Lulu's Fashion Lounge (LVLU) - 2025 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents Lulu's unaudited condensed consolidated financial statements and notes for Q1 2024 and Q1 2023 Condensed Consolidated Balance Sheets Details the company's assets, liabilities, and stockholders' equity as of March 31, 2024, and December 31, 2023 | Asset/Liability Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------------- | :----------------------------- | :----------------------------- | | Assets | | | | Cash and cash equivalents | $5,489 | $2,506 | | Total current assets | $65,220 | $52,520 | | Total assets | $160,633 | $149,445 | | Liabilities | | | | Total current liabilities | $78,986 | $61,887 | | Total liabilities | $102,887 | $88,493 | | Stockholders' Equity | | | | Total stockholders' equity | $57,746 | $60,952 | Condensed Consolidated Statements of Operations and Comprehensive Loss Details the company's net revenue, expenses, and net loss for Q1 2024 and Q1 2023 | Metric | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :-------------------------------- | :------------------------------------- | :------------------------------------ | | Net revenue | $77,259 | $90,976 | | Cost of revenue | $44,613 | $53,015 | | Gross profit | $32,646 | $37,961 | | Selling and marketing expenses | $17,693 | $19,489 | | General and administrative expenses | $21,111 | $24,348 | | Loss from operations | $(6,158) | $(5,876) | | Net loss and comprehensive loss | $(5,736) | $(5,618) | | Basic loss per share | $(0.15) | $(0.14) | | Diluted loss per share | $(0.15) | $(0.14) | Condensed Consolidated Statements of Stockholders' Equity Presents changes in stockholders' equity, including common stock and accumulated deficit, for Q1 2024 and Q1 2023 | Metric | As of March 31, 2024 (in thousands) | As of December 31, 2023 (in thousands) | | :------------------------------------- | :---------------------------------- | :----------------------------------- | | Common Stock Shares Outstanding | 41,255,966 | 40,618,206 | | Additional Paid-In Capital | $256,646 | $254,116 | | Accumulated Deficit | $(198,941) | $(193,205) | | Total Stockholders' Equity | $57,746 | $60,952 | - Equity-based compensation for the thirteen weeks ended March 31, 2024, was $3,023 thousand, contributing to the increase in Additional Paid-In Capital[24] Condensed Consolidated Statements of Cash Flows Details cash flows from operating, investing, and financing activities for Q1 2024 and Q1 2023 | Cash Flow Activity | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------ | | Net cash provided by operating activities | $6,947 | $3,705 | | Net cash used in investing activities | $(959) | $(1,069) | | Net cash used in financing activities | $(3,005) | $(5,026) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $2,983 | $(2,390) | | Cash, cash equivalents and restricted cash at end of period | $5,489 | $7,829 | Notes to Condensed Consolidated Financial Statements Offers detailed explanations of the company's business, accounting policies, and specific financial components 1. Description of Business, Organization and Liquidity Describes Lulus' business, organization, and liquidity, including macroeconomic impacts on sales and spending - Lulus, founded in 1996, is a customer-driven, digitally-native, attainable luxury fashion brand for women, transitioning to a purely online business in 2008[33] - Macroeconomic factors like inflation, interest rates, student loan repayment resumption, and global events continue to impact sales and discretionary consumer spending, leading the company to adjust pricing and promotions[34] - As of March 31, 2024, the Company had $5.5 million in cash and cash equivalents and $6.0 million due under its revolving line of credit, which matures on November 15, 2024. The company is evaluating debt financing sources but believes current cash and operational cash flow, along with conservation measures, will meet obligations for the next year[35][36][37] 2. Significant Accounting Policies Details the company's key accounting principles, including revenue recognition, advertising, and impairment - The company's fiscal year is a 52-53 week period ending on the Sunday nearest December 31. Fiscal years 2024 and 2023 both consist of 52 weeks[38] - Revenue is primarily generated from merchandise sales and recognized upon shipment when control transfers to customers, net of sales returns. Stored-value card revenue is recognized upon redemption, with breakage recognized proportionally over 36 months[46][48][50] | Contract Liability | Balance as of Dec 31, 2023 (in thousands) | Revenue Recognized (in thousands) | Increase due to Cash Received (in thousands) | Balance as of Mar 31, 2024 (in thousands) | | :----------------- | :-------------------------------------- | :-------------------------------- | :------------------------------------------- | :---------------------------------------- | | Deferred Revenue | $50 | $(50) | $230 | $230 | | Stored-Value Cards | $13,142 | $(1,549) | $1,616 | $13,209 | - Advertising costs decreased to $13.0 million for the thirteen weeks ended March 31, 2024, from $15.1 million in the prior year period[53] - The company performed an interim quantitative impairment assessment for goodwill, tradename, and intangible assets as of March 31, 2024, due to a sustained stock price decline and continuing net losses. The fair value exceeded the carrying value by approximately 17%, concluding no impairment existed[56][57] - As an emerging growth company, Lulus has elected to use the extended transition period for complying with new or revised accounting standards[58] 3. Fair Value Measurements Explains fair value measurements, noting that carrying values approximate fair value for short-term financial instruments - The carrying values of cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and the revolving line of credit approximate fair value due to their short-term maturities or daily interest rate resets[63] 4. Balance Sheet Components Details components of the balance sheet, including property and equipment, and accrued expenses | Property and Equipment Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------------------ | :----------------------------- | :----------------------------- | | Total property and equipment | $10,250 | $10,206 | | Less: accumulated depreciation and amortization | $(5,556) | $(5,494) | | Property and equipment, net | $4,694 | $4,712 | | Accrued Expense Category | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :----------------------- | :----------------------------- | :----------------------------- | | Accrued compensation and benefits | $3,633 | $5,057 | | Accrued marketing | $7,241 | $5,002 | | Accrued inventory | $12,815 | $4,151 | | Accrued freight | $2,751 | $1,940 | | Other | $3,637 | $2,193 | | Total Accrued expenses and other current liabilities | $30,077 | $18,343 | 5. Debt Outlines the 2021 Revolving Facility, including capacity, outstanding amounts, interest rates, and covenant compliance - The 2021 Revolving Facility allows borrowings up to $50.0 million, with an option to increase by an additional $25.0 million. It matures on November 15, 2024[67] - During the thirteen weeks ended March 31, 2024, the company borrowed $10.0 million and repaid $12.0 million under the facility[67] - As of March 31, 2024, $6.0 million was outstanding under the Revolving Facility, with $43.7 million available for borrowing and $7.2 million for letters of credit. The interest rate was 7.2%, with a weighted average of 8.3% for the period[67][68] - The company was in compliance with all financial covenants as of March 31, 2024[69] 6. Leases Details lease accounting policies and presents future undiscounted lease payments and liabilities - The company adopted ASC 842 on January 3, 2022, using the alternative transition method, and elected practical expedients including retaining historical lease classification and combining lease and non-lease components[71][72] - Lulus primarily leases distribution facilities, corporate offices, and retail stores under operating lease agreements expiring through December 2031, with options to extend[73] | Fiscal Year | Operating Leases (in thousands) | Finance Leases (in thousands) | Total (in thousands) | | :---------- | :------------------------------ | :---------------------------- | :------------------- | | 2024 (remaining 9 months) | $4,252 | $1,006 | $5,258 | | 2025 | $6,263 | $1,504 | $7,767 | | 2026 | $4,970 | $252 | $5,222 | | 2027 | $5,138 | $74 | $5,212 | | 2028 | $5,252 | $6 | $5,258 | | Thereafter | $6,380 | — | $6,380 | | Total undiscounted lease payment | $32,255 | $2,842 | $35,097 | | Present value adjustment | $(5,582) | $(122) | $(5,704) | | Total lease liabilities | $26,673 | $2,720 | $29,393 | | Less: lease liabilities, current | $(4,106) | $(1,424) | $(5,530) | | Lease liabilities, noncurrent | $22,567 | $1,296 | $23,863 | 7. Commitments and Contingencies Addresses legal proceedings and claims, anticipating no material adverse effects on financial statements - The company is subject to various legal proceedings and claims in the ordinary course of business but does not believe any currently pending matters will have a material adverse effect on its financial statements[75][76] 8. Preferred Stock Details authorized preferred stock, with no shares issued or outstanding as of March 31, 2024 - The company is authorized to issue 10,000,000 shares of preferred stock ($0.001 par value), but no shares were issued or outstanding as of March 31, 2024, and December 31, 2023[78] 9. Common Stock Details authorized common stock, voting rights, dividend policy, and shares reserved for equity plans - The company has authorized 250,000,000 shares of common stock ($0.001 par value). Holders are entitled to one vote per share, and no dividends have been declared to date[79] - As of March 31, 2024, 161,397 shares were reserved for stock options, 1,704,230 for the Omnibus Equity Plan, and 1,368,288 for the 2021 Employee Stock Purchase Plan (ESPP)[79] 10. Equity-Based Compensation Details equity plans, RSU and PSU grants, and associated compensation expenses for the reporting period - The Omnibus Equity Plan and ESPP were adopted in connection with the IPO. The Omnibus Equity Plan automatically increases shares reserved annually by 4% of outstanding common stock, and the ESPP by 1%[80][81][82] - For the thirteen weeks ended March 31, 2024, equity-based compensation expense for the 2023 Bonus Plan was reversed by $0.1 million, and 95,912 fully vested RSUs were awarded on April 1, 2024[84] - During the thirteen weeks ended March 31, 2024, the company granted 1,914,071 RSUs to executives and employees, and 26,616 RSUs to directors. Equity-based compensation expense for RSUs was $1.6 million (vs. $2.8 million in prior year), with $11.3 million unrecognized expense remaining[97] - PSUs were granted to the CEO (1,811,571), President/CIO (300,000), and CMO (50,000) subject to stock price or net revenue growth targets and continued employment. Equity-based compensation expense for PSUs was $0.6 million (vs. $0.2 million in prior year), with $2.1 million unrecognized expense remaining[100][101] 11. Income Taxes Details loss before income taxes, benefit, and effective tax rates for Q1 2024 and Q1 2023 | Metric | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :-------------------------- | :------------------------------------- | :------------------------------------ | | Loss before benefit for income taxes | $(6,315) | $(6,326) | | Benefit for income taxes | $579 | $708 | | Effective tax rate | (9.2)% | (11.2)% | - The effective tax rate differs from the federal rate primarily due to non-deductible executive and equity-based compensation expenses[106][107] 12. Related Party Transactions Discusses related party transactions with significant shareholders, believed to be on arm's length terms - The company has business relationships with entities invested in by significant shareholders (greater than 10% ownership), but these relationships were obtained independently and are believed to be on arm's length terms[108] 13. Subsequent Events Reports the Board's authorization of a $2.5 million stock repurchase program on May 3, 2024 - On May 3, 2024, the Board of Directors authorized a stock repurchase program of up to $2.5 million of common stock, with timing and volume at management's discretion[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition, operational results, and key performance for Q1 2024 and Q1 2023 Overview Overview of Lulus as a digitally-native, attainable luxury fashion brand targeting Millennial and Gen Z women - Lulus is a customer-driven, primarily online, digitally-native, attainable luxury fashion brand for women, targeting Millennial and Gen Z demographics with modern, feminine designs[112] Impact of Macroeconomic Trends on Business Examines how macroeconomic factors like inflation and interest rates negatively impacted Q1 2024 sales and consumer spending - Macroeconomic factors such as inflation, interest rates, and consumer confidence negatively impacted sales in Q1 2024, leading the company to implement pricing and promotional adjustments[114] Liquidity Assesses the company's liquidity, including cash, revolving credit, and plans to meet future obligations - As of March 31, 2024, the company had $5.5 million in cash and cash equivalents and $6.0 million outstanding on its revolving line of credit, which matures in November 2024[115][116] - Management is evaluating debt financing but expects current cash, operating cash flow, and cash conservation measures (marketing, capital spend adjustments) to cover obligations for the next year[118] Key Operating and Financial Metrics Details key operating and financial metrics, including gross margin, net loss, Adjusted EBITDA, and customer data | Metric | Thirteen Weeks Ended March 31, 2024 | Thirteen Weeks Ended April 2, 2023 | | :------------------ | :---------------------------------- | :--------------------------------- | | Gross Margin | 42.3 % | 41.7 % | | Net loss | $(5,736) thousand | $(5,618) thousand | | Adjusted EBITDA | $(2,659) thousand | $16 thousand | | Adjusted EBITDA margin | (3.4)% | — % | | Active Customers | 2,770 thousand | 3,173 thousand | | Average Order Value | $143 | $129 | - Active Customers decreased by 12.7% YoY, from 3.173 million to 2.770 million[120] - Average Order Value (AOV) increased by 10.9% YoY, from $129 to $143[120] Non-GAAP Financial Measures Defines and reconciles non-GAAP financial measures like Adjusted EBITDA and Free Cash Flow for performance evaluation - Adjusted EBITDA is calculated as net loss adjusted for interest expense, income taxes, depreciation and amortization, and equity-based compensation expense. It is used by management to evaluate operating performance and make strategic decisions[126] - Free Cash Flow is defined as net cash provided by operating activities less capitalized software development costs and purchases of property and equipment, serving as an indicator of liquidity[131] | Metric | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------ | | Net loss | $(5,736) | $(5,618) | | Depreciation and amortization | $1,339 | $1,121 | | Interest expense | $383 | $523 | | Income tax benefit | $(579) | $(708) | | Equity-based compensation expense | $1,934 | $4,698 | | Adjusted EBITDA | $(2,659) | $16 | | Net loss margin | (7.4)% | (6.2)% | | Adjusted EBITDA margin | (3.4)% | — % | | Metric | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------ | | Net cash provided by operating activities | $6,947 | $3,705 | | Capitalized software development costs | $(397) | $(551) | | Purchases of property and equipment | $(562) | $(518) | | Free Cash Flow | $5,988 | $2,636 | Factors Affecting Our Performance Identifies key performance drivers including customer acquisition, retention, inventory management, and infrastructure investments - Business performance is influenced by customer acquisition (cost-effectiveness of marketing), customer retention (driving repeat purchases), and efficient inventory management using a 'test, learn, and reorder' strategy[133][134][135] - The company plans to continue investing in operations and infrastructure, including headcount, inventory, fulfillment, logistics, and software/data capabilities, with a disciplined approach to capital spending[136] Components of Our Results of Operations Explains the components of results of operations, including net revenue, cost of revenue, and various expenses - Net revenue is gross sales, net of returns, duties, and promotional discounts, recognized upon shipment[137] - Cost of revenue includes product costs, shipping, distribution facility expenses, and inventory charges. Gross Margin is higher for Lulus and exclusive-to-Lulus merchandise compared to third-party branded products[139][140] - Selling and marketing expenses cover payment processing, advertising, performance marketing, and brand marketing, influenced by promotional discounts[141] - General and administrative expenses include payroll, benefits (including equity-based compensation), and facility costs for corporate functions, increasing due to business growth and public company obligations[142][143] - Interest expense relates to the 2021 Revolving Facility. Income tax benefit is affected by non-deductible executive and equity-based compensation and state taxes[144][145] Our Results of Operations Details the company's financial results for the thirteen weeks ended March 31, 2024, and April 2, 2023 | Metric | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :-------------------------------- | :------------------------------------- | :------------------------------------ | | Net revenue | $77,259 | $90,976 | | Cost of revenue | $44,613 | $53,015 | | Gross profit | $32,646 | $37,961 | | Selling and marketing expenses | $17,693 | $19,489 | | General and administrative expenses | $21,111 | $24,348 | | Loss from operations | $(6,158) | $(5,876) | | Interest expense | $(383) | $(523) | | Other income, net | $226 | $73 | | Loss before income taxes | $(6,315) | $(6,326) | | Income tax benefit | $579 | $708 | | Net loss | $(5,736) | $(5,618) | | Metric (as % of Net Revenue) | Thirteen Weeks Ended March 31, 2024 | Thirteen Weeks Ended April 2, 2023 | | :--------------------------- | :---------------------------------- | :--------------------------------- | | Net revenue | 100 % | 100 % | | Cost of revenue | 58 % | 58 % | | Gross profit | 42 % | 42 % | | Selling and marketing expenses | 23 % | 21 % | | General and administrative expenses | 27 % | 27 % | | Loss from operations | (8)% | (6)% | | Interest expense | — % | (1)% | | Other income, net | — % | — % | | Loss before income taxes | (8)% | (7)% | | Income tax benefit | 1 % | 1 % | | Net loss | (7)% | (6)% | Comparisons for the Thirteen Weeks Ended March 31, 2024 and April 2, 2023 Compares key financial metrics and their changes for Q1 2024 versus Q1 2023 - Net revenue decreased by $13.7 million (15%) due to a 17% decrease in Total Orders Placed and higher return rates, partially offset by higher Average Order Value[148] - Cost of revenue decreased by $8.4 million (16%), primarily driven by lower net revenue[149] - Selling and marketing expenses decreased by $1.8 million (9%) due to lower marketing spend and reduced merchant processing fees[150] - General and administrative expenses decreased by $3.2 million (13%), mainly from a $2.8 million reduction in stock-based compensation and $0.8 million in variable labor savings, partially offset by increased fixed labor[151] - Interest expense decreased by $0.1 million (27%) due to lower average borrowings on the Revolving Facility[152] - Income tax benefit decreased by $0.1 million to $0.6 million[153] Quarterly Trends and Seasonality Examines seasonal fluctuations in net revenue and gross profit, and expense adjustment strategies - The company experiences moderate seasonal fluctuations, with net revenue typically highest in Q2 (spring/summer event dresses) and lowest in Q4 (not a holiday gifting destination)[154] - Gross profit generally fluctuates with net revenue, while selling and marketing expenses are adjusted based on net revenue and inventory optimization needs[155][156] Liquidity and Capital Resources Identifies primary liquidity sources and capital requirements, assessing sufficiency for the next 12 months - Primary liquidity sources are cash from operations and the Revolving Facility. Capital requirements include inventory, payroll, operating expenses, capital expenditures (distribution, software), and debt service[158] - As of March 31, 2024, $6.0 million was outstanding under the 2021 Revolving Facility, with $43.7 million available for borrowing. The facility matures on November 15, 2024[159] - The company believes current cash, operating cash flows, and available borrowings will be sufficient for the next 12 months, but actual results depend on various factors[161] Cash Flow Analysis Analyzes cash flows from operating, investing, and financing activities, highlighting key changes | Cash Flow Activity | Thirteen Weeks Ended March 31, 2024 (in thousands) | Thirteen Weeks Ended April 2, 2023 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------ | | Net cash provided by operating activities | $6,947 | $3,705 | | Net cash used in investing activities | $(959) | $(1,069) | | Net cash used in financing activities | $(3,005) | $(5,026) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $2,983 | $(2,390) | - Net cash provided by operating activities increased by $3.2 million, driven by a $2.8 million reduction in inventory purchases, a $2.5 million increase in accrued expenses (inventory, returns reserve, marketing), and reductions in accounts receivable and assets for recovery[165] - Net cash used in investing activities decreased by $0.1 million, primarily due to less investment in capitalized software development costs[167] - Net cash used in financing activities decreased by $2.0 million, mainly due to higher borrowings on the Revolving Facility offset by higher repayments, increased finance lease payments, and withholding tax payments[169] Critical Accounting Policies and Estimates Reaffirms consistency of critical accounting policies and estimates with prior disclosures, requiring management judgment - The company's critical accounting policies and estimates remain consistent with those disclosed in its 2023 10-K, requiring management to make estimates and assumptions that affect reported financial amounts[171][173] Recent Accounting Pronouncements Discusses the company's evaluation of recently issued FASB ASUs and their potential impact - The company is evaluating the impact of recently issued FASB ASUs, including ASU 2023-07 (Segment Reporting), ASU 2023-09 (Income Taxes), ASU 2024-01 (Stock Compensation), and ASU 2024-02 (Codification Improvements), all effective for annual periods beginning after December 15, 2024[59][60][61][62] JOBS Act Accounting Election Explains the company's election as an 'emerging growth company' for extended accounting standard transition - As an 'emerging growth company' under the JOBS Act, Lulus has elected to use the extended transition period for new or revised accounting standards, which may result in non-comparable financial statements to other public companies[175] Item 3. Quantitative and Qualitative Disclosures About Market Risk Reports no material changes to the company's exposure to market risk since its 2023 10-K filing - No material change in market risk exposure from the 2023 10-K[176] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures as effective, with no material changes to internal control - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2024[178] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2024[179] PART II — OTHER INFORMATION Item 1. Legal Proceedings Reports no legal proceedings are expected to have a material adverse effect on the company's financial statements - The company is not currently a party to any legal proceedings expected to have a material adverse impact on its financial statements[181] Item 1A. Risk Factors States no material changes to risk factors previously disclosed in the company's 2023 10-K - No material changes to risk factors previously disclosed in the 2023 10-K[182] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds to report[183] Item 3. Defaults Upon Senior Securities Reports no defaults upon senior securities during the reporting period - No defaults upon senior securities[184] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[185] Item 5. Other Information Reports a $2.5 million stock repurchase program authorized on May 3, 2024, and no changes to Rule 10b5-1 trading arrangements - On May 3, 2024, the Board authorized a stock repurchase program of up to $2.5 million of common stock[186] - No directors or officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the thirteen weeks ended March 31, 2024[187] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including employment agreements, stock awards, and certifications - Exhibits include the Second Amendment to Employment Agreement for Mark Vos, Form of Performance Stock Unit Award Grant Notice, Second Amendment to Non-Employee Director Compensation Program, and various certifications (CEO, CFO)[188]