Lulu's Fashion Lounge (LVLU) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements Unaudited condensed consolidated financial statements for Lulu's Fashion Lounge Holdings, Inc. as of October 2, 2022, and for the thirteen and thirty-nine week periods then ended are presented Condensed Consolidated Balance Sheets Total assets significantly increased to $180.2 million from $113.8 million as of October 2, 2022, primarily due to higher inventory and new lease right-of-use assets, with a corresponding rise in total liabilities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 2, 2022 | Jan 2, 2022 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $12,465 | $11,402 | +$1,063 | | Inventory, net | $49,416 | $22,176 | +$27,240 | | Lease right-of-use assets | $31,627 | $0 | +$31,627 | | Total Assets | $180,159 | $113,776 | +$66,383 | | Liabilities & Equity | | | | | Revolving line of credit | $15,000 | $25,000 | -$10,000 | | Lease liabilities, noncurrent | $28,554 | $0 | +$28,554 | | Total Liabilities | $113,254 | $69,254 | +$44,000 | | Total Stockholders' Equity | $66,905 | $44,522 | +$22,383 Condensed Consolidated Statements of Operations and Comprehensive Income Net revenue for the thirteen weeks ended October 2, 2022, slightly decreased by 1%, while net income declined to $0.9 million, and for the thirty-nine weeks, net revenue grew 25% to $348.7 million, but net income decreased to $9.0 million due to margin pressure Statement of Operations Summary (in thousands, except per share data) | Metric | Thirteen Weeks Ended Oct 2, 2022 | Thirteen Weeks Ended Oct 3, 2021 | Thirty-nine Weeks Ended Oct 2, 2022 | Thirty-nine Weeks Ended Oct 3, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net revenue | $105,275 | $106,320 | $348,689 | $278,861 | | Gross profit | $44,333 | $50,767 | $157,478 | $133,300 | | Income from operations | $559 | $9,062 | $14,741 | $26,856 | | Net income | $929 | $3,850 | $8,971 | $10,819 | | Diluted EPS | $0.02 | $0.13 | $0.23 | $0.37 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities for the thirty-nine weeks ended October 2, 2022, significantly decreased to $16.3 million from $41.8 million, primarily due to increased inventory investment, while net cash used in financing activities was $11.4 million Cash Flow Summary for the Thirty-nine Weeks Ended (in thousands) | Cash Flow Activity | Oct 2, 2022 | Oct 3, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $16,333 | $41,788 | | Net cash used in investing activities | ($3,868) | ($1,587) | | Net cash used in financing activities | ($11,401) | ($14,828) | | Net increase in cash | $1,064 | $25,373 | - The significant decrease in operating cash flow was largely driven by a $27.2 million increase in inventories, compared to a $6.5 million increase in the prior year period[27][198] Notes to Condensed Consolidated Financial Statements The notes detail accounting policies and financial statement components, highlighting the impact of macroeconomic trends on sales, the adoption of ASC 842, and changes in the company's debt structure and equity-based compensation plans - Changing macroeconomic factors, including inflation and interest rates, have directly impacted sales in fiscal 2022, prompting the company to use pricing and promotional actions to stimulate demand[36] - The company adopted the new lease accounting standard ASC 842 on January 3, 2022, resulting in the recognition of lease right-of-use assets of $28.0 million and lease liabilities of $28.6 million upon adoption[65][86] - In November 2021, the company entered into a new credit agreement for a $50.0 million revolving facility, which was used along with IPO proceeds to repay its previous $105.8 million term loan, with $15.0 million outstanding on the new facility as of October 2, 2022[75][80] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting 25% year-over-year revenue growth for the first thirty-nine weeks of 2022, despite a 1% revenue decline in the third quarter due to macroeconomic pressures and compressed gross margins Key Operating and Financial Metrics Key operating metrics show mixed results, with Active Customers growing to 3.23 million and Average Order Value increasing to $131 for the thirty-nine weeks ended October 2, 2022, while Adjusted EBITDA Margin significantly declined to 5.1% for the third quarter Key Performance Indicators | Metric | Thirteen Weeks Ended Oct 2, 2022 | Thirteen Weeks Ended Oct 3, 2021 | Thirty-nine Weeks Ended Oct 2, 2022 | Thirty-nine Weeks Ended Oct 3, 2021 | | :--- | :--- | :--- | :--- | :--- | | Gross Margin | 45.2% | 47.7% | 45.2% | 47.8% | | Adjusted EBITDA | $5,364K | $11,885K | $30,068K | $35,050K | | Adjusted EBITDA Margin | 5.1% | 11.2% | 8.6% | 12.6% | | Active Customers (in thousands) | 3,230 | 2,500 | 3,230 | 2,500 | | Average Order Value | $133 | $125 | $131 | $120 | Results of Operations Net revenue decreased 1% to $105.3 million in Q3 2022, while for the thirty-nine week period, it increased 25% to $348.7 million, though gross profit fell due to faster growth in cost of revenue and increased operating expenses - Q3 2022 vs Q3 2021: Net revenue decreased 1% due to a 1% decrease in total orders and higher return rates, partially offset by a 6.4% increase in Average Order Value[169] - YTD 2022 vs YTD 2021: Net revenue increased 25% driven by a 23% increase in total orders and a 9% increase in Average Order Value[175] - General and administrative expenses for the 39-week period increased by $18.2 million (32%), primarily due to $6.7 million in higher equity-based compensation and $4.7 million in increased insurance and professional services costs related to being a public company[179] Liquidity and Capital Resources The company's liquidity is primarily supported by cash from operations and a $50 million revolving credit facility, with $12.5 million in cash and $34.8 million available for borrowing as of October 2, 2022, despite a decrease in operating cash flow to $16.3 million due to increased inventory - As of October 2, 2022, the company had $12.5 million in cash and cash equivalents and $34.8 million available for borrowing under its New Revolving Facility[190][193] - Net cash provided by operating activities decreased by $25.5 million year-over-year for the 39-week period, primarily due to a $20.7 million higher investment in inventory balances to support sales volume[198] Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's exposure to market risk compared to the disclosures in its Annual Report on Form 10-K for the fiscal year ended January 2, 2022 - There has been no material change in the company's exposure to market risk from that discussed in the 2021 10-K[209] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of October 2, 2022, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the period, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[211] - There were no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[212] PART II OTHER INFORMATION Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business but does not anticipate any material adverse effect on its financial condition or results of operations from current matters - The company is not currently a party to any legal proceedings that it believes would materially and adversely affect its business or financial condition[214] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended January 2, 2022 - No material changes have occurred to the risk factors previously disclosed in the 2021 Form 10-K[215] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[216] Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - The report includes certifications from the CEO and CFO as required by Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350, as well as XBRL data files[221]