Good afternoon and welcome to Lulu's Third 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 Strauss. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss Lulu's third-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 our ability to pursue alternative debt financing options references to the fiscal year ending December 29, 2024, including our financial outlook for the fiscal quarter and year ending December 29, 2024, as applicable, market opportunities, product launches and other initiatives and our growth. 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. These risks, uncertainties, and assumptions are detailed in this afternoon's press release as well as in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, our Quarterly Report on Form 10-Q for the second quarter ended June 30, 2024, and our Quarterly Report on Form 10-Q for the third quarter ended September 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 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 measures, 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. In Q3, we achieved record growth in our special occasion and bridesmaid dress categories, boosting overall dress sales, which returned to positive year-over-year growth in the quarter and affirming our market leadership in event attire. Softness in our casualwear segment posed challenges, prompting us to reassess this category to better align with our core strength in event-focused apparel and take action on rightsizing the cost structure for these categories. Last quarter, we outlined strategic initiatives and cost-reduction efforts, which remain in full force. Additionally, we are actively pursuing alternative debt financing options that provide Lulu's more flexibility than the current revolving credit facility. This is a top priority, and we will share updates as soon as we are able to do so. Net revenue was $81 million, 3% lower than the prior period, and adjusted EBITDA was a $3.6 million loss compared to $1 million in the prior year period. This quarter, we proactively managed inventory, leveraging markdowns and promotions to optimize our inventory position for future growth, and achieved a 7% reduction in inventory balances over last year, outpacing our 3% net revenue decline. While higher markdown defected margins due to weaker performance in our separates and shoe business, we are confident that our strategic and cost reduction efforts will leverage our strengths, address near-term liquidity needs, and set the stage for sustainable growth. As a reminder, our strategic growth initiatives include continued evolution and optimization of our data-driven merchandising model with customer data and insights to drive value to our brand fans through a 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…

Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. We are encouraged by signs of stabilization as active customer counts remain flat quarter-over-quarter despite a year-over-year decline. New customer acquisition rose by 2% over last year and loyalty adoption rates are showing strong momentum. Our Love Rewards membership saw double-digit growth in new entrants and an overall increase in total membership, marking notable progress from the previous year. We believe these trends reflect the impact of our strategic focus on brand, assortment, and customer engagement, and we remain optimistic about sustaining this positive trajectory. Q3's growth in new customer acquisition centered mostly around full-price segments, marketing, and improvement over last year. Additionally, we were successful in reactivating lapsed customers at a higher rate than Q3 2023. Lapsed customers are those customers that hadn't purchased from Lulu’s in the last 12 months and they returned to Lulu’s gravitating towards high-performing segments like bridesmaid, special occasion, and day event dresses. Year-over-year growth in our international sales continued and achieved its third consecutive quarter of year-over-year high double-digit growth in sales across our top 15 countries outside the U.S. We continue to see potential to further enhance our U.S.-based international shipping model and strategically build brand awareness in select key global markets. I'll now share some progress updates around our strategic initiatives during the quarter. Starting with our product assortment optimization and related margin expansion efforts. In the third quarter, the impact of our merchandising team's assortment optimization efforts became evident with Q3 receipts reflecting newer and novelty styles and colors supported by a significant improvement in reorder comps from Q2. As Crystal mentioned previously, reorder revenue for same-year styles increased by 55% over last year. We are optimistic that this…

Thanks, Mark, and good afternoon, everyone. Our net revenue for the third quarter was approximately $81 million, a 3% decrease year-over-year driven by a 3% decrease in total orders placed and a 2% decrease in average order volume, partially offset by reduced return rates. While markdown sales declined approximately 8% compared to the third quarter of 2023, they represented a more significant mix of our sales when compared to the first two quarters of 2024. This is in part driven by efforts to swiftly reset our inventory in underperforming categories, particularly shoes and separates, while also generating additional liquidity for the business. These actions negatively impacted gross margins year-over-year . However, our special occasion and bridesmaid categories showed resilience with year-to-date sales up 38%. Following last quarter's implementation of our updated return policy, we've seen continued improvements in customer return behavior with return rates lower by 70 basis points year-over-year , supporting improved sales trends and higher inventory turnover this quarter. Gross margin ended the quarter at 38.1%, a decrease of 220 basis points compared to the same period last year, driven by higher rates of markdowns and discounts as we addressed ongoing softness in our casualwear business. Moving on to our expense line items. Our Q3 2024 selling and marketing expenses were $17.6 million up about $800,000 from Q3 2023 due to higher overall online marketing cost per visit. General and administrative expenses decreased by about $1.7 million to $18.9 million an 8% decline from Q3 2023. This decrease was primarily driven by a decrease in stock-based compensation expenses as well as reductions in labor costs due to headcount and executive and management pay reductions enacted during the third quarter. The cost savings measures were implemented throughout the quarter and therefore did not benefit the entire period. Our net…

Thank you, Tiffany. We are turning a corner and are confident that our strategic focus on enhancing brand awareness, customer engagement and disciplined cost reduction efforts positions us for sustainable growth and improved profitability in the coming year. We still have work to do to reset our shoes and separates businesses, but remain encouraged by our growth in dresses and wholesale businesses. By optimizing our business model and refocusing our casual segment towards dressy separates, we believe our commitment to operational excellence will continue to support us through the dynamic consumer landscape and ensure lasting success. Thank you, as always, to our loyal brand fans, dedicated Lulu crew, valued shareholders for your steadfast support as we continue to work towards delivering attainable luxury to more customers and becoming the go-to destination for event apparel for all of life's occasions. We look forward to updating you on our next earnings call. With that, I'll turn it over to questions now.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. [Operator Instructions] The first question comes from Brooke Roach with Goldman Sachs. Please go ahead.

Good afternoon, and thank you for taking our question. I was hoping you could talk a little bit more about the reevaluation of the strategy to focus more on event wear versus casual wear. What does that mean in practice? What percent cut in SKU count should we be expecting? How long does this change take to implement? And what impact should we expect to see both in terms of profitability and margins overall?

Hey, Brooke. Thanks for the question. I would look at it as more of a narrowing of our assortment to bring a more curated offering, specifically in separates and in shoes. And it's more from learnings that we've been testing into over the last several quarters, where we've been really successful with more dressier separates that align better with the aesthetic that we have on the dresses side of the business. I'd be hesitant to guide to specifics from a SKU count reduction, though I'd be comfortable in saying anywhere from 10% to 25% depending on the season. And what that's going to result in is a much more profitable product onboarding process and more curation into to fewer skews and just creating a less overwhelming assortment for our customers within those businesses. So not only will it be more profitable, but I think from a customer experience perspective, she'll learn to know us more for what we sell and dresses across all of our categories. So it's intended to be a more refined assortment for our customer. In terms of how long we would expect it to take place, I think we're going to have some work to do in resetting the assortment in Q4 going into Q1. By Q2 and into the back half of next year, we should be extremely efficient and having a much more curated and much more profitable assortment across those businesses. So I expect to see a little bit more pressure, offset though by the success we've had in our special occasion, our bridesmaids and just overall our dress business returning back to positive comps.

Great. And then just one follow-up for Tiffany. Can you expand on the levers in your control to generate additional liquidity as you look ahead? What additional cost optimization efforts do you see as opportunities to improve cash balances and liquidity overall?

Thanks, Brooke. Yeah, so we obviously enacted on some of that already in Q3 as we outlined on the call. So there were a variety of things that were outlined around headcount reduction and some of the pay adjustments that we've done for the executive management team, reducing our board size, pulling back on some of the more top-of-funnel marketing spend. We're going to continue and we will be continuing to evaluate that going through the balance of Q4 and into next year as to whether we can go deeper on any of those elements. I think, generally speaking, we're doing some internal, just sort of process review and trying to, one thing we just rolled out a couple of weeks ago was how we refund our customers, and having basically sales, certain sales products being refunded to store credit rather than to cash. So just looking at sort of internal processing opportunities like that where we can create liquidity for ourselves by changing an internal process. So those will continue to be on the table and evaluated as we progress. And then the other part that we outlined on the call, which is really a top priority for all of us right now is really around the renegotiation of our revolver and essentially looking for alternative credit financing options to afford us a bit more flexibility there, after the original credit facility we had that was reduced back in August. So we're focused on that as well just as another source of liquidity.

Great. Thanks for the color. I'll pass it on.

Thanks, Brooke.

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

Hi. Thank you. A follow-up on the liquidity. Historically, you haven't been in a particularly promotional business, but it sounds like you're leaning a bit more into the markdowns and promotions now. How much is that dictated by product assortment and the need to clear through underperforming categories versus liquidity needs? And is that something we should think about continuing into Q4 just maybe help us out with the dynamics of Q4 gross margin to the extent possible? Thank you.

Yes. Thanks, Janine. Good question. I think for Q3, it was a little bit of both. I mean, we definitely saw the opportunity to start this reset process around our separates and shoe business, really our more casual business reset that Crystal outlined in the previous question. I think that was a key element that we wanted to make sure that we were keeping our inventory metrics in check and keeping our inventory in a comfortable position while at the same time generating liquidity. I think that is a key thing that we're focused on. So I think the two things kind of went hand in hand. I would expect through the balance of Q4, and as Crystal alluded to, with us trying to reset our, separates assortment and our casualwear assortment more quickly, I would expect that to continue through Q4, and into early next year as well.

Okay. Great. And then, sorry if I missed it. Any update on physical retail or how that's performing?

Wholesale has been working great for us. It's been accelerating over the last several quarters. And, like we alluded to in the call, we've got double-digit comps that we're putting up, so that's been great, giving our customers a chance to experience product in person. And from a store perspective, Melrose continues to progress, and it's been a great brand and activation center where we can engage with influencers, interact with our customers in real-time and get data straight from our customers' mouth. So in that sense, it's been great. No near-term future plans for Extra Stores at this point, but we'll update you more on that as it progresses.

Thanks so much.

Thank you. The next question is from the line of Dana Telsey with Telsey Group. Please go ahead.

Hi, good afternoon, everyone. As you think about the health of your consumer and the competitive landscape, given what you've seen more recently, what are you seeing in terms of anything regional, any with the categories that you mentioned in terms of the continued softness in casualwear? How do you see the reset of the assortment and SKUs along with pricing? And then lastly, in terms of China, any more explicit is it? All of your goods come from China? What did you do last time when there are tariffs? How should we be thinking about it? Thank you.

Thank you. Let me start with the last one as it relates to imports from China. No, not all our products come from China, but there is obviously a clear dependency on that. And as I alluded to, what we did the last time that the tariffs were increased and increased, what we did is essentially look at and work with our vendors and their manufacturers as well as with what can we do from a consumer pricing perspective in order to basically share the burden, right, across that and that has been successful. And what really helps there is that from our products and the quality that we provide, we have so much to offer there that a few dollars could be added to pricing without disrupting demand so to say. And so we feel that that is in the short term partly a response. Obviously, we continue to diversify out of China where we can, and where we can't, it more is, -- but then it's about the costing as well as the overall supply chain and we're rethinking or looking at how we can reduce that cost by either we've spoken about vendor consolidation, for example, so higher volumes, there and that's a way to lower pricing or take certain portions out of the supply chain in order to obtain products at a lower cost. As it relates to your question around to the competitive landscape. If you look at promotion trackers, etcetera, it is very competitive out there. Part of our process has been to start working on our inventory reset and using that specifically from a promotion perspective, which Tiffany alluded to, we will continue to do so throughout Q4 and probably a portion of Q1. Trying to think what ---

As it relates to the reset of the assortment, as far as SKUs go in terms of pricing, we're going to continue to leverage our GBBs and there's not likely to be material changes across pricing for each of the classes that we're working to reset, but there will be a reduction I'd say across the board and it'll be dynamic as we look at what our customer reacts and responds to. So still in that that entry price point all the way up to halo price point, I'd expect that mix to stay fairly similar to what we have currently. No material changes there.

Thank you.

Thank you. Ladies and gentlemen, that was the last question. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.