign, We Are Lulus to kick off International Women's Month. Building on the success of last year's Friends of Life campaign, which nearly doubled brand recall over Lulus' twenty twenty one digital campaign, this multi phase initiative highlights our positioning as a dress destination and features our LULUS team through customer facing activations and events, influencer collaborations and out of home marketing such as prime billboard placement in New York's Times Square and targeted placements in key college cities to foster early brand loyalty and capture the attention of a high value demographic at a pivotal stage. We see a significant opportunity to continue investing in awareness as a long term growth driver. Our third initiative focuses on driving technology enablement to improve decisioning, efficiencies and create seamless customer experience across channels. In Q4, the Lulus app saw a significant increase in usage, conversion and year over year revenue growth fueled by extended performance marketing integration into the app.

Speaker 4

We see continued app growth opportunities and we will be testing first time app only features that personalize the customer experience even further. Additionally, we released return policy updates and enabled robotics driven fulfillment and returns in our Southern California distribution facility. We also launched the Lulus and Poshmark integration and we are very excited that our customers can now list their high quality Lulus products on Poshmark directly and effortlessly from their Lulus order history page. And in that way, extend the life and usage of Lulus products. We recently consolidated two of our distribution facilities by moving operations from our former distribution facility in Chico, Northern California to our existing logistics facility in Southern California.

Speaker 4

Consolidation started in Q4 twenty twenty four and was successfully completed in Q1 twenty twenty five. Kudos to all the teams involved. We did a fantastic job ensuring that our customers were never impacted by this move of operations and continued to receive their orders on time. A special thanks and shout out to all Chico distribution center colleagues who cared deeply about our customers and the quality of their work. They will always remain an essential part of the Lulu story.

Speaker 4

All in all, we are encouraged by the continued momentum across our strategic initiatives as we enhance cost efficiency and more effectively expand our reach to a broader customer base. And now I'll hand you over to Tiffany Smith, Lulu's Chief Financial Officer to provide more color on our financials.

Speaker 3

Thanks, Mark, and good afternoon, everyone. As anticipated, our Q4 net revenue was approximately $66,100,000 down 12% year over year driven by a 12% decrease in total orders placed and a 5% decrease in average order value, partially offset by improved return rates, which improved for the second consecutive quarter on a year over year basis. For the full year, net revenue totaled $315,900,000 down 11% versus 2023, primarily due to a 12% decline in total orders placed and higher return rates, partially offset by a 3% increase in average order value. Gross margin for the quarter was 37.9%, down 120 basis points versus the prior year, impacted by higher markdowns and discounts and ongoing softness in casual wear. For the full year, gross margin declined 50 basis points to 41.2% compared to 2023.

Speaker 3

On the expense side, Q4 selling and marketing expenses totaled $12,700,000 down about $2,600,000 year over year as we shifted our investment toward higher markdowns and discounts. For the full year, selling and marketing expenses were $72,900,000 a reduction of $3,400,000 versus 2023, reflecting disciplined cost management as well as a higher mix of markdowns and discounts. General and administrative expenses decreased $2,900,000 to $18,900,000 in Q4 twenty twenty four, a 13.3% decline year over year due to lower employee related costs driven by fixed cost reductions and lower variable labor and supply costs due to lower sales. For the full year, general and administrative expenses were $81,300,000 down $10,800,000 or 11.7% from $92,100,000 in 2023, driven by a combination of fixed cost reductions, lower variable costs resulting from lower revenues and lower insurance costs. Net loss for Q4 worsened to $31,900,000 from $7,200,000 year over year, reflecting the impact of a non cash twenty eight point four million dollars goodwill impairment charge.

Speaker 3

Excluding the goodwill charge, our adjusted net loss for the quarter of $3,500,000 represents the narrowest loss of the last six quarters and more than a 50% reduction in the net loss in Q4 of last year. Our focused cost reduction efforts drove $5,500,000 or 15% in savings across selling and marketing and general and administrative expenses, more than offsetting the gross profit decline of $4,300,000 Q4's net loss also benefited from a state income tax receivable accrual contributing to a $2,700,000 year over year increase in the income tax benefit and a realized Q1 twenty twenty five cash benefit. For the full year, our net loss was $55,300,000 compared to $19,300,000 in 2023. Included in the current year's net loss was a non cash goodwill impairment charge of $28,400,000 Excluding the goodwill impairment, our adjusted net loss for the year was $26,900,000 Q4's adjusted EBITDA loss was approximately $3,300,000 compared to a $2,000,000 loss in Q4 twenty twenty three, driven primarily by the impact of lower gross profit, partially offset by lower expenses. Adjusted EBITDA margin was negative 5% versus negative 2.6% in the prior year.

Speaker 3

For the full year, adjusted EBITDA loss was approximately $9,700,000 compared to a gain of $3,200,000 in 2023 with full year adjusted EBITDA margin of negative 3.1% versus positive 0.9% in 2023. Interest expense totaled $313,000 in Q4 versus $337,000 in Q4 twenty twenty three and $1,300,000 for the full year 2024 compared to $1,700,000 in 2023. Diluted loss per share for the quarter was 0.76 compared to a diluted loss per share of $0.18 in Q4 of twenty twenty three. Excluding the impact of the goodwill impairment, our adjusted diluted loss per share for the quarter would have been $0.08 representing a $0.1 improvement compared to Q4 of twenty twenty three. Our full year diluted loss per share was $1.33 which was $0.85 worse compared to 2023.

Speaker 3

Excluding the goodwill impairment, our adjusted diluted loss per share for the year would have been $0.65 or $0.17 worse than 2023. In Q4 twenty twenty four, net cash used in operating activities was $2,500,000 an improvement from $5,700,000 net cash used last year. Free cash flow used in the quarter of $3,000,000 improved by $3,700,000 year over year. We ended the quarter with net debt of $8,600,000 an increase of $3,100,000 compared to Q4 of twenty twenty three. For the full year, net cash provided by operating activities was $2,600,000 compared to $15,400,000 in 2023.

Speaker 3

Free cash flow used for the year was $300,000 compared to free cash flow generated of $11,500,000 in 2023. Our inventory balance at quarter end was $34,000,000 down about $1,400,000 year over year reflecting ongoing discipline in inventory management. Inventory levels were down 4% year over year while our fiscal year '20 '20 '4 sales were down 11. This reflects the impact of prior year inventory carryover sales, which boosted twenty twenty three's results, but did not recur in 2024. To provide further context on our credit facility, as of the end of Q4, we had $13,100,000 borrowed under the 15,000,000 revolving line.

Speaker 3

During the first quarter of twenty twenty five, we made a $3,000,000 repayment and do not have access to additional borrowings under our credit facility. As outlined in our 10 ks, we've executed an additional amendment to our credit agreement, which provides a limited waiver to compliance with the financial covenants for the period of four fiscal quarters ended on or about 12/31/2024, as well as a suspension of measurement of certain financial covenants for the first quarter ending on or about 03/31/2025, while we continue to pursue alternative financing. The amendment contemplates that we will complete a refinancing and exit the credit agreement with Bank of America by 06/15/2025. Moving on to guidance. For fiscal year 2025, we anticipate net revenue to be between $280,000,000 and $310,000,000 which represents a decrease of between 112% compared to 2024.

Speaker 3

The low end of our range contemplates further macroeconomic pressures and challenges to consumer confidence and demand. The upper end of the range assumes stable demand and continued improvements in our product assortment and brand. As noted last year, we began implementing cost reduction measures in the second half of twenty twenty four to improve profitability and align our cost structure with sales growth trends. The benefit of these reductions is expected to drive an inflection to positive adjusted EBITDA in 2025. Our adjusted EBITDA outlook for 2025 is expected to be between $0 and $6,000,000 representing an increase of between $9,700,000 and $15,700,000 compared to 2024.

Speaker 3

The downside of our adjusted EBITDA outlook contemplates a worsening consumer backdrop and margin pressure related to inability to mitigate the impact of tariffs. Related to liquidity, we anticipate our Q1 twenty twenty five ending net debt position to be between $3,000,000 and $4,000,000 down from $8,600,000 as of the end of Q4 twenty twenty four and we expect to be operating cash flow positive in 2025 including in Q1 twenty twenty five. Lastly, we expect another well controlled year of capital expenditures, which are planned to be between $2,500,000 and $3,000,000 down between 13% to flat versus the prior year. And with that, I'll pass it back to Crystal for closing remarks.

Speaker 2

Thank you, Tiffany. We are confident that our clear focus on assortment optimization, brand awareness to drive customer engagement and investments in our tech enabled business model alongside disciplined cost management positions us for sustainable growth and improved profitability in the year ahead. While work remains to reset our shoes and separates businesses, we are encouraged by the strong momentum in dresses and wholesale. By optimizing our business model and refining our casual segment towards dressier separates, we are reinforcing our commitment to operational excellence, adaptability and long term success in an evolving consumer landscape. I'd like to thank our Lou Crew for their tireless commitment to our brand and our customers, our loyal customers for their continued trust and our valued shareholders for their continued support.

Speaker 2

As we strengthen our position as the go to dress destination for life special moments, we remain confident in our path forward. We look forward to sharing our progress on our next earnings call. And with that, I'll turn it over to questions now.

Operator

Thank you. We will now be conducting a question and answer session. This does conclude the question and answer session as well as today's teleconference. Thank you for your participation. You may disconnect your lines at this time.

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