Good afternoon and welcome to Lulu’s Second Quarter 2023 Earnings Conference Call. Today’s call is being recorded and we have allocated 1 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 2023 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts 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 year ending December 31, 2023, including our financial outlook for full year 2023; 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 January 1, 2023, filed with the SEC on March 14, 2023, 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 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; our President and CIO, Mark Vos; and our Executive Chairman, David McCreight. Following our prepared remarks, we’ll open the call for your questions. With that, I’ll turn the call over to Crystal.

Thank you, Naomi, and good afternoon, everyone. Thank you for joining us today. Before I jump into our results, I’d like to thank our team for their tireless efforts and dedication to building our brand and delivering the best experience to our brand fans. During the second quarter, like many others, we experienced continued choppiness in consumer demand, a shift from the early signs of stabilization we observed at the beginning of the second quarter. Top line demand fell short of our expectations and return rates worsened compared to our forecast, leading to the disappointing Q2 results. More specifically, revenue was $106 million, representing a 19% decline compared to Q2 2022. Similar to the first quarter of 2023, the continuation of a challenging macro environment led to softer consumer demand. We also faced tough comparisons in the first half of 2Q, following last year’s benefit from the return to events, where we saw a 27% year-over-year net revenue growth in 2Q 2022. Our adjusted EBITDA for Q2 2023 was $4.2 million compared to $15 million in Q2 2022, primarily due to lower top line demand and higher returns. We continue to be surgical with promotions and markdowns and are focused on optimizing full-price sales in spite of the highly promotional environment around us. We believe a more normalized and balanced approach to promotions is best for the longer-term health of the brand, and it reinforces our attainable pricing for high-quality products. Despite the shortfall in the quarter, our balance sheet remained strong, and aside from our revolver, includes no long-term debt. We believe that, along with our capital-light operating model, positions us well to continue investing in long-term growth opportunities and weather continued macro uncertainty. Net cash provided by operating activities was $4.6 million in the second quarter of 2023…

Thank you, Crystal. First, I’d like to start by providing an update on our customer and how she interacted with us during the quarter. New and repeat customer counts were down in Q2 year-over-year, while units per transaction was up sequentially from Q1 2023, a decrease compared to Q2 of last year. At the end of Q2 2023, we had 3.1 million active customers compared to 3.3 million at the end of Q2 2022 and 3.2 million at the end of Q1 2023, representing a 5% and a 3% decrease, respectively. We have redoubled our efforts to capture and retain customers in this more challenging and dynamic macroeconomic environment, leveraging the strength of the Lulu’s brand, the affordable quality of our products and the effectiveness of the Lulu’s brand hug. To that end, from a marketing perspective, we are continuing to shift more of our marketing spend from direct response performance marketing to brand awareness marketing, while keeping overall marketing efficacy and spend as a percent of revenue within our targeted ranges to remain first order contribution margin profitable. This strategy allows us to introduce Lulu’s to more consumers and to improve the overall efficiency of our marketing investments over the long term. Despite the challenges in customer discretionary spending and the year-over-year increase in the cost of new customer acquisition, we continued our investments in more top-of-the-funnel brand marketing, and our influencer and ambassadors generated brand reach, impressions and earned media value to support Lulu’s word-of-mouth marketing. Based on our social media and brand’s data tracking, we have seen continued gains in the Lulu’s share of voice across multiple channels and improved brand familiarity, which provides us with the confidence that we’re on the right growth path. Kudos goes to our marketing and creative teams, who have successfully attracted…

Thanks, Mark and good afternoon everyone. While we saw signs of stabilizing consumer trends in early Q2 and observed sequential monthly improvement in our net revenue year-over-year comparisons as the quarter progressed, net revenue fell short of our expectations with a double-digit year-over-year decline in Q2, mostly attributed to lower top line demand and higher-than-expected return rates. In spite of lower net revenue, we are encouraged by sequential improvement in our gross margin rate, as well as an improving spread in our quarterly rate compared to Q2 of 2022. With respect to the second quarter results, our net revenue of $106 million was down 19% year-over-year, which fell short of our expectations for the quarter. The decline was primarily driven by a decrease in total orders of 16% compared to the prior year, a modest 1% decrease in average order value to $135, higher markdowns and discounts and product returns. While our overall return rate in the second quarter was higher than the prior year, we observed an improving year-over-year spread in our monthly return rates as the quarter progressed, primarily explained by product mix shift during the quarter. Gross margins for the second quarter declined by 110 basis points from the same period last year to 44.7%. While gross margin was still below expectations, it improved sequentially by 300 basis points from 41.7% to 44.7% and was in line with Q2 2019, a more normalized pre-pandemic period. Compared to the same period last year, gross margin declined as a result of several factors: increased markdowns and discounts, higher return shipping costs, and slightly higher depreciation and applied materials burden related to our distribution facilities. This was partially offset by favorability in outbound and inbound freight costs. For historical comparisons to a more normalized pre-pandemic period, markdowns and discounts in…

Thank you, Tiffany. I’d like to take a moment to thank each of you, the Lulu crew, our brand fans, shareholders and the Board for their continued support as we continue to work towards executing on our long-term strategy and delighting our customers. With that, I’ll turn it over to questions now.

Thank you. [Operator Instructions] And our first question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Good afternoon. And thank you so much for taking our question. Crystal, I was wondering if you could update us on what you’re seeing in the competitive environment broadly and how that’s influenced the trends that you’ve seen both quarter-to-date and your view of consumer engagement with the brand? And then secondly, for Tiffany, I was hoping you could provide a little bit more detail regarding the assumptions that you’ve made in the second half sales guide regarding the macro and your own idiosyncratic initiatives that you have in place to drive sales. Thak you very much.

Hey, Brooke. Thanks for the questions. See, the competitive environment has certainly changed even just from a few years ago, and we are seeing more competition or intensive competition, especially for those looking to compete in more of an entry price point, albeit at a lower quality than Lulu’s. That said, we’re not really looking to compete in that fast fashion or disposable fashion race to the bottom and we are really willing candidly to change our business model to accommodate any business practices that would enable that type of business mix. What we’re really focused on now and hyperfocused, I would say, is continuing to build awareness and brand awareness for our attainable luxury products and reinstating that positioning for our customers. And we see it every day in our exit surveys from our customer base, where they can’t believe the quality for the price. And I think that’s really where we’re going to win in the long-term. So in the near-term, that’s where our focus will be in reinforcing that value proposition for our customers.

Brooke, hi, it’s Tiffany. With regard to your question about the revenue guidance for the balance of the year, the biggest, I would say, change that we contemplated and factored in relative to where we were prior to lowering the guidance is taking into account the current faster macro environment and factoring in the impact that we’re expecting with regard to the student loan payments and interest resumption starting in September is something that we think we needed to wait a little more heavily in our guidance, given that our customers is a Gen Z, millennial, largely college educated, we do think that they are going to feel that that in terms of their discretionary spend, and so we’ve assume that will be an impact for us towards the latter part of Q3 and into Q4. So that’s certainly factored in with regard to just lower demand overall. Given what we saw in the second quarter with regards to higher return rates, we do attribute that partly to product mix that we saw with a higher dress mix in the second quarter. But to be extra conservative there, we did also layer in a higher than originally estimated return rate for the balance of the year as well.

Thank you very much. I will pass it on.

Thank you. And our next question is from Janine Stichter with BTIG. Please proceed with your question.

Hi, thanks for taking my question. A question for Tiffany. I want to hear more about how you’re thinking about the back half gross margin. Are we still looking for the gross margin to be roughly flat to the back half of the year? And then philosophically, I know sometimes you – when you’re a little bit more cautious on the promotions or you pull back on the promotions, do you ramp up the marketing spend to compensate? So how do you just think about the balance of marketing versus pulling the promotional lever into the back half of the year? Thank you.

Sure. Thanks, Janine. Good question. So for the back half of the year, we are – we continue to be, already 5 weeks into Q3, pleased with our overall gross margin performance. We did see good sequential improvement from Q1 into Q2, as noted on the call, and we expect the back half gross margin to improve on a year-over-year basis for each of Q3 and Q4. We expect to see some continued gains in regards to the shipping cost rationalization that we’ve done this year that definitely affected us positively in Q2. That will continue to affect us in Q3, Q4 since those initiatives were not in effect last year. With regards to promotions and discounts and the balances that we make and the trade-off with marketing spend, we do expect, as always, to sort of lean into our data-driven model in order to determine the right mix of those. So I’m not going to provide an explicit breakout or percentage between those – the mix of those, but we do continue to react to what’s going on in the market. And historically, Q4 has been a more expensive marketing quarter, and that’s been a time when we’ve, in the past, leaned a little more heavily into promotions and discounting, which may be the case this year as well. But generally, we try to keep that somewhat nimble in terms of being able to flex on that as needed.

Great. And then just one more on gross margin. You alluded earlier to some of the costing initiatives that you’re working on. Just where are we in that? And when will we start to really see the impact on gross margin?

I think the expectation should be that will be more pronounced into next year. It’s not something that we want to swing too hard overnight. And it’s going to be incremental as we kind of test and learn our way into optimizations there. We have a great team in place. We’re really excited about the progress we’ve made so far. But given our buying cycles and our current business model, we want to be cautious. So I would say Q2 and into Q3 and Q4 next year, we will start to see some real benefits there. But in the near-term, it will be small and gradual.

Great, thanks. Best of luck.

Thank you.

Thank you. Our next question comes from the line of Garrett Greenblatt with Jefferies. Please proceed with your question.

Hi, thanks for taking my question, guys. I’d like to get some more color on the wholesale partnership you mentioned. I’m kind of curious about the longer-term opportunity for that and just how you’re thinking about that strategy overall.

In the near-term, we look at it as a profitable brand awareness channel and an opportunity for our customers to engage with our product in person. I don’t want to share the specifics or the details because it’s still very new and recent for us. But I will say we’re pleased with the acceptance and the excitement that we’ve received from partners that are looking to carry our products. And we will continue to update you guys as this matures a little bit. But again, it’s been a fairly positive, very exciting initiative for us internally.

Okay, thank you.

Thank you. And our next question comes from the line of Jonna Kim with TD Cowen. Please proceed with your question.

Thanks for taking my questions. Just curious about – I know you talked about it a little bit about month-to-month trends that you saw during the quarter. And did you see any outsized slowdown in one customer group versus other? And I know 2Q is seasonally heavy dress season, but just curious how the non-dress performed during the quarter. Thank you very much.

Hi, Jonna, this is Tiffany. I’ll just speak just with regard to the progression that we saw throughout Q2 on a monthly basis. While overall, our Q2 net rev comps were down about 19% year-over-year, we did see monthly year-over-year comp improve very gradually as we progressed through the quarter. So April, for example, we were down 20.5%. May, we were down just under 19%. And June, we were down about 17.5% on a year-over-year basis. So, some improvement there as the quarter progressed. I don’t know, Mark, if you have any specific customer additions.

So when we look at that from the perspective of, let’s say, household incomes, then we did not see any specific segment stand out and that it was more across the board, similar changes in behavior. And so there was nothing to report there that has been called out.

From a product assortment perspective, separates more specifically, our more casual end use and our more basic essentials underperformed to our expectations, where our customers are really looking for newness and novelty. There are a couple of months that underperformed to what we had expected from a separate and casual end use. So as we pivoted our assortment towards more novelty and more newness, especially in the more recent weeks, if not month, we’re actually very encouraged by the team’s ability to pivot more towards what our customer is seeking right now. That’s not to say those other products aren’t performing. They just weren’t performing up to our expectations for the quarter. So we’re happy about the progress we’ve made in Q3 towards pivoting more of the assortment towards what she is actually looking for.

Alright. Thank you.

Thank you. Our next question comes from the line of Alice Xiao with Bank of America. Please proceed with your question.

Hi, thanks for taking my questions. I think international seems to be an interesting opportunity. Can you talk about what conversion rates look like right now internationally versus domestically? Is there a structural margin difference between international and domestic sales? And also how big do you think international can get over time?

Great questions. So we do – so international as a percent of revenue for us right now is still very small. And we’ve spoken about – really about removing the barriers and the friction that we had. And so we feel that we’re now in a good place that we can start building that revenue. As it relates to the experiences and the data that we see thus far, then yes, between international and domestic, there is certainly a difference in conversion rate with international at this point being lower than the domestic, and that’s also where the opportunity for us lies to focus and iterate because we have not spent a lot of time over the last several years on that international component. So we look forward to growing that and build out over time the revenue opportunity, as you pointed out.

Got it. And then over time, how...

In terms of just the overall size of the opportunity?

Right, right.

At this point, we have not put any targets or stakes or communicated that externally. We are assessing what that opportunity is and then to look at how do we best capture that. And we feel that we needed to get first to a position that we could look at that holistically without all the friction that was in place. And from there on, we will assess the opportunity. And if we feel comfortable how we – how that would look like, we will communicate that.

Alright, thank you.

Thank you. And our next question comes from Dana Telsey with Telsey Group. Please proceed with your question.

Hi, good afternoon, everyone. As we look at the AOV, which was – the AOV, which was down around 1%, I think that’s a slight improvement from the down 3% in the first quarter. What are you seeing in AOV? How you’re planning it and balancing the level of markdowns with return rate? Thank you.

Hi, Dana, this is Tiffany. Thank you for your question. Yes. So we were pretty pleased with where AOV ended during the quarter. We would typically expect to see it come down a bit as we progress through the balance of the year. Largely, as we move particularly into Q4, we start to be a bit more promotional. And typically, the AOVs are lower based on the product mix as well of that quarter. So we planned it accordingly, similar to what we’ve seen in prior years in terms of the cadence there. And I may have missed your other question, was it around return rate?

Yes, exactly.

[45:33]such [indiscernible]:

Got it. And then as you plan for the back half of the year, basically to drive conversion, anything we should be watching for, whether it’s product introductions? Mark, as you’ve mentioned, brand awareness marketing campaigns that you’re doing? How do you think of parsing out third quarter and fourth quarter and what may be the same or different as compared to last year’s execution? Thank you.

I would say it’s going to be more of the same, but potentially, a reallocation of monies from the performance side towards awareness specifically to support the store and some of the other initiatives that we have. But similar to what we’ve always done, it will be in a very test and iterate kind of way. I’d not model out meaningful increases in our overall marketing spend when compared to the first half of the year.

Thank you.

Thank you. We have reached the end of our question-and-answer session. And with that, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.