Lulu’s Fashion Lounge Holdings, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Lulu’s is a digitally native online retailer of women’s clothing, shoes and accessories serving primarily Millennial and Gen Z customers. The filing covers the unaudited 13-week quarter ended April 3, 2022, compared with the quarter ended April 4, 2021. The company completed its initial public offering in November 2021, raising approximately $82.0 million in net proceeds.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenue | $111.9 million | $69.0 million | +62% |
| Gross profit | $53.0 million | $31.1 million | +70% |
| Gross margin | 47.3% | 45.1% | +220 bps |
| Income from operations | $3.3 million | $2.6 million | +26% |
| Net income attributable to common stockholders | $2.0 million | $(1.4) million | Improved |
| Net income per diluted share | $0.05 | $(0.08) | Improved |
| Adjusted EBITDA | $9.9 million | $5.4 million | +84% |
| Adjusted EBITDA margin | 8.9% | 7.8% | +110 bps |
| Net cash provided by operating activities | $20.2 million | $16.7 million | +22% |
Revenue growth reflected a 51% increase in total orders, a 20% increase in average order value to $133, and fewer markdowns and promotional discounts, partly offset by higher returns. Active customers increased to approximately 3.0 million from 1.9 million.
Selling and marketing expense increased 63% to $21.9 million, including a 70% increase in online marketing spending. General and administrative expense increased 84% to $27.8 million, driven by equity-based compensation, labor, insurance, professional services, and public-company costs. Advertising expense was $16.9 million, compared with $9.9 million in the prior-year quarter.
Interest expense declined 95% to $0.2 million following repayment of the prior term loan with IPO proceeds. The effective tax rate was negative 34.18%, principally reflecting state taxes and nondeductible executive and equity-based compensation.
Cash flow, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $19.9 million at April 3, 2022, including $19.4 million of cash and cash equivalents.
- Operating activities generated $20.2 million of cash. Investing activities used $1.7 million, primarily for software development, equipment and the Ontario, California distribution facility. Financing activities used $10.6 million, including a $10.0 million repayment on the revolving facility.
- Inventory increased to $42.1 million from $22.2 million at January 2, 2022, reflecting purchases to support higher expected sales volume. The returns reserve increased to $20.0 million from $9.7 million.
- The new revolving facility provides up to $50.0 million of commitments, with potential expansion to $75.0 million. Borrowings outstanding were $15.0 million, leaving $35.0 million available, plus approximately $7.25 million of letter-of-credit capacity.
- The revolving facility matures November 15, 2024, bears interest at SOFR plus a margin or an alternative base rate, and is subject to financial and other covenants. Management reported compliance with all financial covenants.
- Management stated that cash, operating cash flow and available revolver capacity are expected to satisfy capital expenditures, working capital needs and debt repayments for at least the next 12 months, although future cash generation and borrowing availability are not assured.
Material changes versus the prior comparable period
- The company moved from a $1.4 million net loss to $2.0 million of net income, despite substantially higher operating expenses.
- Gross margin improved by 220 basis points, primarily due to a more favorable product mix and fewer markdowns and discounts.
- Debt-related costs declined materially after the November 2021 IPO-funded repayment of the $105.8 million term loan and $1.4 million of accrued interest. The former credit facility was terminated.
- Liquidity improved, with net cash of $4.4 million at quarter-end compared with net debt of $13.6 million at January 2, 2022, based on the company’s non-GAAP calculation.
- The company adopted ASC 842 lease accounting on January 3, 2022, recording $30.9 million of lease right-of-use assets and $32.0 million of lease liabilities at April 3, 2022.
- Equity-based compensation increased to $5.8 million from $1.9 million. The company granted approximately 2.0 million restricted stock units during the quarter and recognized $1.1 million related to CEO special compensation awards.
Guidance, outlook, commentary and risks
The filing does not provide specific quarterly or full-year revenue, margin or earnings guidance. Management expects revenue to grow over time, but cautions that growth rates may slow. It expects gross margin to increase modestly over the long term while operating expenses increase with investment in marketing, headcount, fulfillment, logistics, technology, international expansion and public-company compliance.
Management continues to expect COVID-19 effects, inflation, supply-chain pressures, transportation costs, labor availability and new variants to affect fiscal 2022 results. Mitigation actions include earlier ordering, smaller test orders followed by reordering successful styles, and supplier diversification. The business is seasonal, with historically higher revenue in the second and third fiscal quarters due to demand for special-event dresses and spring and summer fashion.
Key risks include fashion and customer-preference changes, inventory management and returns, discretionary consumer spending, customer-acquisition costs, reliance on third-party suppliers and transportation providers, distribution-center disruptions, cybersecurity and technology-system risks, competition, international operations and COVID-19-related disruptions. Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of April 3, 2022.
Important facts for investors to verify
- Whether revenue and active-customer growth can continue as marketing spending rises and post-pandemic demand normalizes.
- Inventory levels, sell-through, markdowns, returns and the adequacy of the $20.0 million returns reserve.
- The sustainability of the 47.3% gross margin and 8.9% Adjusted EBITDA margin, including the effect of shipping, inflation and supply-chain costs.
- Cash conversion after working-capital investment and the company’s ability to maintain positive liquidity while carrying $15.0 million of revolver debt and substantial lease obligations.
- The effect of equity-based compensation, executive awards and future share issuances on reported earnings and dilution.
- Compliance with the revolving facility’s leverage covenant and the impact of variable interest rates through the November 2024 maturity.
- The terms and potential cost of the employment agreements entered into May 12, 2022 with the co-presidents, including severance and equity-vesting provisions.