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&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 First Quarter 2024 Results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including, but not limited to, statements regarding management's expectations, plans, strategies, goals and objectives and their implementation; our expectations around the continued impact of the macroeconomic environment, consumer demand and return rates on our business; our future expectations regarding financial results; 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-K for the fiscal year-ended December 31, 2023 and our quarterly report on Form 10-Q for the first quarter ended March 31, 2024 filed with the SEC this afternoon, all of which can be found on our website at investors.lulus.com. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO, Crystal Landsem; our CFO, Tiffany Smith; and our President and CIO, Mark Vos. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Jumping into results from the first quarter, net revenue was $77.3 million, 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 fourth 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. Consistent with recent trends, event dresses 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 stockouts and size and completeness. We are proactively working to mitigate these issues supported by technology platform investments around presale orders to capture customer demand and mitigate the negative impact of product stockouts. With the rollout of this technology at the beginning of the year, we expect to see more meaningful improvements by June and beyond. Adjusted EBITDA of a $2.7 million loss was closely in line with expectations despite revenue coming in slightly below our projections and was mostly impacted by the…

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 increasing 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. 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 the purchase behavior by customer household income segments shows stable trends across our core segments, $50,000 to $150,000 annual income, both from a new customer acquisition as well as a 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. We expect that these segments will continue to gravitate towards Lulu's, supported by our expanded price ranges…

Thanks, Mark, and good afternoon, everyone. Our net revenue for the first quarter was approximately $77.3 million, 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 $2.7 million 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. 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&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 sale ratios drove our overall return rate in the first quarter 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. These policy changes, while aimed at directly improving our profitability by reducing return rates and partially offsetting the cost of returns, are designed…

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, LuCrew 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 now.

[Operator Instructions] Our first question is from the line of Brooke Roach with Goldman Sachs.

Crystal, I was hoping you could elaborate on the 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?

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 depth 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. 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 nonevent 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 fit consistency across product classes, which should, in turn, bring lower return rates and just a higher net keep rate throughout the rest of the year. 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. 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.

Great. And then maybe a follow-up for Tiffany. You raised the low end of the EBITDA guide despite some softer revenues in the first quarter 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?

Sure. Good question, Brooke. So our previous guidance -- the original guidance that we put out for the year actually already contemplated benefits to improving return rate, 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, et cetera, that will help our profitability sooner in the year than what we originally anticipated.

The only thing that I would add to that is our lower-than-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.

Our next question is from the line of Janine Stichter with BTIG.

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?

Sure. 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. 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 customers. And as we -- Crystal spoke to on the first response, just increasing the depth of our buys, getting more new products 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, et cetera, 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 gross level, which to us is indicating the customers shopping with greater intent, but we're seeing our net UPTs kept holding consistent with what they were before. So that's a good early indicator that she's still shopping with us, but just shopping with better intent and keeping 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 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.

Got it. That's really helpful. And then just another one for me. I think you mentioned it 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.

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 customers would shop us in these other categories. So that will evolve over the next several quarters.

Our next question is from the line of Dana Telsey with Telsey Advisory Group.

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? 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?

Thanks, Dana. I'll try to 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 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 non-dress category. But we continue to be really encouraged by what we see on the event dressing front of the business overall.

From a store plans perspective, we're thrilled with the 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. It's 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 influencer 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.

And sorry, Dana, I think you had a question also on the cadence of what we saw during the quarter...

Yes, exactly.

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 I 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.

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

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

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