Lulu’s Fashion Lounge Holdings, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Lulu’s is a digitally native online retailer of women’s clothing, shoes and accessories, primarily serving Millennial and Gen Z customers. The filing covers the unaudited three and nine months ended October 3, 2021, compared with September 27, 2020. Fiscal 2021 ends January 2, 2022. The company operates as one retail segment and is an emerging growth company.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenue | $106.3 million | $54.5 million | $278.9 million | $194.1 million |
| Revenue growth | 95.0% | — | 43.6% | — |
| Gross profit | $50.8 million | $24.4 million | $133.3 million | $86.9 million |
| Gross margin | 47.7% | 44.8% | 47.8% | 44.8% |
| Operating income (loss) | $9.1 million | $4.1 million | $26.9 million | $(3.2) million |
| Net income (loss) | $3.9 million | $0.4 million | $10.8 million | $(15.2) million |
| Net income (loss) attributable to common stockholders | $2.3 million | $0.2 million | $6.5 million | $(15.7) million |
| Adjusted EBITDA | $11.9 million | $5.2 million | $35.1 million | $19.0 million |
| Adjusted EBITDA margin | 11.2% | 9.6% | 12.6% | 9.8% |
Advertising expense was $13.9 million in Q3 and $34.0 million for the first nine months, compared with $7.3 million and $28.4 million, respectively, in the prior-year periods. Average order value increased to $125.07 in Q3 and $119.99 for the first nine months, versus $102.69 and $107.99. Active customers increased to approximately 2.5 million from 2.3 million.
Cash flow, liquidity and debt
- Cash provided by operating activities was $41.8 million for the nine months, compared with $21.2 million in the prior-year period.
- Investing cash use was $1.6 million, primarily for capitalized software and property and equipment.
- Financing cash use was $14.8 million, including $7.6 million of term-loan repayments, $8.6 million repayment of the revolving facility and $1.4 million of net Series B-1 preferred-stock proceeds.
- Cash and cash equivalents were $40.9 million at October 3, 2021, with restricted cash of $0.5 million. Total assets were $145.3 million.
- The October 3 balance sheet showed $103.4 million of term-loan carrying value, all classified as current, and no revolver borrowings. Revolver capacity was approximately $9.1 million after letters of credit.
- Total liabilities were $165.2 million, exceeding total assets; stockholders’ deficit was $156.3 million.
- Management stated that the company’s liquidity concerns were alleviated after the subsequent IPO and new credit facility and that resources were sufficient for at least 12 months.
Material changes versus the prior comparable period
- Revenue grew 95% in Q3 and 44% for the first nine months, reflecting higher active customers and customer spending, fewer markdowns and discounts, and recovery in demand for event-related apparel as in-person activities resumed.
- Gross margin improved by approximately 290 basis points in Q3 and 300 basis points for the first nine months, aided by product mix and lower promotional activity.
- Operating results shifted from a nine-month operating loss of $3.2 million to operating income of $26.9 million; nine-month net results shifted from a $15.2 million loss to $10.8 million of net income.
- Selling and marketing expense increased 116% in Q3 and 37% for the first nine months as marketing spending was restored from pandemic-suppressed levels.
- General and administrative expense increased 95% in Q3 but only 6% for the first nine months; the prior-year period included substantially higher one-time equity-based compensation.
- Inventory increased to $23.4 million from $16.9 million at January 3, 2021. The returns reserve increased to $18.3 million from $2.9 million, with a corresponding asset for recovery of $6.2 million.
Guidance, outlook, commentary and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management expects revenue to increase in absolute dollars, but growth rates may slow. It expects gross margin to improve modestly over the long term while investing in headcount, inventory, fulfillment, logistics, software and international expansion.
- COVID-19 remains a material uncertainty, including risks involving customer demand, labor availability, supplier disruptions, shipping costs and consumer behavior. Management reported a rapid recovery beginning in March 2021 but expects continued volatility.
- The company signed a new warehouse lease beginning December 2021, with approximately $15.7 million of rent over the lease term and total future operating lease payments of $25.9 million as of October 3, 2021.
- On November 15, 2021, after the reporting date, the company completed its IPO, issuing 5.75 million shares at $16.00 per share. The IPO converted Series A preferred stock into 15.0 million common shares and redeemed Series B and Series B-1 preferred stock for approximately $17.9 million.
- On the same date, the company entered into a $50.0 million, three-year revolving facility and borrowed $25.0 million. IPO and revolver proceeds were used to repay approximately $105.8 million of term-loan principal and $1.4 million of accrued interest. The prior credit facility was terminated.
- The filing contains inconsistent descriptions of IPO net proceeds: approximately $85.6 million in the notes and parts of MD&A, versus approximately $81.3 million in the liquidity and use-of-proceeds discussion. This value should be verified against the final prospectus and audited subsequent-event disclosures.
- Equity-based compensation, returns estimates, inventory valuation, preferred-stock valuation and tax calculations involve significant management judgment. The company also expects increased public-company compliance costs.
Principal risks
- Fashion risk, inventory mismanagement, excess stock, markdowns and changing customer preferences.
- COVID-19-related supply-chain, labor, shipping and demand disruption.
- Dependence on digital advertising platforms, social media, influencers, email and other third-party traffic sources.
- Competition and pricing pressure in online and traditional apparel retail.
- Supplier, manufacturing, sourcing, transportation and distribution-center disruptions, including higher freight and input costs.
- Cybersecurity, privacy, payment-processing and information-technology risks.
- Reliance on discretionary consumer spending and exposure to economic downturns.
- Substantial indebtedness, variable interest rates, restrictive covenants and dependence on subsidiary cash distributions.
- Public-company compliance, internal-control, litigation, intellectual-property, product-liability and regulatory risks.
Investor verification checklist
- Reconcile the conflicting IPO net-proceeds amounts of $85.6 million and $81.3 million.
- Confirm the post-IPO capital structure, including common shares issued on preferred-stock conversion, LP distributions and preferred-stock redemptions.
- Assess post-IPO net debt, revolver usage, leverage covenant compliance and interest expense under the new facility.
- Monitor returns, inventory levels, markdowns, shipping costs and the sustainability of the 47.8% nine-month gross margin.
- Evaluate whether higher marketing spending is generating durable customer growth and repeat purchases.
- Review the new warehouse commitment and capacity requirements against projected growth.
- Track COVID-19, supplier, freight, labor, cybersecurity and consumer-discretionary spending developments.
- Consider the effects of preferred-stock participation, equity compensation and potential dilution on common-stock earnings and ownership.