Lulu’s Fashion Lounge Holdings, Inc. — 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. This unaudited Form 10-Q covers the thirteen weeks and thirty-nine weeks ended October 2, 2022, compared with the periods ended October 3, 2021. Fiscal 2022 ends January 1, 2023.
The company completed its initial public offering in November 2021, raising approximately $82.0 million in net proceeds and using IPO proceeds and new revolving borrowings to repay its prior term loan.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 39 Weeks 2022 | 39 Weeks 2021 |
|---|---|---|---|---|
| Net revenue | $105.3 million | $106.3 million | $348.7 million | $278.9 million |
| Gross profit | $44.3 million | $50.8 million | $157.5 million | $133.3 million |
| Gross margin | 42.1% | 47.7% | 45.2% | 47.8% |
| Income from operations | $0.6 million | $9.1 million | $14.7 million | $26.9 million |
| Net income | $0.9 million | $3.9 million | $9.0 million | $10.8 million |
| Adjusted EBITDA | $5.4 million | $11.9 million | $30.1 million | $35.1 million |
| Adjusted EBITDA margin | 5.1% | 11.2% | 8.6% | 12.6% |
Q3 diluted earnings per share were $0.02, compared with $0.13 in the prior-year quarter. Year-to-date diluted earnings per share were $0.23, compared with $0.37 in the prior-year period.
- Customer and order metrics: Active customers increased to 3.23 million from 2.50 million. Average order value increased to $133 from $125 in Q3 and to $131 from $120 year to date.
- Cash flow: Operating cash flow was $16.3 million, compared with $41.8 million in the prior-year period. Investing cash outflow was $3.9 million, primarily for software, property and equipment. Financing cash outflow was $11.4 million.
- Liquidity: Cash and cash equivalents were $12.5 million, with restricted cash of $0.5 million, at October 2, 2022. Total cash, cash equivalents and restricted cash increased by $1.1 million during the first thirty-nine weeks.
- Working capital: Inventory increased to $49.4 million from $22.2 million at January 2, 2022. Returns reserve increased to $18.8 million from $9.7 million, reflecting higher expected returns and sales volume.
- Debt: The company had $15.0 million outstanding under its revolving facility, $34.8 million of additional borrowing availability and $0.3 million of outstanding letters of credit. The facility matures November 15, 2024 and carried an interest rate of 4.8% at quarter-end.
- Lease obligations: Current and noncurrent lease liabilities totaled $32.5 million following adoption of ASC 842.
Material changes versus the prior comparable periods
- Q3 revenue decreased 1%, as a 1% decline in orders and higher return rates more than offset a 6.4% increase in average order value.
- Year-to-date revenue increased 25%, driven by a 23% increase in orders and a 9% increase in average order value, partially offset by higher returns.
- Q3 gross margin declined 560 basis points. Cost of revenue increased 10% despite slightly lower revenue, due to product mix, higher outbound and return shipping costs, fuel surcharges and costs associated with the Southern California distribution facility.
- Year-to-date gross margin declined 260 basis points to 45.2%, while cost of revenue increased 31%.
- Q3 operating income fell to $0.6 million from $9.1 million. General and administrative expense increased 15%, including higher equity-based compensation, insurance and professional services, while selling and marketing expense declined 6%.
- Year-to-date selling and marketing expense increased 37%, including a 44% increase in online marketing spending, and general and administrative expense increased 32%.
- Interest expense declined 91% in Q3 and 94% year to date following repayment of the former high-cost term loan in November 2021.
- Operating cash flow declined primarily because of higher inventory balances, lower accrued expenses and lower net income. Inventory investment reduced operating cash flow by $27.2 million year to date.
Outlook, management commentary, risks and unusual items
Management expects cash and cash equivalents, operating cash flow and available revolver capacity to be sufficient for capital expenditures, working capital requirements and debt repayments for at least the next twelve months. The filing does not provide formal revenue, earnings or margin guidance.
- Inflation, interest rates, fuel prices and consumer confidence have affected discretionary spending, shopping behavior, promotions and pricing. Management expects these factors to continue affecting results.
- COVID-19 demand effects have largely subsided, but supply-chain and labor risks remain. The company is ordering earlier, using a “test, learn and reorder” approach and diversifying suppliers.
- Inventory management remains a key risk because merchandise is purchased ahead of demand and may require markdowns or generate excess inventory if customer preferences change.
- Higher return rates, shipping costs, fuel surcharges and distribution-facility costs are pressuring gross margins.
- Customer acquisition and retention depend on marketing efficiency, social media, influencers, affiliates and third-party platforms. The company increased marketing investment materially year to date.
- Competition, fashion trends, consumer discretionary spending, technology and cybersecurity, supply-chain disruptions, third-party transportation providers and international macroeconomic conditions could materially affect results.
- Unusual or nonrecurring items include a $0.7 million Q3 income tax benefit related primarily to a prior-year amended tax return and significant equity-based compensation expense of $12.2 million year to date.
- The company adopted ASC 842 in 2022, recognizing substantial right-of-use assets and lease liabilities. Management reported effective disclosure controls and compliance with debt covenants as of October 2, 2022.
- The filing states that no pending legal matter is expected to have a material adverse effect, and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether order growth, customer growth and average order value can offset higher returns, promotions, shipping costs and product costs.
- Inventory aging, markdown exposure and the adequacy of the returns reserve, particularly after inventory more than doubled from year-end.
- Whether gross margin and Adjusted EBITDA margin stabilize after the substantial Q3 deterioration.
- Cash conversion and working-capital requirements, including the effect of further inventory purchases and accrued-liability changes.
- Revolver utilization, interest-rate exposure, covenant compliance and refinancing needs before the November 2024 maturity.
- The sustainability and cash impact of equity-based compensation, public-company costs and distribution-center investments.
- Actual fourth-quarter and full-year performance, as the filing provides no formal financial guidance and states that interim results are not necessarily indicative of the full fiscal year.