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

Good afternoon, everyone and thank you for joining us to discuss Lulu's second quarter 2024 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements including but not limited to statements regarding management's expectations, plans, strategies, goals and objectives and their implementation, our expectations around the continued impact of the macroeconomic environment, consumer demand and return rates on our business, our future expectations regarding financial results, our ability to realize the intended impact of cost reduction measures, references to the fiscal year ending December 29, 2024 including our financial outlook for 2024, market opportunities, product launches and other initiatives and our growth. These statements, which are subject to various risks uncertainties, assumptions and other important factors could cause our actual results, performance or achievements to differ materially from results performance or achievements expressed or implied by these statements. These risks uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC including our annual report on Form 10-K for the fiscal year ended December 31, 2023 and our Quarterly Report on Form 10-Q for the second quarter ended June 30, 2024 filed with the SEC this afternoon, all of which can be found on our website at investors.lulus.com. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information including adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO Crystal Landsem; our CFO, Tiffany Smith; and our President and CIO, Mark Vos. Following our prepared remarks we'll open the call for your questions. With that I'll turn the call over to Crystal.

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Our second quarter results were in line with the expectations laid out in our preliminary results with net revenue of $92 million, 13% lower than the prior year period and adjusted EBITDA of $0.2 million losses, $4.4 million below the prior year period. First quarter headwinds including declines in markdown sales and higher return rates due to strong sales and high-margin occasion wear, combined with slower adoption of our new return policy contributed to the softer than expected results for the quarter. Despite progress on margin goals and reduced operating expenses, profitability was limited by fixed costs against lower than expected net revenue base. As with many direct-to-consumer companies, we are navigating a range of external challenges putting pressure on top line and bottom line results. However, we view these obstacles as temporary and are tightly managing expenses to withstand the short-term headwinds. To that end, we remain committed to our long-term growth initiatives, which reinforce our competitive strengths and that will enable us to endure near-term volatility and position us for sustainable growth. These include; continued evolution and optimization of our data-driven merchandising model with customer data and insights to drive value to our brand fans through our robust reorder algorithm and an improved and evolving assortment, amplifying our unique brand DNA and community-focused culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement, and delivering excellent customer service to drive increased word-of-mouth introductions. By capitalizing on these strengths, we're confident that we can reach a broad base of potential customers and steadily increase our market share over time. Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually…

Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. While active customer accounts declined in the second quarter compared to prior year, we remain encouraged by the increase in penetration of active customers that are repeating on a quarter-over-quarter basis. Also, new entrants and total loyalty program membership grew once again year-over-year. And both repeat customer penetration and loyalty program growth are strong indicators of Lulu's brand's relevance and future revenue opportunity. As mentioned last quarter, limited markdown inventory has constrained the new customer acquisition segments of potential customers that are looking for a deal. However, our new customer acquisition segments of only full price products purchased, which are our largest segments performed best and also showed quarter-over-quarter improvement in their comps. The relative strength in these important full price new customer acquisition segments aligns with an increased ratio of new products sold and our optimism around our merchandising assortment adjustments. The third quarter receipts expected to further reinforce our buying and merchandising team's focus. We are optimistic about the customer acquisition ramp-up from these new and novelty product introductions. Additionally, in Q2, we saw a year-over-year increase in average unit retail, driving a higher average order value and total order value per customer for both new and returning customers and was higher compared to Q2 last year. Additionally, we increased merchandise margins, due to the combined effects of our costing efforts and lower markdown sales. While international sales remained a small percentage of our total company sales, we achieved another consecutive quarter of year-over-year high double-digit growth in units sold comps in our top 15 countries outside the US including strong growth in our largest markets Canada, the UK and Mexico. We see much room for optimizing…

Thanks, Mark, and good afternoon everyone. Our net revenue for the second quarter was approximately $92 million, a 13% decrease year-over-year, driven by a 14% decrease in total orders placed with increased return rates partially offset by higher average order value. Markdown sales were down approximately 32%, compared to the second quarter of 2023 contributing to the overall net revenue decline and gross margin improvement. We also saw notable declines in our casual business during the quarter. As a result of the implementation of our new return policy, we saw an increase in restocking fee revenue and some improvement in customer return behavior despite our decision to honor exceptions to the previous return policy through part of Q2 to ease customers into the changes, which resulted in some top line pressure. Gross margin ended the quarter at 45.5%, an increase of 80 basis points compared to the same period last year driven by lower markdowns and a shift toward higher-margin product categories. Moving down the P&L, to give some insights into expense line items. Q2 2024, selling and marketing expenses were $24.9 million, up about $200,000 from Q2 2023 due to increased brand marketing initiatives, including the first brand campaign launch since 2021 to drive brand awareness and customer engagement. We expect the value generation from this incremental marketing spend to materialize over multiple quarters. General and administrative expenses decreased by about $3 million to $21.4 million, a 12% decline from Q2 2023. This reduction was primarily driven by lower stock comp expenses as well as lower variable labor and benefits costs, which were lower with decreased sales volumes and increased operational efficiencies. Quarterly G&A expenses included a $423,000 accrual for a pending legal matter. Excluding this non-routine item, we achieved some leverage in the quarter on our G&A costs…

Thank you, Tiffany. We are confident that our strategic initiatives in enhancing brand awareness and customer engagement, coupled with our diligent cost reduction efforts, position us for sustainable growth and improve profitability in the coming year. Our commitment to operational excellence will serve us well amidst ongoing macro volatility. Thank you to our dedicated brand fans, Lulu crew and shareholders for your unwavering support as we continue to deliver attainable luxury to our customers. We look forward to updating you on our next earnings call. With that, I'll turn it over to questions now.

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

Hi. Good afternoon, everyone.

Hi, Dana.

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

Thanks for the question, Dana. I think at a high level, we believe our customer continues to be under pressure due to just various macroeconomic pressures that we've discussed over the last several quarters and is also reflected in withdrawing our full year guidance for EBITDA and also, just the conservatism in general of our third quarter guidance. All that being said we're still focusing on opportunities where we can drive engagement and growth and profitability, especially in this more challenging and volatile environment. What's been really great for us to see is our business does continue to recover. And going into July, we've seen an inflection to roughly flat customer -- active customers within the month. So we're really encouraged by that. I think the high level takeaway is that our recovery is well underway. It's just taking longer than we had anticipated because of the consumer backdrop.

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

Yes. Hi Dana, I'll jump in. This is Tiffany. So we gave the revenue guidance, because I think we have more confidence obviously in the third quarter revenue pacing that we've seen to-date. But given -- as we announced -- we're working through some cost reductions, we announced that during the call. Some of those things are going to have more immediate benefits. Some will have longer-term benefits. We're still working through sort of all of the puts and takes around that. And as we work through this we want to maintain as much flexibility as possible on the timing of these changes. I also want to make sure that we're reading the business and the macro properly to ensure that we've made sufficient adjustments, to adjust our cost structure, to better align with our slower sales -- slower-than expected sales recovery. But at the same time, because of all the momentum Crystal noted, that we're seeing in the business I want to be careful not to pull back too hard on cost reductions and push too hard there and jeopardize the momentum that we're seeing building in the business.

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

Got it. Thank you.

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

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

Yeah. It's a good question. For us and typically in the third and fourth quarter when there's more pressure on performance marketing we tend to pull levers across markdowns discounts and paid marketing spend. And really it's an optimization in the moment based on where the consumer is and where we're getting the best use of our cash for that marketing spend. I think the way to think about this for us is we're continuing to invest but prudently, on the brand, because we are seeing positive momentum in brand equity and just momentum in general from how our customers are interacting with the brand. But that said, we have to be very cautious about where we're spending and making sure that the payoff is as much for the near-term as it is for the long-term. So I would expect to see puts and takes throughout the back half of the year across markdowns discounts and marketing spend the way that we've done it in the past which is truly reactionary to the macro and where we're seeing the best bang for the buck.

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

Yeah. Good question, Brooke. I think for -- at the current time free cash flow -- maintaining positive cash flow is really a big priority for us. And so I think there are as you said potentially other levers that we could pull as needed. The ones that we disclosed on the call were largely headcount in nature. We have done some headcount reductions in certain areas where we felt we could continue to grow without certain individuals. But I think for the most part the executive pay cuts have been implemented. A lot of the levers there pulled around headcount are probably pretty limited in terms of what we can continue to do given we are a fairly lean team already and have been running pretty lean in most areas. There may be a little bit more there but I doubt it. I think it's going to be more considering other types of G&A spend other areas where we can make more meaningful reductions. But I don't have specifics that I think we want to share at this point given it's a bit fluid.

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

Yeah.

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

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

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

Yeah. It's a good question. So I mean we had a really robust and record-breaking special occasion in bridesmaids business in the second quarter which is just a testament to customers leaning on us for their special moment which was great to see. The most pressure that we experienced was more in the casual space. And we're continuing to invest in the recovery of that business. That said, the new site is comping just fine to last year. But we're taking a little bit longer to rebuild the reorder funnel in that space just given the competitive nature as well as the consumer pressure that we've been seeing with our customer set. Say it differently that's going to continue to improve overtime, but it's taking longer than we had anticipated.

Got it. That's helpful. Thank you.

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