Lulu’s Fashion Lounge Holdings, Inc. — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Lulus is a digitally native online retailer of women’s apparel, footwear and accessories, primarily serving Millennial and Gen Z customers. The filing covers the 52-week fiscal year ended January 2, 2022; the comparable fiscal 2020 year ended January 3, 2021 had 53 weeks. The company began trading on Nasdaq under “LVLU” on November 11, 2021.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net revenue | $375.6 million | $248.7 million | Up 51.1% |
| Gross profit | $176.7 million | $110.3 million | Up 60.3% |
| Gross margin | 47.1% | 44.4% | Up 270 basis points |
| Operating income (loss) | $22.3 million | $(4.7) million | Improved $27.0 million |
| Net income (loss) | $2.0 million | $(19.3) million | Improved $21.3 million |
| Adjusted EBITDA | $41.4 million | $18.9 million | Up 118.9% |
| Adjusted EBITDA margin | 11.0% | 7.6% | Up 340 basis points |
| Active customers | 2.8 million | 2.0 million | Up 38.0% |
| Average order value | $120 | $106 | Up 13.2% |
Revenue growth reflected higher active customers and customer spending, fewer markdowns and promotional discounts, and increased marketing investment. Sales returns were higher than in 2020, when the pandemic had shifted sales toward categories with lower return rates.
Net cash provided by operating activities was $26.9 million, compared with $4.9 million in 2020. Investing cash outflow was $3.4 million, primarily for software, equipment and the Ontario distribution facility. Financing cash outflow was $27.7 million, reflecting debt repayment and preferred-stock redemption, partially offset by IPO proceeds and new borrowings.
At January 2, 2022, the company had $11.4 million of cash and cash equivalents, $0.5 million of restricted cash, $25.0 million drawn under a new $50.0 million revolving facility, and $25.0 million of remaining borrowing availability. Net debt was $13.6 million. The facility matures November 15, 2024, bears interest at floating rates, and includes a maximum total leverage covenant of 2.50:1.00, stepping down to 2.00:1.00 after 18 months. Management stated that available cash, operating cash flow and borrowing capacity should fund needs for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue rebounded strongly from the pandemic-affected 2020 period and exceeded fiscal 2019 revenue of $369.6 million.
- Gross margin improved due to a more favorable product mix and lower markdowns and discounts.
- Selling and marketing expense increased 39.5% to $66.7 million as the company resumed customer acquisition and retention spending.
- General and administrative expense increased 30.6% to $87.7 million, including higher labor, bonus and equity-based compensation costs.
- Interest expense declined 20.3% to $12.8 million due to lower borrowings and lower rates than under the prior credit facility.
- The company completed its IPO, issuing 5.75 million shares at $16.00 per share and receiving approximately $82.0 million of net proceeds.
- IPO proceeds and new revolving borrowings were used to repay approximately $107.2 million related to the prior term loan and redeem all Series B and Series B-1 preferred stock for approximately $17.9 million.
- GAAP net income was $2.0 million, but net loss attributable to common stockholders was $122.9 million because of a $123.0 million deemed dividend associated with the conversion of preferred stock and IPO down-round provisions. Adjusted diluted earnings per share was $0.57 versus $(0.13) in 2020.
Outlook, commentary, risks and unusual items
Management expects continued investment in brand awareness, customer retention, inventory, fulfillment, logistics, technology, category expansion and international markets. It expects gross margin to improve modestly over the long term but does not provide formal revenue or earnings guidance in the filing.
- COVID-19 remains a material uncertainty affecting consumer demand, labor availability, supply chains, shipping costs and event-related apparel demand.
- The business is exposed to fashion-trend risk, inventory mismanagement, markdowns, returns and discretionary consumer spending.
- Most merchandise is sourced from third parties, with significant exposure to China and other international manufacturing markets. Tariffs, trade restrictions, supplier disruptions, labor issues, raw-material costs and transportation delays could pressure margins and availability.
- Competition in online apparel is intense, while customer acquisition depends significantly on digital platforms, search engines, social media, influencers and email marketing.
- Cybersecurity, privacy, payment processing and evolving U.S. and international data-protection regulations could increase costs or create liability.
- The company recorded $13.7 million of equity-based compensation expense and $1.4 million of debt-extinguishment loss in 2021. Adjusted EBITDA excludes these and other items and should not be treated as discretionary cash flow.
- The company entered new operating leases, including a distribution facility lease with approximately $15.7 million of payments over the lease term. Adoption of the new lease accounting standard was expected to add approximately $33.5 million to $37.5 million of right-of-use assets and lease liabilities.
- Subsequent to year-end, the company granted approximately 1.6 million RSUs and granted additional fully vested RSUs to the CEO; estimated related stock-based compensation was approximately $16.3 million. On March 29, 2022, it repaid $10.0 million under the revolving facility.
Most important facts for investors to verify
- Whether 2021 revenue growth and the 47.1% gross margin are sustainable as pandemic-related comparisons normalize.
- Customer retention, repeat-purchase trends, marketing efficiency and the profitability of the expanded customer base.
- Inventory levels, return rates, markdown activity and supply-chain and transportation costs.
- Compliance with the revolving facility’s leverage covenant and the company’s ability to generate sufficient operating cash flow.
- The future effect of equity-based compensation, CEO awards, RSUs and other dilution on earnings per share and cash generation.
- The effects of new lease accounting, distribution-facility expansion and other fixed-cost commitments.
- Potential impacts from COVID-19, inflation, labor shortages, tariffs, international sourcing, cybersecurity incidents and changing privacy regulations.
- The distinction between GAAP net income of $2.0 million, net loss attributable to common stockholders of $122.9 million and non-GAAP Adjusted EBITDA of $41.4 million.