Q2 2024 Lulu’s Fashion Lounge Holdings Inc Earnings Call

August 14, 2024

Speaker Change: project MondaySunday, Tuesday, Wednesday, Friday groups, Thanksgiving Day system, ?? Member of the

Naomi Beckman: You may begin. Good afternoon, everyone, and thank you for joining us to discuss Lulu's second quarter 2024 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including but not limited to statements regarding management's expectations, plans, strategies, goals, and objectives and their implementation, our expectations around the continued impact of the macroeconomic environment, consumer demand and return rates on our business, our future expectations regarding financial results, our ability to realize the intended impact of cost reduction measures, references to the fiscal year ending December 29, 2024, including our financial outlook for 2024, market opportunities, product launches, and other initiatives, and our growth. These statements, which are subject to various risks, uncertainties, assumptions, and other important factors, could cause our actual results, performance, or achievements to differ materially from results, performance, or achievements expressed or implied by these statements.

Operator: Good afternoon and welcome to the Lulu 2nd quarter 2024 earnings conference call. Today's call is being recorded, and we have allocated one hour for the prepared remarks and Q&A.

Speaker Change: Good afternoon and welcome to the Lulu second quarter 2024 earnings conference call. Today's call is being recorded and we have allocated one hour for the prepared remarks and Q&A.

Naomi Beckman: These risks, uncertainties, and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our annual report on Form 10K for the fiscal year ended December 31st, 2023, and our quarterly report on Form 10K for the second quarter ended June 30th, 2024, filed with the SEC this afternoon, all of which can be found on our website at www.investors.luv.com. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information except as required by law.

Naomi Beckman-Stras: At this time, I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary, Naomi Beckman-Stras. Thank you. You may begin.

Naomi Beckman: During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt, and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP.

Speaker Change: At this time, I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary, Naomi Beckman-Strauss. Thank you.

Naomi Beckman: Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures, as well as description, limitations, and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO, Crystal Landsem, our CFO, Tiffany Smith, and our president and CIO Vos. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal. Thank you, Naomi, and good afternoon, everyone.

Naomi Beckman-Stras: Good afternoon, everyone, and thank you for joining us to discuss Lulu 2nd quarter 2024 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements, including but not limited to statements regarding management's expectations, plans, strategies, goals and objectives, and their implementation. Our expectations around the continued impact of the macroeconomic environment, consumer demand and return rates on our business, our future expectations regarding financial results, our ability to realize the intended impact of cost reduction measures, references to the fiscal year ending December 29th, 2024, including our financial outlook for 2024, market opportunities, product launches and other initiatives, and our growth.

Crystal Landsem: We appreciate you joining us today. Our second quarter results were in line with the expectations laid out in our preliminary results, with net revenue of $92 million, 13% lower than the prior year period, and adjusted EBITDA of $0.2 million losses, or $0.4 million below the prior year period. First quarter headwinds, including declines and mark-down sales and higher return rates due to strong sales and high-margin occasion wear.

Speaker Change: Good afternoon, everyone, and thank you for joining us to discuss Lulu's second quarter 2024 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Security's litigation reform act of 1995.

Crystal Landsem: Despite progress on margin goals and reduced operating expenses, profitability was limited by fixed costs against lower-than-expected net revenue base. As with many direct-to-consumer companies, we are navigating a range of external challenges, putting pressure on top-line and bottom-line results. However, we view these obstacles as temporary and are tightly managing expenses to withstand the short-term headwinds.

Crystal Landsem: To that end, we remain committed to our long-term growth initiatives, which reinforce our competitive strengths and that will enable us to endure near-term volatility and position us for sustainable growth. These include, Continued evolution and optimization of our data-driven merchandising model with customer data and insights to drive value to our brand fans through our robust reorder algorithm and an improved and evolving assortment. Amplifying our unique brand DNA and community focus culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement and delivering excellent customer service to drive increased word of mouth introduction.

Crystal Landsem: By capitalizing on these strengths, we're confident that we can reach a broad base of potential customers and steadily increase our market share over time. Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually drive better decisioning, higher engagements, and increased efficiencies. We are confident in our competitive strengths and are encouraged by the steady improvements these focused initiatives have yielded across our core competencies.

Crystal Landsem: So with that, I'd like to highlight some of the positive outcomes from the quarter. Our special occasion and bridesmaids net sales grew by over 30% year over year and surpassed our pre-pandemic peak, marking a record quarter for these product categories and reinforcing Lulu's brand position as the go-to destination for all of life's moments. Growth margin improved in the second quarter with an 80 basis point expansion year over year due to lower markdown sales and a shift toward higher margin product classes. Markdown sales decreased by approximately 30% compared to the prior year.

Speaker Change: All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements.

Crystal Landsem: Thanks to our healthier inventory position. Inventory levels declined by 19% for Q2 2023, driven by further tightening of our weeks of supply in our reorder business, surpassing the year-over-year net revenue decline, and showcasing the agility of our data-driven buying model. Additionally, inventory mix across new, novelty, and reorder products continues to improve, driving further confidence in the future reorder funnel. Our new return policy boosted restocking fee revenue and led to an improvement in customer return behavior towards the end of the quarter, even as we extended exceptions to the previous policy which resulted in some top line pressure.

Crystal Landsem: We're seeing continued progress on our net revenue comps, which improved sequentially in the quarter, with early third quarter sales showing a continuation of positive trends, suggesting improving traction within our strategic initiative. Our third-party brand and influencer collaborations this quarter have proven highly effective, driving increased media interest, social traffic, and purchase intent. Notable partnerships with Levi's, Vans, and the D'Amelio sisters have not only strengthened our brand equity, but also catalyzed prospective partnership opportunities. In Q2, we renewed our strategy on third-party partnerships. Recognizing their value in enhancing product visibility and desirability for both new and existing customers.

Speaker Change: including but not limited to statements regarding management's expectations, plans, strategies, goals, and objectives, and their implementation.

Speaker Change: Our expectations around the continued impact of the macroeconomic environment.

Speaker Change: Consumer Demand and Return Rates on Our Business.

Speaker Change: Our future expectations regarding financial results.

Speaker Change: our ability to realize the intended impact of cost reduction measures, references to the fiscal year ending December 29, 2024, including our financial outlook for 2024, market opportunities, product launches, and other initiatives, and our growth.

Crystal Landsem: We believe returning to pre-pandemic third party merchandise allocations enhances our offerings, lowers the entry barrier for new customers, and creates significant growth opportunities for synergistic brand partnerships. We also saw continued strong demand for new and novelty products supporting our reorder pipeline and driving positive sales and favorable margins performance in key high volume categories. As discussed in prior quarters, we are actively adapting to significant trend shifts while upholding the enduring quality that defines our brand. We anticipate sustained momentum, with third quarter receipts reflecting our merchandising team's fresh vision. I'm excited about the tangible value our new products and merchandising efforts are generating.

Naomi Beckman-Stras: These statements, which are subject to various risks, uncertainties, assumptions, and other important factors, could cause our actual results, performance, or achievements to differ materially from results, performance, or achievements expressed or implied by these statements.

Speaker Change: These statements, which are subject to various risks, uncertainties, assumptions, and other important factors, could cause our actual results, performance, or achievements to differ materially from results, performance, or achievements expressed or implied by these statements.

Naomi Beckman-Stras: These risks, uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our annual report on Form 10-K for the fiscal year ended December 31st, 2023, and our quarterly report on Form 10-Q for the 2nd quarter ended June 30th, 2024, filed with the SEC this afternoon, all of which can be found on our website and investors.luz.com. Any such forward-looking statements represent management's estimates as of the date of this call, but we may elect to update such forward-looking statements at some point in the future. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law.

Speaker Change: These risks, uncertainties, and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our annual report on Form 10-K for the fiscal year ended December 31, 2023,

Speaker Change: and our quarterly report on Form 10-Q for the second quarter ended June 30, 2024, filed with the SEC this afternoon, all of which can be found on our website at investors.louisv.com.

Speaker Change: Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information except as required by law.

Naomi Beckman-Stras: During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt, and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-gap measures may be different from non-gap measures used by other companies.

Speaker Change: During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt, and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.

Speaker Change: The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP.

Speaker Change: Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures, as well as description, limitations, and rationale for using each measure, can be found in this afternoon's press release and in our SEC filings.

Naomi Beckman-Stras: Reconciliation of GAAP to non-GAAP measures, as well as description, limitations, and rationale for using each measure, can be found in this afternoon's press release and in our SEC filing.

Naomi Beckman-Stras: Joining me on the call today are our CEO, Crystal Lanson; our CFO, Tiffany Smith; and our president and CIO, Bob.

Speaker Change: Joining me on the call today are our CEO , Crystal Landsem, our CFO , Tiffany Smith, and our President and CIO, Mark Vos. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Naomi Beckman-Stras: Following our prepared remarks, we'll open the call for your questions.

Crystal Lanson: With that, I'll turn the call over to Crystal. Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Our second quarter results were in line with the expectations laid out, and our preliminary results with net revenue of 92 million, 13 percent lower than the prior year period, and adjusted EBITDA of 0.2 million losses, 4.4 million below the prior year period. First quarter headwinds, including declines and markdown sales and higher return rates due to strong sales and high margin occasion wear, combined with slower adoption of our new return policy, contributed to the softer than expected results for the quarter.

Crystal Landsem: Finally, our wholesale business is progressing steadily, highlighted by the introduction of more cohesive collections and new developments based on our best-selling items, streamlined fulfillment processes, and reinvigorated partnership with a long-standing major in the second half. Looking ahead to Q3 and Q4, we are working towards further expanding partnerships, enhancing IMUs for both Lulu's and our wholesale partners, further optimizing our product strategy and offering in-season and chase opportunities, which will drive meaningful wholesale growth in the back half of the year. We remain focused on growth with our departments for our partners and have opened distribution with three new major retailers. Turning to the less favorable aspects about the quarter.

Crystal Landsem: Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today.

Crystal Landsem: Our casual business was disproportionately challenged during the quarter, driving the majority of the year-over-year declines in net sales. Returns continued to pressure results driven partially by mixed shifts into higher return rate products, a higher concentration of full price sales, and consumer behavior favoring larger orders to accommodate bringing the dressing room home. That said, we are encouraged by the downward trend in return rates across most product classes towards the end of the quarter.

Speaker Change: Our second quarter results were in line with the expectations laid out in our preliminary results with net revenue of $92 million, 13% lower than the prior year period, and adjusted EBITDA of $0.2 million losses, $4.4 million below the prior year period.

Speaker Change: First quarter headwinds, including declines in markdown sales and higher return rates due to strong sales and high margin occasion wear, combined with slower adoption of our new return policy, contributed to the softer than expected results for the quarter.

Crystal Landsem: Profitability was pressured due to higher fixed costs on a lower than anticipated net revenue, Due to these softer results and continued macroeconomic pressures and uncertainty, we are swiftly implementing cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth. These cost reductions will include the following, been approximately 10 to 15% reduction in operating expenses for the second half of 2024 compared to the first half, including a reduction in six payroll costs coming from reduced headcount and pay cuts to the executive and management team, as well as tightening a fixed and variable cost to better align with the anticipated slower sales recovery. Capital expenditure estimates for the year are expected to decrease by $1.5 to $2.5 million and we are now projecting approximately $3.5 million in CapEx for the fiscal year.

Crystal Lanson: Despite progress on margin goals and reduced operating expenses, profitability was limited by fixed costs against lower than expected net revenue base. We're on top line and bottom line results. However, we view these obstacles as temporary and are tightly managing expenses to withstand the short-term headwind. To that end, we remain committed to our long-term growth initiatives, which reinforce our competitive strengths and that will enable us to endure near-term volatility and position us for sustainable growth. These include continued evolution and optimization of our data driven merchandising model with customer data and insights to drive value to our brand fans.

Speaker Change: Despite progress on margin goals and reduced operating expenses, profitability was limited by fixed costs against lower-than-expected net revenue base.

Speaker Change: As with many direct-to-consumer companies, we are navigating a range of external challenges, putting pressure on top-line and bottom-line results. However, we view these obstacles as temporary and are tightly managing expenses to withstand the short-term headwinds.

Mark Vos: We anticipate realizing savings from these actions in the third and fourth quarter of 2024, extending through 2025. We believe these actions will allow us to achieve our growth and profitability goals more efficiently, while still maintaining a strong operating model that can meet our strategic objectives, deliver positive cash flow, and ultimately provide a runway for long-term sustainable growth. We continue to make progress against our 2024 Strategic Initiatives of Product Assortment and Supply Chain Optimization, Brand Awareness Efforts, Investments in Technology, and Remaining Cash Flow Parts of it.

Speaker Change: To that end, we remain committed to our long-term growth initiatives, which reinforce our competitive strengths and that will enable us to endure near-term volatility and position us for sustainable growth. These include…

Mark Vos: As we enter into the second half of the year, I'm confident that our cost reductions alongside our strategic initiatives and brand awareness and customer engagement will drive long term sustainable growth, expand profitability, and enhance our customer base over time. That said... With a slower than expected recovery, amidst persistent macroeconomic pressures weighing on consumer demand, we are withdrawing our full-year net revenue and adjusted EBITDA outlook and providing quarterly guidance as we assess the immediate impacts of our cost-saving measures and other initiatives.

Speaker Change: Continued evolution and optimization of our data-driven merchandising model with customer data and insights to drive value to our brand fans through our robust reorder algorithm and an improved and evolving assortment.

Crystal Lanson: Through our robust reorder algorithm and an improved and evolving assortment. Amplifying our unique brand DNA and community focus culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement, and delivering excellent customer service to drive increased word of mouth introductions. By capitalizing on these strengths, we're confident that we can reach a broad base of potential customers and steadily increase our market share over time. Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations, and continually drive better decisioning, higher engagement, and increased efficiencies.

Speaker Change: Amplifying our unique brand DNA and community-focused culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement, and delivering excellent customer service to drive increased word-of-mouth introductions.

Speaker Change: By capitalizing on these strengths, we're confident that we can reach a broad base of potential customers and steadily increase our market share over time.

Speaker Change: Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually drive better decisioning, higher engagements, and increased efficiencies.

Crystal Lanson: We are confident in our competitive strengths and are encouraged by the steady improvements these focused initiatives have yielded across our core competencies.

Speaker Change: We are confident in our competitive strengths and are encouraged by the steady improvements these focused initiatives have yielded across our core competencies.

Crystal Lanson: So, with that, I'd like to highlight some of the positive outcomes from the quarter. Our special occasion and bridesmaids net sales grew by over 30% year over year and surpassed our pre-pandemic peak, marking a record quarter for these product categories and reinforcing Lulu's brand position as the go-to destination for all of life's moments. Growth margin improved in the second quarter with an 80 basis point expansion year over year due to lower markdown sales and a shift toward higher margin product classes. Markdown sales decreased by approximately 30% compared to the prior year, thanks to our healthier inventory position.

Mark Vos: We remain optimistic about our sales recovery and business turn around and are encouraged by improving month-to-month trends in our business. With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer, who will share some updates on progress against 2024 priorities. Mark?

Speaker Change: So with that, I'd like to highlight some of the positive outcomes from the quarter.

Mark Vos: Thank you, Crystal. I'll start by providing an update on our customer and how she interacts it with us during the quarter. While active customer counts declined in the second quarter compared to prior year, we remain encouraged by the increase in penetration of active customers that are repeating on a quarter-over-quarter basis. Also, new entrants and total loyalty program membership grew once again year over year. And both repeat customer penetration and loyalty program growth are strong indicators of Lulu's brand relevance and future revenue opportunities.

Speaker Change: Our special occasion and bridesmaids net sales grew by over 30% year over year and surpassed our pre-pandemic peak marking a record quarter for these product categories and reinforcing Lulu's brand position as the go-to destination for all of life's moments.

Mark Vos: As mentioned last quarter, limited markdown inventory has constrained the new customer acquisition segments of potential customers that are looking for a deal. However, our new customer acquisition segments of only full-price products purchased, which are our largest segments, performed best and also showed quarter-over-quarter improvement in their comps.

Speaker Change: Growth margin improved in the second quarter with an 80 basis point expansion year over year due to lower markdown sales and a shift toward higher margin product classes. Markdown sales decreased by approximately 30% compared to the prior year thanks to our healthier inventory position.

Crystal Lanson: Inventory levels declined by 19% from Q2 2023, driven by further tightening of our weeks of supply and our reorder business surpassing the year-over-year net revenue decline and showcasing the agility of our data-driven buying model. Additionally, inventory makes across new novelty and reorder products continues to improve, driving further confidence in the future reorder funnel. Our new return policy boosted restocking fee revenue and led to an improvement in customer return behavior towards the end of the quarter, even as we extended exceptions to the previous policy, which resulted in some top line pressure. We are seeing continued progress on our net revenue comps, which improve sequentially in the quarter, with early third quarter sales showing a continuation of positive trends, suggesting improving traction within our strategic initiatives.

Mark Vos: The relative strength in these important full price new customer acquisition segments aligns with an increased ratio of new products sold and our optimism around our merchandising assortment adjustment. With third quarter receipts expected to further reinforce our buying and merchandising team's focus, we are optimistic about the customer acquisition ramp-up from these new and novelty product introductions. Additionally, in Q2, we saw a year-over-year increase in average unit retail, driving a higher average order value and total order value per customer, for both new and returning customers, and was higher compared to Q2 last year.

Speaker Change: Inventory levels declined by 19% for Q2 2023, driven by further tightening of our weeks of supply in our reorder business, surpassing the year-over-year net revenue decline, and showcasing the agility of our data-driven buying model.

Mark Vos: Additionally, we increased merchandise margins due to the combined effects of our costing efforts and lower markdown sales. While international sales remain a small percentage of our total company sales, we achieved another consecutive quarter of year over year I double digit growth in units sold arms in our top 15 countries outside the U.S, including strong growth in our largest markets, Canada, the UK, and Mexico. We see much room for optimizing our international top and bottom line of the current U.S.-based shipping model.

Speaker Change: Additionally, inventory mix across new novelty and reorder products continues to improve, driving further confidence in the future reorder funnel.

Speaker Change: Our new return policy boosted restocking fee revenue and led to an improvement in customer return behavior towards the end of the quarter, even as we extended exceptions to the previous policy, which resulted in some top-line pressure.

Mark Vos: Product and Price Offering Differentiation, and Building on our Growth Momentum by Making Selective Brand Activation Investment Support. I'll now share some updates around our strategic initiatives progress during the, Starting with our Product Assortment Optimization and Related Margin Expansion Efforts, Our merchandising and buying teams remain highly focused on evolving and revining our assortment to best meet the changing preferences of our core Lulu's customers. Incorporating newer styles and improving product margin through our strengthened product costing team. New and novelty merchandise saw meaningful year-over-year growth in both style and car varieties.

Speaker Change: We are seeing continued progress on our net revenue comps, which improved sequentially in the quarter, with early third quarter sales showing a continuation of positive trends, suggesting improving traction within our strategic initiatives.

Crystal Lanson: Our third party brand and influencer collaboration to this quarter have proven highly effective, driving increased media interest, social traffic, and purchase intent.

Mark Vos: And while customers respond positively and new products to share of order value substantially increased here over year, we frequently sold out too quickly, missing potential sales, In Q2, we tested our buying algorithms with new forecast capabilities, which could start impacting products arriving in Q3 and beyond. Once fully ramped, we expect this to improve visibility and predictability around trend cycles and provide better insights into depth of product domain. Additionally, we see opportunities in external data sources like trend, weather, geographic and other macro data to detect demand patterns earlier and more accurately.

Speaker Change: Our third party brand and influencer collaborations this quarter have proven highly effective, driving increased media interest, social traffic, and purchase intent.

Mark Vos: Our ongoing vendor network consolidation has continued to improve product costs by balancing purchasing across vendors, diversifying geographical sourcing to reduce dependencies on certain countries of origin, and enhancing fit and fabric consistency. On the fit front, we have been working to reduce fit-related returns through a holistic approach that enhances the overall shopping journey for our customers while optimizing our bottom line. Our shopping experience improvements have increased customer engagement with fit-related information and contributed to positively impacting our return rate.

Crystal Lanson: Network. Notable partnerships with Levi's, Vans, and the Demilio sisters have not only strengthened our brand equity, but also catalyzed prospective partnership opportunities. In Q2, we renewed our strategy on third-party partnerships, recognizing their value and enhancing product visibility and desirability for both new and existing customers. We believe returning to pre-pandemic third-party merchandise allocations enhances our offerings, lowers the entry barrier for new customers, and creates significant growth opportunities for synergistic brand partnerships. We also saw continued strong demand for new and novelty products supporting our reorder pipeline and driving positive sales and favorable margins, performance, and key high-volume categories.

Mark Vos: Improved collaboration and communication channels with key vendors, streamlining of processes, and refining product fit flexibility are starting to reflect increased fit consistency. These enhancements are expected to benefit a significant portion of our assortment in Q3 of 2024 and have full effect from Q4 2024 forward. We believe improved fit consistency and increased fit flexibility where possible will have a positive impact on fit-related return rates, as well as strengthen the overall Lulu's customer shopping experience. And last but not least, we are also very excited about the addition of size XXL for Select Lulu's branded apparel.

Speaker Change: Notable partnerships with Levi's, Vans, and the D'Amelio sisters have not only strengthened our brand equity, but also catalyzed prospective partnership opportunities.

Mark Vos: Initial shipments began in Q2 with availability expanding over the next several quarters. Initial readings support our belief that greater size inclusivity will broaden our potential customer base and boost new customer acquisition and reduce return rates in adjacent sites. As Crystal highlighted, our Q2 return policy changes, together with the aforementioned initiatives, started to show positive impacts by late Q2 and into Q3, reducing return costs. As a reminder, the new policy introduced a modest restocking fee and a tighter return window.

Speaker Change: In Q2, we renewed our strategy on third-party partnerships, recognizing their value and enhancing product visibility and desirability for both new and existing customers.

Mark Vos: We will continue to monitor and refine our return policy to discourage excessive returns and minimize unprofitable customers. Next, we are making investments in brand initiatives that support customer acquisition, retention, and brand differentiation. As we discussed on our last call, our first major multi-channel brand campaign, Friends For Life, launched in early Q2, with the goals of reinfigurating our core customers and communicating our distinct brand image, which underscores loses role in all of life's moments, from the everyday to the extraordinary. In May, our Friends for Life campaign took center stage on a heavily-trafficked billboard in Times Square, a first for the brand.

Mark Vos: Our Besties at Brunch series, which kicked off in Nashville in May, followed by Chicago in June, received more than 500 RSVPs and effectively bridged our online and in-person brand presence. Activating new social and influencer initiatives and celebrating the Lulu's community. The Friends for Life, Full Funnel Campaign, and Real Life Activations directly resulted in... More than 80% of website visitors that viewed the campaign were new to the Lulu's brand hug, many of which we converted to first-time new customers.

Mark Vos: The strongest ever at recall numbers, demonstrating a great connection between our differentiating brand, and prospective and existing customers. A full funnel marketing approach that operated at low CPMs and showed promising incremental return and advertising spend in several digital channels. In addition to the campaign's success, we gained valuable insights into platform performance and ad format. We will refine our approach going forward and are confident in our ability to further improve our brand campaign performance in next campaigns.

Speaker Change: We believe returning to pre-pandemic third-party merchandise allocations enhances our offerings, lowers the entry barrier for new customers, and creates significant growth opportunities for synergistic brand partnerships.

Mark Vos: In conjunction with these announcements, we have introduced the Lulu's Love's feature on our website to highlight these partnerships which have allowed us to expand our reach and enhance brand awareness by leveraging other brand platforms. We are early on in these brand collaborations and partnerships and look forward to optimizing their impacts on Lulu's brand awareness, relevance, and reaching new potential customers, and ultimately sales. Building on the success of our influence for edits with Kennedy Alliance in Q1, we partnered with Anna Herring and Delaney Childs in Q2, the further drive rental awareness and audiences to the site. Notably, an adherence edit went viral, amassing over 1.5 million views and nearly 40,000 shares.

Mark Vos: We're encouraged by the strong return of these collaborations and we look forward to upcoming influencer collaborations and expanding our creator network. Our diverse influencer strategy has resonated with the Lulu's customer community and we believe further reinforces our mission of being there for all life's moments. In Q2, we also launched the Pretty Little Liars Original Sin Edit, curated by the hit shows wardrobe stylist and features on the show's webpage, leveraging a collaborative of media toast and giveaway, reaching the show's 12 million followers in addition to ours.

Speaker Change: We also saw continued strong demand for new and novelty products supporting our reorder pipeline and driving positive sales and favorable margins performance in key high-volume categories.

Crystal Lanson: As discussed in prior quarters, we are actively adapting to significant trends shifts while upholding the enduring quality that defines our brand. We anticipate sustained momentum, with third-quarter receipts reflecting our merchandising team's fresh vision. I'm excited about the tangible value our new products and merchandising efforts are generating. Finally, our wholesale business is progressing steadily, highlighted by the introduction of more cohesive collections and new developments based on our best-selling items, dream-length fulfillment processes, and reinvigorated partnership with a long-standing major in the second half. Looking ahead to Q3 and Q4, we are working toward further expanding partnerships, enhancing IMUs for both Lulu's and our wholesale partners, further optimizing our product strategy and offering in-season and chase opportunities, which will drive meaningful wholesale growth in the back half of the year.

Mark Vos: Our media expansion and publicity efforts gained significant momentum this quarter, doubling press coverage in Q2 and securing placements in top-tier retail, financial, and consumer publications. This boost increased users on Lulu's channels and drew inbound interest from various media outlets. We believe in the strategic value of our brand and customer acquisition initiatives and are confident in maximizing our reach and impact despite broader cost reduction efforts in Q3. We anticipate continuing to build momentum for the Lulu's brand, increasing awareness and driving revenue as we execute our strategy. Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels. We are encouraged by increasing usage of the Lulu's app and its growing share of overall revenue.

Speaker Change: As discussed in prior quarters, we are actively adapting to significant trend shifts while upholding the enduring quality that defines our brand. We anticipate sustained momentum, with third quarter receipts reflecting our merchandising team's fresh vision. I'm excited about the tangible value our new products and merchandising efforts are generating.

Mark Vos: Year over year, Q2 saw healthy growth in app users and improved conversion rates. Additionally, our investment in driving more paid traffic towards Lulu's app is yielding strong return. The website redesign featuring larger and more prominent product images and expanded video use has led to the increased engagement on our website, higher conversion rates, and an increase in account registration. Our engineering and continuous revenue optimization teams have an exciting roadmap, further enhanced the shopping experience and product discovery. We are enhancing operational efficiency with strategic investments in automation and robotics in our distribution centers.

Mark Vos: As mentioned on the last call, in Q2, we added automation to our largest distribution center in eastern Pennsylvania, and early feedback shows improvements in order accuracy, reduced cycle times, and better unit economics. As you've heard, we continue to make good progress on our strategic initiatives, maximizing our impact in a thoughtful and cost-efficient manner. I'm excited about the team we have in place and their dedication to delivering the right products to our customers, and now I'll hand you over to Tiffany Smith, Lulu's chief financial officer to provide more color on our financials. Tiffany?

Tiffany Smith: Thanks, Mark, and good afternoon, everyone. Our net revenue for the second quarter was approximately $92 million, a 13% decrease year over year, driven by a 14% decrease in total orders placed with increased return rates, partially offset by higher average order value. Markdown sales were down approximately 32% compared to the second quarter of 2023, contributing to the overall net revenue decline and gross margin improvement. We also saw notable declines in our casual business during the quarter.

Speaker Change: Finally, our wholesale business is progressing steadily, highlighted by the introduction of more cohesive collections and new developments based on our best-selling items, streamlined fulfillment processes, and reinvigorated partnership with a long-standing major in the second half.

Speaker Change: Looking ahead to Q3 and Q4, we are working toward further expanding partnerships, enhancing IMUs for both Lulu's and our wholesale partners,

Speaker Change: further optimizing our product strategy and offering in-season and chase opportunities, which will drive meaningful wholesale growth in the back half of the year. We remain focused on growth with our department store partners and have open distribution with three new major retailers.

Crystal Lanson: We remain focused on growth with our departments for partners and have opened distribution with three new major retailers.

Crystal Lanson: Turning to the less favorable aspects about the quarter, our casual business was disproportionately challenged during the quarter, driving the majority of the year-over-year declines in net sales. Returns continued to pressure results driven partially by mixed shifts into higher return rate products, a higher concentration of full-price sales, and consumer behavior favoring larger orders to accommodate bringing the dressing room home. That said, we are encouraged by the downward trend in return rates across most product classes towards the end of the quarter. Profitability was pressured due to higher fixed costs on a lower than anticipated net revenue base.

Tiffany Smith: As a result of the implementation of our new return policy, we saw an increase in restocking fee revenue and some improvement in customer return behavior, despite our decision to honor exceptions to the previous return policy through part of Q2 to ease customers into the changes, which resulted in some top-line pressure. Growth margin ended the quarter at 45.5%, an increase of 80 basis points compared to the same period last year, driven by lower markdowns and a shift toward higher margin product categories.

Tiffany Smith: Moving down the P&L to get some insights into expense line items. Q2 2024 selling and marketing expenses were $24.9 million, up about $200,000 from Q2 2023 due to increase brand marketing initiatives, including the first brand campaign launch since 2021 to drive brand awareness and customer engagement. We expect the value generation from this incremental marketing spend to materialize over multiple quarters. General and Administrative Expenses decreased by about $3 million to $21.4 million, a 12% decline from Q2 2023.

Speaker Change: Turning to the less favorable aspects about the quarter.

Speaker Change: Our casual business was disproportionately challenged during the quarter, driving the majority of the year-over-year declines in net sales.

Speaker Change: Returns continued to pressure results driven partially by mixed shifts into higher return rate products, a higher concentration of full price sales, and consumer behavior favoring larger orders to accommodate bringing the dressing room home.

Speaker Change: That said, we are encouraged by the downward trend in return rates across most product classes towards the end of the quarter.

Tiffany Smith: This reduction was primarily driven by lower stock comp expenses, as well as lower variable labor and benefits costs, which were lower with decreased sales volumes and increased operational efficiency. Quarterly, GNA expenses included a $423,000 accrual for a pending legal matter. Excluding this non-routine item, we achieved some leverage in the quarter on our GNA cost, resulting in a 14% decline in the remaining GNA expenses compared to the 13% decline in net revenue. Our net loss of $10.8 million worsened by $8.2 million compared to the same period last year.

Speaker Change: Profitability was pressured due to higher fixed costs on a lower-than-anticipated net revenue base.

Tiffany Smith: The net loss was impacted by a non-cash expense increasing our income tax provision by $5.4 million related to the establishment of a valuation allowance on our deferred tax assets during the second quarter, as well as the previously noted $423,000 non-routine accrual for a legal matter included in G&A expenses. Adjusted EBITDA loss for the second quarter was approximately $200,000 compared to due to 2023's adjusted EBITDA gain of $4.2 million due to elevated fixed costs amid reduced revenue. Our Q2 adjusted EBITDA margin was negative 0.2% compared to 4% in the same period last year. Interest expense for the quarter was approximately $270,000 compared to $426,000 in Q2 2023.

Crystal Lanson: Due to these softer results and continued macroeconomic pressures and uncertainty, we are swiftly implementing cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth.

Speaker Change: Due to these softer results and continued macroeconomic pressures and uncertainty, we are swiftly implementing cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth.

Tiffany Smith: For the quarter, we reported a diluted loss per share of $0.26, which is a decrease of $0.19 compared to a diluted loss per share of $0.07 in the second quarter of 2023. Turning to our balance sheet and liquidity on July 22nd, we finalized a amendment to extend our revolving credit agreement with Bank of America, which was originally set to mature a November 15th of this year. The amended agreement now matures on August 15, 2025 and reduces our revolving facility from $50 million to $15 million with a future reduction to $10 million on March 31, 2025. The original $50 million borrowing capacity was partly intended to repay prior debt at our 2021 IPO.

Crystal Lanson: These cost reductions will include the following. In approximate 10 to 15 percent reduction in operating expenses for the second half of 2024 compared to the first half, including a reduction in fixed payroll costs coming from reduced headcount and pay cuts to the executive and management team, as well as tightening a fixed and variable costs to better align with the anticipated slower sales recovery. Capital expenditure estimates for the year are expected to decrease by one and a half to two and a half million in graphics for the fiscal year. We anticipate realizing savings from these actions in the third and fourth quarter of 2024, extending through 2025.

Speaker Change: These cost reductions will include the following.

Speaker Change: It's an approximate 10-15% reduction in operating expenses for the second half of 2024 compared to the first half, including a reduction in fixed payroll costs coming from reduced head

Speaker Change: and Pay Cuts to the Executive and Management team, as well as tightening of fixed and variable costs to better align with the anticipated slower sales recovery.

Speaker Change: Capital expenditure estimates for the year are expected to decrease by $1.5 to $2.5 million, and we are now projecting approximately $3.5 million in CapEx for the fiscal year.

Speaker Change: We anticipate realizing savings from these actions in the 3rd and 4th quarter of 2024, extending through 2025.

Crystal Lanson: We believe these actions will allow us to achieve our growth and profitability goals more efficiently while still maintaining a strong operating model that can meet our strategic objectives, deliver positive cash flow, and ultimately provide a runway for long-term sustainable growth.

Speaker Change: We believe these actions will allow us to achieve our growth and profitability goals more efficiently, while still maintaining a strong operating model that can meet our strategic objectives, deliver positive cash flow, and ultimately provide a runway for long-term sustainable growth.

Crystal Lanson: We continue to make progress against our 2024 Strategic Initiatives of Product Disortment and Supply Chain Optimization, Brand Awareness Efforts, Investments in Technology, and Remaining Cash Flow Positive. As we enter into the second half of the year, I'm confident that our cost reductions alongside our Strategic Initiatives and Brand Awareness and Customer Engagement will drive long-term, sustainable growth, expand profitability, and enhance our customer base over time.

Tiffany Smith: We believe the reduced borrowing capacity is sufficient in a short term while we actively work toward a longer-term source of financing. At the end of the second quarter 2024, we remain in compliance with all applicable financial covenants under the amended credit agreement. In the second quarter of 2024, business continued to generate cash with $3.7 million of net cash provided by operating activities, a decrease of $900,000 on a year-over-year basis. Similarly, we generated $3 million of free cash flow for the quarter, representing a $900,000 decrease on a year-over-year basis.

Speaker Change: We continue to make progress against our 2024 strategic initiatives of product assortment and supply chain optimization, brand awareness efforts, investments in technology, and remaining cash flow positive.

Tiffany Smith: During the second quarter, we paid off our revolving line of credit balance, ending the quarter in a net cash position of $1.8 million. As announced last quarter, our Board of Directors authorized a stock repurchase program to repurchase up to $2.5 million of our common stock. In the second quarter, we repurchased approximately $87,000 worth or about 48,000 shares of stock. We will continue to take a holistic view to allocate capital on a quarterly basis, striving for the highest return on our investments while maintaining a healthy liquidity position. Our inventory balance at quarter end was $37.7 million, down about $8.6 million from the same period last year.

Speaker Change: As we enter into the second half of the year, I'm confident that our cost reductions, alongside our strategic initiatives and brand awareness and customer engagement, will drive long-term sustainable growth, expand profitability, and enhance our customer base over time.

Crystal Lanson: That said, with a slower than expected recovery, amidst persistent macroeconomic pressures weighing on consumer demand, we are withdrawing our full-year net revenue and adjusted EBITDA outlook and providing quarterly guidance as we assess the immediate impacts of our cost-saving measures and other initiatives. We remain optimistic about our sales recovery and business turnaround and are encouraged by improving month-to-month trends in our business.

Speaker Change: That said, with a slower-than-expected recovery amidst persistent macroeconomic pressures weighing on consumer demand, we are withdrawing our full-year net revenue and adjusted EBIT to Outlook and providing quarterly guidance as we assess the immediate impacts of our cost-saving measures and other initiatives.

Tiffany Smith: This 19% inventory decrease year-over-year exceeded our 13% year-over-year net revenue decline as we continue to reduce the weeks of supply in our reorder business. Moving on to guidance. Given the uncertainty driven by ongoing macroeconomic headwinds and persisting consumer pressures, we are withdrawing the previously issued full-year net revenue and adjusted EBITDA outlook. We would like to provide some insight into our sales expectations for the third quarter. Our preliminary results for the month of July reflect a net revenue year-over-year comparison in the negative low single digits with sequential improvement in net revenue comp.

Tiffany Smith: We expect slightly more challenging August comps due to last year's promotions and the earlier seasonal clearance this July, with a projected return to negative single digits in September. For the third quarter, we anticipate net revenue to be between approximately $75 million and $79 million, compared to $83.1 million in the same period last year, reflecting a year-over-year decline of between 5 and 10 percent.

Tiffany Smith: As a result of continued macroeconomic pressures and uncertainty, we are in the process of implementing cost reduction measures to improve our profitability and to better align our current business needs with current sales growth trends. Cost reduction measures include an approximate 10% to 15% reduction in operating expenses for the second half of 2024 compared to the first half, federal line with the anticipated slower sales recovery. This includes a decrease in fixed payroll costs resulting from reduced fixed headcount combined with pay cuts for our executives and certain members of the management team.

Speaker Change: We remain optimistic about our sales recovery and business turnaround and are encouraged by improving month-to-month trends in our business.

Mark Vos: With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. He will share some updates on progress against 2024 priorities. Mark?

Mark Vos: Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. While active customer accounts declined in the second quarter compared to prior year, we remain encouraged by the increase in penetration of active customers that are repeating on a quarter-of-a-quarter basis. Also, new entrants and total loyalty program membership grew once again year-over-year, and both repeat customer penetration and loyalty program growth are strong indicators of Lulu's brand's relevance and future revenue opportunity. As mentioned last quarter, limited markdown inventory has constrained the new customer acquisition segments of potential customers that are looking for a deal.

Tiffany Smith: In light of the uncertain macroeconomic environment, as we carefully manage the timing and execution of our cost reduction measures, we are refraining from providing an updated outlook on margins and profitability for the third quarter. Lastly, as part of our cost reduction efforts, we are reducing our capital expenditure plan for the year by between 30 and 40 percent. We now project capital expenditures for the full year to be approximately $3.5 million compared to the previous expectation of $5 to $6 million. And with that, I'll pass it back to Crystal for closing remarks. Thank you, Tiffany.

Mark Vos: Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter.

Crystal Landsem: We are confident that our strategic initiatives in enhancing brand awareness and customer engagement coupled with our diligent cost reduction efforts position us for sustainable growth and improve profitability in the coming year. Our commitment to operational excellence will serve us well amidst ongoing macro volatility. Thank you to our dedicated brand fans, the Loo Crew, and shareholders for your unwavering support as we continue to deliver attainable luxury to our customers.

Operator: We look forward to updating you on our next earnings call. With that, I'll turn it over to questions now. We will now begin the question and answer session. To ask a question, you may press star, then 1, on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: While active customer counts declined in the second quarter compared to prior year, we remain encouraged by the increase in penetration of active customers that are repeating on a quarter-over-quarter basis.

Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Dana Telsey with Telsey Advisory Group. Please go ahead. Hi. Good afternoon, everyone.

Speaker Change: Also, new entrants and total Loyalty Program membership grew once again year over year. And both repeat customer penetration and Loyalty Program growth are strong indicators of Lulu's brand relevance and future revenue opportunity.

Dana Telsey: Crystal, as you think about the core health of the consumer and what you're seeing out there, and the competitive landscape with promotions. What's changing in your business? Whether pricing, you mentioned some of the categories and how you're planning for the back half of the year. In addition to you, give out sales for the third quarter, but not any adjusted EBITDA. Any framework you could provide there.

Crystal Landsem: Thank you. Thanks for the question, Dana. I think at a high level, we believe our customer continues to be under pressure due to just various macroeconomic pressures that we've discussed over the last several quarters, and it's also reflected in withdrawing our four-year guidance for EBITDA, and also just the conservatism in general of our third quarter guidance. All that being said, we're still focusing on opportunities where we can drive engagement and growth and profitability, especially in this more challenging and volatile environment.

Speaker Change: As mentioned last quarter, limited markdown inventory has constrained the new customer acquisition segments of potential customers that are looking for a deal.

Mark Vos: However, our new customer acquisition segments of only full-price products purchased, which are our largest segments, perform the best and also show quarter-of-a-quarter improvement in their cost. The relative strength in these important full-price new customer acquisition segments aligns with an increased ratio of new product sold and our optimism around our merchandising assortment adjustments. The third quarter receipts, expected to further reinforce, are buying and merchandising teams' focus. We are optimistic about the customer acquisition ramp-up from these new and novelty product introductions. Additionally, in Q2, we saw a year-over-year increase in average unit retail, driving a higher average order value and total order value per customer.

Crystal Landsem: What's been really great for us to see is our business does continue to recover and going into July, we've seen an inflection to roughly flat customer, active customers within the month. So we're really encouraged by that.

Speaker Change: However, our new customer acquisition segments of only full-price products purchased, which are our largest segments, performed best and also showed quarter-over-quarter improvement in their comps.

Crystal Landsem: I think that the high level takeaway is that our recovery is well underway. It's just taking longer than we had anticipated because of the consumer backdrop. Got it. And then on the Adjust VBIT dot, in terms of any framework. Yeah, Dana, I'll jump in. This is Tiffany.

Speaker Change: The relative strength in these important full-price new customer acquisition segments aligns with an increased ratio of new products sold and our optimism around our merchandising assortment adjustments.

Tiffany Smith: So we gave the revenue guidance, because I think we have more confidence, obviously, in the third quarter revenue pacing that we've seen to date. But given, as we announced, we're working through some cost reductions, we announced that during the call. Some of those things are going to have more immediate benefits, some will have longer term benefits.

Tiffany Smith: We're still working through sort of the all of the puts and takes around that. And as we work through this, we want to maintain as much flexibility as possible on the timing of these changes. Also want to make sure that we're reading the business and the macro properly to ensure that we've made sufficient adjustments to adjust our cost structure to better align with our slower than expected sales recovery. But at the same time, because of all the momentum Crystal noted that we're seeing in the business, we want to be careful not to pull back too hard on cost reductions and push too hard there and jeopardize the momentum that we're seeing building in the business.

Speaker Change: The third quarter receipts are expected to further reinforce our buying and merchandising team's focus. We are optimistic about the customer acquisition ramp-up from these new and novelty product introductions.

Speaker Change: Additionally, in Q2 we saw a year-over-year increase in average unit retail, driving a higher average order value and total order value per customer, for both new and returning customers, and was higher compared to Q2 last year.

Mark Vos: For both new and returning customers, it was higher compared to Q2 last year. Additionally, we increased merchandise margins due to the combined effects of our costing efforts and lower markdown sales. While international sales remain a small percentage of our total company sales, we achieved another consecutive quarter of year-over-year I double-digit growth in units sold in our top 15 countries outside the US, including strong growth in our largest markets, Canada, the UK, and Mexico. We see much room for optimizing our international top and bottom line of the current US-based shipping market. Product and price offering differentiation and building on our growth momentum by making selective brand activation investments abroad.

Speaker Change: Additionally, we increased merchandise margins due to the combined effects of our costing efforts and lower markdown sales.

Speaker Change: While international sales remain a small percentage of our total company sales, we achieved another consecutive quarter of year-over-year, I-double-digit growth in units sold in our top 15 countries outside the U.S.

Speaker Change: Including strong growth in our largest markets, Canada, the UK, and Mexico.

Speaker Change: We see much room for optimizing our international top and bottom line of the current US-based shipping model.

Speaker Change: Product and Price Offering Differentiation, and building on our growth momentum by making selective brand activation investments abroad.

Mark Vos: I'll now share some updates around our strategic initiatives progress during the quarter. Starting with our product assortment optimization and related margin expansion efforts. Our merchandising and buying teams remain highly focused on evolving and revining our assortment to best meet the changing preferences of our core Lulu's customer, incorporating newer styles and improving product margin through our strength and product costing team. New and novelty merchandise on meaningful year-over-year growth in both style and color varieties offered. While customers respond positively and new products to share of order value substantially increased year-over-year, we frequently sold out too quickly, missing potential sales opportunities.

Tiffany Smith: Just to add to that, I think the way to look at it is our goal is to continue to nurture the areas in our business where we're seeing all the grassy shoes and the positive momentum, but also managing our cash flow prudently, in anticipation of a potentially choppier consumer in the back. God, thank you.

Speaker Change: I'll now share some updates around our strategic initiatives progress during the quarter.

Operator: The next question will come from Brooke Roach with Goldman Sachs. Please go ahead. Good afternoon,

Brooke Roach: Thank you for taking our questions. I was hoping you could dive a little bit deeper on the plans that you have to drive engagement in the back half and continue the momentum on the sequential recovery and sales. How are you planning selling and marketing expenses in the back half, and are there fixed versus variable expenses that we should consider within that line item? Going Forward. Yeah, it's a good question.

Speaker Change: Starting with our product assortment optimization and related margin expansion efforts.

Crystal Landsem: For us, and typically in the third and fourth quarter, when there's more pressure on performance marketing, we tend to pull levers across markdowns, discounts, and paid marketing spend. And really, it's an optimization in the moment based on where the consumer is and where we're getting the best use of our cash for that marketing spend. I think the way to think about this for us is we're continuing to invest, but prudently on the brand side, because we are seeing positive momentum in brand equity, and just momentum in general from how our customers are interacting with the brand.

Speaker Change: Our merchandising and buying teams remain highly focused on evolving and reviving our assortment to best meet the changing preferences of our core Lulu's customer, incorporating newer styles and improving product margin through our strengthened product costing team.

Crystal Landsem: But that said, we have to be very cautious about where we're spending and making sure that the payoff is as much for the near term as it is for the long term. So I'd expect to see splits and takes throughout the back half of the year across markdowns, discounts, and marketing spend the way that we've done it in the past, which is truly reactionary to the macro, and where we're seeing the best bang for the buck.

Crystal Landsem: As a follow-up, can you talk a little bit about the levers that you can pull to reduce costs and defend profitability in both the near and medium term beyond the 10-15% second half operating expense cuts that were announced today? How are you thinking about the range of outcomes on profit margins and free cash flow generation for the business? Should the timeline of recovery continue to elongate versus your current expectation?

Tiffany Smith: We have good question, Brooke. I think for, at the current time, free cash flow, maintaining positive cash flow is really a big priority for us. And so I think there are, as you said, potentially other levers that we could pull as needed. The ones that we disclose on the call were largely headcount in nature. We have done some headcount reduction in certain areas where we felt we could continue to grow without certain certain individuals, but I think for the most part, the executive pay cuts have been implemented.

Tiffany Smith: A lot of the levers there pulled around headcount are probably pretty limited in terms of what we can continue to do given we are fairly lean team already and have been running pretty lean in most in most areas. There may be a little bit more there, but I doubt it.

Tiffany Smith: I think it's going to be more considering other other types of DNA spend other areas where we can can make more meaningful reductions, but I don't have specifics that I think we want to share at this point given it's a bit fluid. And just as a reminder, our cost structure is highly variable, so if sales were to worsen from our expectations and our cost structure would also be reduced proportionate And just as a reminder, our cost structure is highly variable, so if sales were to worsen from our expectations and our cost structure would also be reduced proportionate, Thank you very much. I'll pass. The next question comes from Janine Stichter with BTIG. Please go ahead. Hey, everyone. You got Ethan Saghi on for Janine.

Operator: You know, I was just wondering, in terms of category trends, I know you highlighted the casual business is seeing some softness. I was just wondering if you could give some more color on what's not working as well in the assortment and the strategies you have in place to address those issues. Thanks. Yeah, it's a good question.

Ethan Saghi: So, I mean, we had a really robust and record-breaking special occasion in bridesmaids business in the second quarter, which is just a testament to customers leaning on us for their special moments, which was great to see. The most pressure that we experienced was more in the casual space, and we're continuing to invest in the recovery of that business. That said, the new side is comping just fine to last year, but we're taking a little bit longer to rebuild the reorder funnel in that space.

Ethan Saghi: Just given the competitive nature, as well as the consumer pressure that we've been seeing with our customer set. I said differently, that's going to continue to improve over time, but it's taking longer than we had anticipated.

Crystal Landsem: Got it. That's helpful. Thank you. This will conclude our question and answer session, as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Speaker Change: New and novelty merchandise saw meaningful year-over-year growth in both style and color varieties offered.

Speaker Change: And while customers responded positively and new products share of order value substantially increased year over year, we frequently sold out too quickly, missing potential sales opportunities.

Mark Vos: In Q2, we tested our buying algorithms with new forecast capabilities, which could start impacting products arriving in Q3 and beyond. Once fully rent, we expect this to improve visibility and predictability around trend cycles and provide better insights into depth of product demand. Traditionally, we see opportunities in external data sources like trend, whether geographic and other macro data would detect demand patterns earlier and more accurately. Our ongoing vendor network consolidation has continued to improve product costs by balancing purchasing across vendors by firstifying geographical sourcing to reduce dependencies on certain countries of origin and enhancing fit and fabric consistency.

Speaker Change: In Q2, we tested our buying algorithms with new forecast capabilities, which could start impacting products arriving in Q3 and beyond.

Speaker Change: Once fully ramped, we expect this to improve feasibility and predictability around trend cycles and provide better insights into depth of product demand.

Speaker Change: Additionally, we see opportunities in external data sources like trend, weather, geographic, and other macro data to detect demand patterns earlier and more accurately.

Speaker Change: Our ongoing vendor network consolidation has continued to improve product costs by balancing purchasing across vendors, diversifying geographical sourcing to reduce dependencies on certain countries of origin, and enhancing fit and fabric consistency.

Mark Vos: On the fit front, we have been working to reduce fit-related returns through a holistic approach that enhances the overall shopping journey for our customers while optimizing our bottom line. Our shopping experience improvements have increased customer engagement with fit-related information and contributed to positively impacting our return rate. Improved collaboration and communication channels with key vendors, streamlining of processes and refining product fit flexibility are starting to reflect increased fit consistency. These enhancements are expected to benefit a significant portion of our assortment in Q3 of 2024 and have full effect from Q4-24 forward. We believe improved fit-consistency and increased fit flexibility were possible, will have a positive impact on fit-related return rates as well as strengthen the overall lose customer shopping experience.

Speaker Change: On the fit front, we have been working to reduce fit-related returns through a holistic approach that enhances the overall shopping journey for our customers while optimizing our bottom line.

Speaker Change: Our shopping experience improvements have increased customer engagement with fit-related information and contributed to positively impacting our return rate.

Speaker Change: Improved collaboration and communication channels with key vendors, streamlining of processes, and refining product fit flexibility are starting to reflect increased fit consistency.

Speaker Change: These enhancements are expected to benefit a significant portion of our assortment in Q3 of 2024 and have full effect from Q4 of 2024 forward.

Speaker Change: We believe improved fit consistency and increased fit flexibility where possible will have a positive impact on fit-related return rates, as well as strengthen the overall Lulu's customer shopping experience.

Mark Vos: Last but not least, we are also very excited about the addition of size double XL for select Lose branded apparel. Initial shipments began in Q2 with availability expanding over the next several quarters. Initial readings support our belief that greater size inclusivity will broaden our potential customer base and boost new customer acquisition and reduce return rates in adjacent sizes. As Bristol highlighted, our Q2 return policy changes to get it with before mentioned initiatives started to show positive impacts by late Q2 and Q3, reducing return costs. As a reminder, the new policy introduced a modest restocking fee and a tighter return window.

Speaker Change: And last but not least, we are also very excited about the addition of size XXL for Select Lulus branded apparel.

Speaker Change: Initial shipments began in Q2, with availability expanding over the next several quarters. Initial readings support our belief that greater size inclusivity will broaden our potential customer base and boost new customer acquisition and reduce return rates in adjacent sizes.

Operator: Good afternoon and welcome to the Lulu 2nd quarter 2024 earnings conference call. Today's call is being recorded and we have allocated one hour for the prepared remarks and Q&A.

Naomi Beckman-Stras: At this time I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary Naomi Beckman-Stras. Thank you. You may begin.

Speaker Change: As Crystal highlighted, our Q2 return policy changes, together with the aforementioned initiatives, started to show positive impacts by late Q2 and into Q3, reducing return costs.

Naomi Beckman-Stras: Good afternoon everyone and thank you for joining us to discuss Lulu 2nd quarter 2024 results. Before we begin we would like to remind you that this conference call will include forward looking statements within the meaning of the private securities litigation reform act of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward looking statements, including but not limited to statements regarding management's expectations, plans, strategies, goals and objectives and their implementation.

Crystal Landsem: As a reminder, the new policy introduced a modest bee stocking fee and a tighter return window.

Mark Vos: We will continue to monitor and refine our return policy to discourage excessive returns and minimize unprofitable customers.

Crystal Landsem: We will continue to monitor and refine our return policy to discourage excessive returns and minimize unprofitable customers.

Mark Vos: Next, we are making investments in brand initiatives that support customer acquisition, retention, and brand differentiation. As discussed on our last call, our first major multi-channel brand campaign, Friends for Life, launched in early Q2, with the goals of reinfigurating our core customers and communicating our distinct brand image, which underscores Lulu's role in all of life's moments, from the everyday to the extraordinary. In May, our Friends for Life campaign took center stage on a heavily trafficked billboard in Times Square, a first for the brand. Our Bestie Step Branch series, which kicked off in Nashville in May, followed by Chicago in June, receives more than 500 RSVPs and effectively bridged our online and in-person brand presence, activating new social and influencer initiatives and celebrating the Lulu's community.

Crystal Landsem: Next, we are making investments in brand initiatives that support customer acquisition, retention, and brand differentiation.

Naomi Beckman-Stras: Our expectations around the continued impact of the macroeconomic environment, consumer demand and return rates on our business, our future expectations regarding financial results, our ability to realize the intended impact of cost reduction measures references to the fiscal year ending December 29th 2024 including our financial outlook for 2024, market opportunities, product launches and other initiatives and our growth. These statements which are subject to various risks, uncertainties, assumptions and other important factors could cause our actual results, performance or achievements to differ materially from results, performance or achievements expressed or implied by these statements.

Speaker Change: As a disaster on our last call, our first major multi-channel brand campaign, friends for life, launched in early Q2, with the goals of re-infigurating our core customers and communicating our distinct brand image, which underscores loses role in all of life's moments, from the everyday to the extraordinary.

Speaker Change: In May, our Friends for Life campaign took center stage on a heavily trafficked billboard in Times Square, a first for the brand.

Speaker Change: Our Besties at Brunch series, which kicked off in Nashville in May, followed by Chicago in June , received more than 500 RSVPs and effectively bridged our online and in-person brand presence, activating new social and influencer initiatives and celebrating the Lulu's community.

Naomi Beckman-Stras: These risks, uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our annual report on form 10K for the fiscal year ended December 31st 2023 and our quarterly report on form 10Q for the 2nd quarter ended June 30th 2024, filed with the SEC this afternoon, all of which can be found on our website and investors.luz.com. Any such forward looking statements represent management's estimates as of the date of this call, but we may elect to update such forward looking statements at some point in the future. We undertake no obligation to revise or update any forward looking statements or information except as required by law.

Mark Vos: The Friends For Life full funnel campaign and real-life activations directly resulted in more than 80% of website visitors. That viewed the campaign were new to the Lulu's brand hub, many of which we converted to first-time new customers. The strongest ever at recall numbers demonstrating a great connection between our differentiating brand message and perspective and existing customers. A full funnel marketing approach that operated at low CTMs and showed promising incremental return on advertising spend in several digital channels. In addition to the campaign success, we gained valuable insights into platform performance and ad formats. We will refine our approach going forward, and our confidence in our ability to further improve our brand campaign performance in next campaigns.

Speaker Change: The Friends for Life Full Funnel Campaign and Real Life Activations directly resulted in

Speaker Change: More than 80% of website visitors that viewed the campaign were new to Toulouse Brand Hub, many of which we converted to first-time new customers.

Speaker Change: The strongest ever at recall numbers, demonstrating a great connection between our differentiating brand message and prospective and existing customers.

Speaker Change: A full funnel marketing approach that operated at low CPMs and showed promising incremental return on advertising spend in several digital channels.

Naomi Beckman-Stras: During our call today, we will also reference certain non-gap financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. We use non-gap measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-gap financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAP.

Speaker Change: In addition to the campaign success, we gained valuable insights into platform performance and ad formats

Speaker Change: We will refine our approach going forward and are confident in our ability to further improve our brand campaign performance in next campaigns.

Mark Vos: In the second quarter and quarter to date, we have announced several exciting third-party partnerships, launched influencer edits, increased social content creation volume, and amplified our reach to earns media and brand relationships. We've ramped up our investments in third-party partnerships, elaborating with iconic and sought-after brands, including Levi's, Boys, Lie, Bands, and an early Q3, the Emilio Foodware. The launch of Levi's was particularly successful, driving sales and quick stockings. In conjunction with these announcements, we've introduced the Lulu's love feature on our website to highlight these partnerships, which have allowed us to expand our reach and enhance brand awareness by leveraging other brand platforms. We are early on in these brand collaborations and partnerships and look forward to optimizing their impacts on Lulu's brand awareness, relevance, and reaching new potential customers, and ultimately sales.

Speaker Change: In the second quarter, and quarter to date, we have announced several exciting third party partnerships.

Speaker Change: Launched influencer edits, increased social content creation volume, and amplified our reach through earned media and brand relationships.

Naomi Beckman-Stras: Our non-gap measures may be different from non-gap measures used by other companies. Reconciliation of GAP to non-gap measures as well as description, limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filing.

Speaker Change: We've ramped up our investments in third-party partnerships, collaborating with iconic and sought-after brands including Levi's, Boys Fly, Vans, and in early Q3, D'Amelio Footwear.

Naomi Beckman-Stras: Joining me on the call today are our CEO, Crystal Lanson, our CFO, Tiffany Smith, and our president and CIO, Bob. Following our prepared remarks, we'll open the call for your question.

Speaker Change: The launch of Levi's was particularly successful, driving sales and quick stock-outs.

Crystal Lanson: With that, I'll turn the call over to Crystal. Thank you Naomi and good afternoon everyone. We appreciate you joining us today. Our second quarter results were in line with the expectations laid out and our preliminary results with net revenue of 92 million, 13 percent lower than the prior year period and adjusted EBITDA of 0.2 million losses, 4.4 million below the prior year period. First quarter headwinds, including declines and markdown sales and higher return rates due to strong sales and high margin occasion wear combined with slower adoption of our new return policy contributed to the softer than expected results for the quarter.

Speaker Change: In conjunction with these announcements, we have introduced the Lulu's Loves feature on our website to highlight these partnerships, which have allowed us to expand our reach and enhance brand awareness by leveraging other brands' platforms.

Speaker Change: We are early on in these brand collaborations and partnerships and look forward to optimizing their impacts on Lulu's brand awareness, relevance, and reaching new potential customers, and ultimately sales.

Mark Vos: Building on the success of our influencer edits with Kennedy Alliance in Q1, we partnered with Anna Herring and Delaney Childs in Q2 to further drive brand awareness and audiences to the site.

Speaker Change: Building on the success of our influencer edit with Kennedy Lyons in Q1, we partnered with Anna Herring and Delaney Childs in Q2 to further drive brand awareness and audiences to the site.

Mark Vos: Update. Notably, an adherence edit went viral, amassing over 1.5 million views and nearly 40,000 shares. We're encouraged by the strong return of these collaborations, and we look forward to upcoming influencer collaborations and expanding our creator network. Our diverse influencer strategy has resonated with the Lulu's customer community, and we believe further reinforces our mission of being there for all life's moments. In Q2, we also launched a Pretty Little Liars: Original Sin edit curated by the hit show's wardrobe stylists and features on the show's webpage, leveraging a collaborative media post and giveaway, reaching the show's 12 million followers in addition to ours.

Crystal Lanson: Despite progress on margin goals and reduced operating expenses profitability was limited by fixed costs against lower than expected net revenue base. We're on top line and bottom line results. However, we view these obstacles as temporary and are tightly managing expenses to withstand the short term headwind. To that end, we remain committed to our long term growth initiatives, which reinforce our competitive strengths and that will enable us to endure near term volatility and position us for sustainable growth.

Speaker Change: Notably, an adherence edit went viral, amassing over 1.5 million views and nearly 40,000 shares.

Speaker Change: We're encouraged by the strong return in these collaborations and we look forward to upcoming influencer collaborations and expanding our creator network.

Speaker Change: Our diverse influencer strategy has resonated with the Lulu's customer community and we believe further reinforces our mission of being there for all life's moments.

Speaker Change: In Q2, we also launched a Pretty Little Liars original thin edit, curated by the hit show's wardrobe stylist and featured on the show's webpage, leveraging a collaborative media post and giveaway, reaching the show's 12 million followers in addition to ours.

Crystal Lanson: These include continued evolution and optimization of our data driven merchandising model with customer data and insights to drive value to our brand fans. Through our robust reorder algorithm and an improved and evolving assortment. Amplifying our unique brand DNA and community focus culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement and delivering excellent customer service to drive increased word of mouth introductions. By capitalizing on these strengths, we're confident that we can reach a broad base of potential customers and steadily increase our market share over time.

Mark Vos: Our media expansion and publicity efforts gained a significant momentum this quarter, doubling press coverage in Q2 on securing placements in top-tier retail, financial, and consumer publications. This boost increased users on Lulu's channels and drew inbound interest from various media outlets. We believe in the strategic value of our brand and customer acquisition initiatives, and our confidence in maximizing our reach and impact despite broader cost reduction efforts in Q3. We anticipate continuing to build momentum for the Lulu's brand, increasing awareness, and driving revenue as we execute our strategies.

Speaker Change: Our media expansion and publicity efforts gained significant momentum this quarter, doubling press coverage in Q2 and securing placements in top-tier retail, financial, and consumer publications. This boost increased users on Google's channels and drew inbound interest from various media outlets.

Speaker Change: We believe in the strategic value of our brand and customer acquisition initiatives and are confident in maximizing our reach and impact, despite broader cost reduction efforts in Q3.

Crystal Lanson: Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually drive better decisioning higher engagement and increased efficiencies. We are confident in our competitive strengths and are encouraged by the steady improvements these focused initiatives have yielded across our core competencies.

Speaker Change: We anticipate continuing to build momentum for the Luluz brand, increasing awareness, and driving revenue as we execute our strategies.

Mark Vos: Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels. We are encouraged by the increasing usage of the Lulu's app and its growing share of overall revenue. Year over year, Q2 saw healthy growth in app users and improved conversion rates. Additionally, our investment in driving more paid traffic towards the Lulu's app is yielding strong returns. The website redesign featuring larger and more prominent product images and expanded video use has led to the increased engagement on our website, higher conversion rates, and an increase in account registrations. Our engineering and continuous revenue optimization teams have an exciting roadmap to further enhance the shopping experience and product discovery.

Speaker Change: Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels.

Crystal Lanson: So with that, I'd like to highlight some of the positive outcomes from the quarter. Our special occasion and bridesmaids net sales grew by over 30% year over year and surpassed our pre pandemic peak marking a record quarter for these product categories and reinforcing Lulu's brand position as the go to destination for all of life's moments. Growth margin improved in the second quarter with an 80 basis point expansion year over year due to lower markdown sales and a shift toward higher margin product classes.

Speaker Change: We are encouraged by increasing usage of the Luluz app and its growing share of overall revenue. Year over year, Q2 saw healthy growth in app users and improved conversion rates.

Speaker Change: Additionally, our investment in driving more paid traffic towards Lulu's app is yielding strong returns.

Speaker Change: The website redesign, featuring larger and more prominent product images and expanded video use, has led to the increased engagement on our website, higher conversion rates, and an increase in account registrations.

Crystal Lanson: Markdown sales decreased by approximately 30% compared to the prior year thanks to our healthier inventory position. Inventory levels declined by 19% from Q2 2023 driven by further tightening of our weeks of supply and our reorder business surpassing the year over year net revenue decline and showcasing the agility of our data driven buying model. Additionally, inventory makes across new novelty and reorder products continues to improve driving further confidence in the future reorder funnel.

Speaker Change: Our engineering and continuous revenue optimization teams have an exciting roadmap to further enhance the shopping experience and product discovery.

Mark Vos: We are enhancing operational efficiency and strategic investments in automation and robotics in our distribution centers. As mentioned on the last call in Q2, we added automation to our largest distribution center in eastern Pennsylvania, and early feedback shows improvements in order accuracy, reduced cycle times, and better unity economics. As you've heard, we continue to make good progress on our strategic initiatives, maximizing our impact in a thoughtful and cost-efficient manner. I'm excited about the team we have in place and their dedication to delivering the right products to our customers.

Speaker Change: We are enhancing operational efficiency and strategic investments in automation and robotics in our distribution centers.

Speaker Change: As mentioned on the last call, in Q2, we added automation to our largest distribution center in eastern Pennsylvania, and early feedback shows improvements in order accuracy, reduced cycle times, and better unit economics.

Crystal Lanson: Our new return policy boosted restocking fee revenue and led to an improvement in customer return behavior towards the end of the quarter, even as we extended exceptions to the previous policy which resulted in some top line pressure. We are seeing continued progress on our net revenue comps which improve sequentially in the quarter with early third quarter sales showing a continuation of positive trends, suggesting improving traction within our strategic initiatives. Our third party brand and influencer collaboration to this quarter have proven highly effective driving increased media interest, social traffic and purchase intent.

Speaker Change: As you've heard, we continue to make good progress on our strategic initiatives, maximizing our impact in a thoughtful and cost-efficient manner. I'm excited about the team we have in place and their dedication to delivering the right products to our customers.

Tiffany Smith: And now, I'll hand you over to Tiffany Smith, Lulu's Chief Financial Officer to provide more color on our financials. Tiffany?

Tiffany Smith: And now, I'll hand you over to Tiffany Smith, Lulu's Chief Financial Officer, to provide more color on our financials. Tiffany?

Tiffany Smith: Thanks, Mark, and good afternoon everyone. Our net revenue for the second quarter was approximately $92 million, a 13% decrease year over year driven by a 14% decrease in total orders placed, with increased return rates, partially offset by higher average order values. 2.

Crystal Lanson: Network. Notable partnerships with Levi's, Vans, and the Demilio sisters have not only strengthened our brand equity, but also catalyzed prospective partnership opportunities. In Q2, we renewed our strategy on third-party partnerships, recognizing their value and enhancing product visibility and desirability for both new and existing customers. We believe returning to pre-pandemic third-party merchandise allocations enhances our offerings, lowers the entry barrier for new customers, and creates significant growth opportunities for synergistic brand partnerships. We also saw continued strong demand for new and novelty products supporting our Reorder pipeline and driving positive sales and favorable margins, performance, and key high-volume categories.

Tiffany Smith: Thanks, Mark, and good afternoon, everyone.

Tiffany Smith: Our net revenue for the second quarter was approximately $92 million, a 13% decrease year-over-year, driven by a 14% decrease in total orders placed with increased return rates, partially offset by higher average order value.

Tiffany Smith: Markdown sales were down approximately 32% compared to the second quarter of 2023, contributing to the overall net revenue decline and gross margin improvement. We also saw notable declines in our casual business during the quarter. As a result of the implementation of our new return policy, we saw an increase in restocking fee revenue and some improvement in customer return behavior despite our decision to honor exceptions to the previous return policy through part of Q2, the ease customers into the changes, which resulted in some top line pressure. Gross margin ended the quarter at 45.5%, an increase of 80 basis points compared to the same period last year, driven by lower markdowns and a shift toward higher margin product categories.

Speaker Change: Markdown sales were down approximately 32% compared to the second quarter of 2023, contributing to the overall net revenue decline and gross margin improvement. We also saw notable declines in our casual business during the quarter.

Speaker Change: As a result of the implementation of our new return policy, we saw an increase in restocking fee revenue and some improvement in customer return behavior, despite our decision to honor exceptions to the previous return policy through part of Q2 to ease customers into the changes, which resulted in some top-line pressure.

Speaker Change: Growth margin ended the quarter at 45.5%, an increase of 80 basis points compared to the same period last year, driven by lower markdowns and a shift toward higher margin product categories.

Tiffany Smith: Moving down the P&L to give some insights into expense line items. Q2, 2024 selling and marketing expenses were $24.9 million, up about $200,000 from Q2, 2023, due to increased brand marketing initiatives, including the first brand campaign launch since 2021 to drive brand awareness and customer engagement. We expect the value generation from this incremental marketing spend to materialize over multiple quarters. General and administrative expenses decreased by about $3 million to $21.4 million, a 12% decline from Q2, 2023. This reduction was primarily driven by lower stock crop expenses, as well as lower variable labor and benefits costs, which were lower with decreased sales volumes and increased operational efficiencies.

Speaker Change: Moving down the P&L to give some insights into expense line items.

Speaker Change: Q2 2024 selling and marketing expenses were $24.9 million, up about $200,000 from Q2 2023 due to increased brand marketing initiatives, including the first brand campaign launched since 2021, to drive brand awareness and customer engagement.

Crystal Lanson: Looking ahead to Q3 and Q4, we are working toward further expanding partnerships, enhancing IMUs for both Lulu's and our wholesale partners, further optimizing our product strategy and offering in-season and chase opportunities, which will drive meaningful wholesale growth in the back half of the year. We remain focused on growth with our departments for partners and have opened distribution with three new major retailers.

Speaker Change: We expect the value generation from this incremental marketing spend to materialize over multiple quarters.

Speaker Change: General and administrative expenses decreased by about $3 million to $21.4 million, a 12% decline from Q2 2023.

Crystal Lanson: Turning to the less favorable aspects about the quarter, our casual business was disproportionately challenged during the quarter, driving the majority of the year over year declines in net sales. Returns continued to pressure results driven partially by mixed shifts into higher return rate products, a higher concentration of full-price sales, and consumer behavior favoring larger orders to accommodate bringing the dressing room home. That said, we are encouraged by the downward trend in return rates across most product classes towards the end of the quarter.

Speaker Change: This reduction was primarily driven by lower stock comp expenses as well as lower variable labor and benefits costs which were lower with decreased sales volumes and increased operational efficiencies.

Tiffany Smith: Quarterly, G&A expenses included a $423,000 accrual for a pending legal matter. Excluding this non-routine item, we achieved some leverage in the quarter on our G&A cost, resulting in a 14% decline in the remaining G&A expenses compared to the 13% decline in net revenue.

Speaker Change: Quarterly G&A expenses included a $423,000 accrual for a pending legal matter.

Speaker Change: Excluding this non-routine item, we achieved some leverage in the quarter on our G&A costs, resulting in a 14% decline in the remaining G&A expenses compared to the 13% decline in net revenue.

Crystal Lanson: Profitability was pressured due to higher fixed costs on a lower than anticipated net revenue base. Due to these softer results and continued macroeconomic pressures and uncertainty, we are swiftly implementing cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth.

Tiffany Smith: Our net loss of $10.8 million worsened by $8.2 million compared to the same period last year. The net loss was impacted by a non-cash expense increasing our income tax provision by $5.4 million related to the establishment of a valuation allowance on our deferred tax assets during the second quarter, as well as the previously noted $423,000 non-routine accrual for a legal matter included in G&A expenses. Adjusted EBITDA loss for the second quarter was approximately $200,000 compared to Q2, 2023's adjusted EBITDA gain of $4.2 million due to elevated fixed costs amid reduced revenue. Our Q2 adjusted EBITDA margin was negative 0.2% compared to 4% in the same period last year.

Speaker Change: Our net loss of $10.8 million worsened by $8.2 million compared to the same period last year.

Speaker Change: The net loss was impacted by a non-cash expense increasing our income tax provision by $5.4 million, related to the establishment of a valuation allowance on our deferred tax assets during the second quarter.

Speaker Change: as well as the previously noted $423,000 non-routine accrual for a legal matter included in G&A expenses.

Speaker Change: Adjusted EBITDA loss for the second quarter was approximately $200,000 compared to Q2 2023's adjusted EBITDA gain of $4.2 million due to elevated fixed costs amid reduced revenue.

Speaker Change: Our Q2 adjusted EBITDA margin was negative 0.2% compared to 4% in the same period last year.

Crystal Lanson: We anticipate realizing savings from these actions in the third and fourth quarter of 2024 extending through 2025. We believe these actions will allow us to achieve our growth and profitability goals more efficiently while still maintaining a strong operating model that can meet our strategic objectives, deliver positive cash flow, and ultimately provide a runway for long-term sustainable growth.

Tiffany Smith: Interest expense for the quarter was approximately $270,000 compared to $426,000 in Q2, 2023.

Speaker Change: Interest expense for the quarter was approximately $270,000 compared to $426,000 in Q2 2023.

Tiffany Smith: For the quarter, we reported a diluted loss per share of 26 cents, which is a decrease of 19 cents compared to a diluted loss per share of 7 cents in the second quarter of 2023.

Speaker Change: For the quarter, we reported a diluted loss per share of $0.26, which is a decrease of $0.19 compared to a diluted loss per share of $0.07 in the second quarter of 2023.

Tiffany Smith: Turning to our balance sheet and liquidity, on July 22nd, we finalized an amendment to extend our revolving credit agreement with Bank of America, which was originally set to mature on November 15th of this year. The amended agreement now matures on August 15th, 2025, and reduces our revolving facility from $50 million to $15 million, with a future reduction to $10 million on March 31st, 2025. The original $50 million borrowing capacity was partly intended to repay prior debt at our 2021. We believe the reduced borrowing capacity is sufficient in the short term while we actively work toward a longer-term source of financing.

Speaker Change: Turning to our balance sheet and liquidity, on July 22nd, we finalized an amendment to extend our revolving credit agreement with Bank of America, which was originally set to mature on November 15th of this year.

Speaker Change: The amended agreement now matures on August 15, 2025, and reduces our revolving facility from $50 million to $15 million, with a future reduction to $10 million on March 31, 2025.

Speaker Change: The original $50 million borrowing capacity was partly intended to repay prior debt at our 2021 IPO.

Speaker Change: We believe the reduced borrowing capacity is sufficient in the short term, while we actively work toward a longer term source of financing.

Tiffany Smith: At the end of the second quarter 2024, we remain in compliance with all applicable financial covenants under the amended credit agreement. In the second quarter 2024, business continued to generate cash with $3.7 million of net cash provided by operating activities, a decrease of $900,000 on a year-over-year basis. Similarly, we generated $3 million of free cash flow for the quarter, representing a $900,000 decrease on a year-over-year basis. During the second quarter, we paid off our revolving line of credit balance, ending the quarter in a net cash position of $1.8 million.

Speaker Change: At the end of the second quarter 2024, we remain in compliance with all applicable financial covenants under the amended credit agreement.

Mark Vos: With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. He will share some updates on progress against 2024 priorities. Mark? Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. While active customer accounts declined in the second quarter compared to prior year, we remain encouraged by the increase in penetration of active customers that are repeating on a quarter-of-a-quarter basis.

Speaker Change: In the second quarter of 2024, business continued to generate cash with $3.7 million of net cash provided by operating activities, a decrease of $900,000 on a year-over-year basis.

Speaker Change: Similarly, we generated $3 million of free cash flow for the quarter representing a $900,000 decrease on a year-over-year basis.

Speaker Change: During the second quarter, we paid off our revolving line of credit balance, ending the quarter in a net cash position of $1.8 million.

Mark Vos: Also, new entrants and total loyalty program membership grew once again year-over-year, and both repeat customer penetration and loyalty program growth are strong indicators of Lulu's brand's relevance and future revenue opportunity. As mentioned last quarter, limited markdown inventory has constrained the new customer acquisition segments of potential customers that are looking for a deal. However, our new customer acquisition segments of only full-price products purchased, which are our largest segments, perform the best and also shows quarter-of-a-quarter improvement in their cost.

Tiffany Smith: As announced last quarter, our Board of Directors authorized a stock repurchase program to repurchase up to $2.5 million of our common stock. In the second quarter, we repurchased approximately $87,000 worth, or about 48,000 shares of stock. We will continue to take a holistic view to allocate capital on a quarterly basis, driving for the highest return on our investments while maintaining a healthy liquidity position. Our inventory balance at quarter-end was $37.7 million, down about $8.6 million from the end-period last year. This 19% inventory decrease year-over-year exceeded our 13% year-over-year net revenue decline as we continue to reduce the lease of supply in our reorder business.

Speaker Change: As announced last quarter, our Board of Directors authorized a stock repurchase program to repurchase up to $2.5 million of our common stock.

Speaker Change: In the second quarter, we repurchased approximately $87,000 worth or about 48,000 shares of stock. We will continue to take a holistic view to allocate capital on a quarterly basis, striving for the highest return on our investments while maintaining a healthy liquidity position.

Speaker Change: Our inventory balance at quarter end was $37.7 million, down about $8.6 million from the same period last year.

Speaker Change: This 19% inventory decrease year-over-year exceeded our 13% year-over-year net revenue decline as we continue to reduce the weeks of supply in our reorder business.

Mark Vos: The relative strength in these important full-price new customer acquisition segments aligns with an increased ratio of new product sold and our optimism around our merchandising assortment adjustments. The third quarter receipts, expected to further reinforce, are buying and merchandising teams' focus. We are optimistic about the customer acquisition ramp-up from these new and novelty product introductions. Additionally, in Q2, we saw a year-over-year increase in average unit retail driving a higher average order value and total order value per customer.

Tiffany Smith: Moving on to guidance.

Tiffany Smith: Given the uncertainty driven by ongoing macroeconomic headwinds and persisting consumer pressures, we are withdrawing the previously issued full-year net revenue and adjusted EBITDA outlook. We would like to provide some insight into our sales expectations for the third quarter. Our preliminary results for the month of July reflect a net revenue year-over-year comparison in the negative low single digits, with sequential improvement in net revenue comps. We expect slightly more challenging August comps due to last year's promotions and the earlier seasonal clearances July, with a projected return to negative single digits in September. For the third quarter, we anticipate net revenue to be between approximately $75 million and $79 million, compared to $83.1 million in the same period last year, reflecting a year-over-year decline of between 5% and 10%.

Speaker Change: Moving on to guidance. Given the uncertainty driven by ongoing macroeconomic headwinds and persisting consumer pressures, we are withdrawing the previously issued full-year net revenue and adjusted EBITDA outlook.

Speaker Change: We would like to provide some insight into our sales expectations for the third quarter. Our preliminary results for the month of July reflect a net revenue year-over-year comparison in the negative low single digits with sequential improvement in net revenue comps.

Mark Vos: For both new and returning customers, it was higher compared to Q2 last year. Additionally, we increased merchandise margins due to the combined effects of our costing efforts and lower markdown sales. While international sales remain a small percentage of our total company sales, we achieved another consecutive quarter of year-over-year I double-digit growth in units sold in our top 15 countries outside the US, including strong growth in our largest markets, Canada, the UK, and Mexico. We see much room for optimizing our international top and bottom line of the current US-based shipping market. Product and Price offering differentiation and building on our growth momentum by making selective brand activation investments abroad.

Speaker Change: We expect slightly more challenging August comps due to last year's promotions and the earlier seasonal clearance this July , with a projected return to negative single digits in September .

Speaker Change: For the third quarter, we anticipate net revenue to be between approximately $75 million and $79 million, compared to $83.1 million in the same period last year, reflecting a year-over-year decline of between 5 and 10 percent.

Tiffany Smith: As a result of continued macroeconomic pressures and uncertainty, we are in the process of implementing cost reduction measures to improve our profitability and to better align our current business needs with current sales growth trends. The cost reduction measures include an approximate 10-15% reduction in operating expenses for the second half of 2024, compared to the first half. Better align with the anticipated slower sales recovery. This includes a decrease in fixed payroll costs resulting from reduced fixed-head count combined with pay cuts for our executives and certain members of the management team.

Speaker Change: As a result of continued macroeconomic pressures and uncertainty, we are in the process of implementing cost reduction measures to improve our profitability and to better align our current business needs with current sales growth trends.

Speaker Change: The cost reduction measures include an approximate 10-15% reduction in operating expenses for the second half of 2024 compared to the first half, better aligned with the anticipated slower sales recovery.

Speaker Change: This includes a decrease in fixed payroll costs resulting from reduced fixed-head count combined with pay cuts for our executives and certain members of the management team.

Speaker Change: In light of the uncertain macroeconomic environment, as we carefully manage the timing and execution of our cost reduction measures, we are refraining from providing an updated outlook on margins and profitability for the third quarter.

Tiffany Smith: Lastly, as part of our cost reduction efforts, we are reducing our capital expenditure plan for the year by between 30 and 40%. We now project capital expenditures for the full year to be approximately $3.5 million, compared to the previous expectation of $5-6 million.

Speaker Change: Lastly, as part of our cost reduction efforts, we are reducing our capital expenditure plan for the year by between 30 and 40 percent. We now project capital expenditures for the full year to be approximately $3.5 million compared to the previous expectation of $5 to $6 million.

Mark Vos: While customers respond positively and new products to share of order value substantially increased year-over-year, we frequently sold out too quickly, missing potential sales opportunities. In Q2, we tested our buying algorithms with new forecast capabilities, which could start impacting products arriving in Q3 and beyond. Once fully rent, we expect this to improve visibility and predictability around trend cycles and provide better insights into depth of product demand. Traditionally, we see opportunities in external data sources like trend, whether geographic and other macro data would detect demand patterns earlier and more accurately.

Crystal Lanson: And with that, I'll pass it back to Crystal for closing remarks. Thanks. Thank you, Tiffany.

Speaker Change: And with that, I'll pass it back to Crystal for closing remarks.

Crystal Lanson: We are confident that our strategic initiatives in enhancing brand awareness and customer engagement, coupled with our diligent cost reduction efforts, position us for sustainable growth and improve profitability in the coming year. Our commitment to operational excellence will serve us well amidst ongoing macro volatility. Thank you to our dedicated brand fans, Lulu Crew, and shareholders for your unwavering support as we continue to deliver attainable luxury to our customers. We look forward to updating you on our next earnings call.

Crystal Landsem: Thank you, Tiffany. We are confident that our strategic initiatives in enhancing brand awareness and customer engagement, coupled with our diligent cost reduction efforts, position us for sustainable growth and improved profitability in the coming year.

Crystal Landsem: Our commitment to operational excellence will serve us well amidst ongoing macro volatility.

Crystal Landsem: Thank you to our dedicated brand fans, the Loot Crew, and shareholders for your unwavering support as we continue to deliver attainable luxury to our customers. We look forward to updating you on our next earnings call. With that, I'll turn it over to questions now.

Operator: With that, I'll turn it over to questions now.

Operator: Thank you.

Operator: We'll now begin the question and answer session. If you ask a question, you may press star, then one, on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two.

Speaker Change: Thank you.

Mark Vos: Our ongoing vendor network consolidation has continued to improve product costs by balancing purchasing across vendors by firstifying geographical sourcing to reduce dependencies on certain countries of origin and enhancing fit and fabric consistency. On the fit front, we have been working to reduce fit-related returns through a holistic approach that enhances the overall shopping journey for our customers while optimizing our bottom line. Our shopping experience improvements have increased customer engagement with fit-related information and contributed to positively impacting our return rate.

Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2.

Operator: At this time, we will pause momentarily to assemble our roster.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: [inaudible]

Dana Telsey: The first question comes from Dana Telsie with Telsie Advisory Group.

Speaker Change: The first question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Dana Telsey: Please go ahead. Hi, good afternoon everyone.

Crystal Lanson: Crystal, as you think about the core health of the consumer and what you're seeing out there and the competitive landscape with promotions, what's changing in your business, whether pricing you mentioned some of the categories and how you're planning for the back half of the year. In addition to you gave out sales for the third quarter, but not any adjusted EBITDA, any framework you could provide there. Thank you. Thanks for the question, Dana. I think at a high level, we believe our customer continues to be under pressure due to just various macroeconomic pressures that we've discussed over the last several quarters and is also reflected in withdrawing our full year guidance for EBITDA and also just the conservatism in general of our third quarter guidance.

Dana Telsey: Hi. Good afternoon, everyone.

Mark Vos: Improved collaboration and communication channels with key vendors, streamlining of processes and refining product fit flexibility are starting to reflect increased fit consistency. These enhancements are expected to benefit a significant portion of our assortment in Q3 of 2024 and have full effect from Q4-24 forward. We believe improved fit-consistency and increased fit flexibility were possible, will have a positive impact on fit-related return rates as well as strengthen the overall lose customer shopping experience.

Crystal Landsem: Crystal, as you think about, hi, as you think about the core health of the consumer and what you're seeing out there and the competitive landscape with promotion

Dana Telsey: What's changing in your business, whether pricing, you mentioned some of the categories, and how you're planning for the back half of the year, in addition to you gave out sales for the third quarter, but not any adjusted EBITDA, any framework you could provide there. Thank you.

Dana Telsey: Thanks for the question, Dana. I think at a high level, we believe our customer continues to be under pressure due to just various macroeconomic pressures that we've discussed over the last several quarters.

Mark Vos: Last but not least, we are also very excited about the addition of size double XL for select lose branded apparel. Initial shipments began in Q2 with availability expanding over the next several quarters. Initial readings support our belief that greater size inclusivity will broaden our potential customer base and boost new customer acquisition and reduce return rates in adjacent sizes. As Bristol highlighted, our Q2 return policy changes to get it with before mentioned initiatives started to show positive impacts by late Q2 and Q3, reducing return costs. As a reminder, the new policy introduced a modest restocking fee and a tighter return window. We will continue to monitor and refine our return policy to discourage excessive returns and minimize unprofitable customers.

Dana Telsey: And it's also reflected in withdrawing our four-year guidance for EBITDA and also just the conservatism in general of our third quarter guidance. All that being said, we're still focusing on opportunities where we can drive engagement and growth and profitability, especially in this more challenging and volatile environment.

Crystal Lanson: All that being said, we're still focusing on opportunities where we can drive engagement and growth and profitability, especially in this more challenging and volatile environment. What's been really great for us to see is our business does continue to recover, and going into July, we've seen an inflection to roughly flat customer active customers within the month, so we're really encouraged by that. I think the high level takeaway is that our recovery is well underway. It's just taking longer than we had anticipated because of the consumer backdrop. Got it.

Speaker Change: What's been really great for us to see is our business does continue to recover and going into July we've seen an inflection to

Speaker Change: Roughly flat customer, active customers within the month, so we're really encouraged by that. I think the high level takeaway is that our recovery is well underway. It's just taking longer than we had anticipated because of the consumer backdrop. Thank you for your time.

Tiffany Smith: And then on the adjusted EBITDA in terms of any framework.

Speaker Change: Got it. And then on the Adjust VBIT dot...

Tiffany Smith: Dana, I'll jump in. This is Tiffany. So we gave the revenue guidance because if we have more confidence, obviously in the third quarter revenue pacing that we've seen today. But given, as we announced, we're working through some cost reductions, we announced that during the call. Some of those things are going to have more immediate benefits. Some will have longer-term benefits. We're still working through all of the puts and takes around that. And as we work through this, we want to maintain as much flexibility as possible on the timing of these changes. Also want to make sure that we're reading the business and the macro properly to ensure that we've made sufficient adjustments to adjust our cost structure to better align with our slower sales, slower than expected sales recovery.

Tiffany Smith: in Champagne, Primoina.

Tiffany Smith: Yeah, Dana, I'll jump in. This is Tiffany. So we gave

Mark Vos: Next, we are making investments in brand initiatives that support customer acquisition, retention and brand differentiation. As discussed on our last call, our first major multi-channel brand campaign, Friends For Life, launched in early Q2, with the goals of reinfigurating our core customers and communicating our distinct brand image which underscores Lulu's role in all of life's moments, from the everyday to the extraordinary. In May, our Friends For Life campaign took center stage on a heavily trafficked billboards in Times Square, a first for the brand.

Tiffany Smith: The revenue guidance, because I think we have more confidence, obviously, in the third quarter revenue pacing that we've seen to date. But given, as we announced, we're working through some cost reductions. We announced that during the call. Some of those things are going to have more immediate benefits, some will have longer term benefits. We're still working through sort of all of the puts and takes around that. And as we work through this, we want to maintain as much flexibility as possible on the timing of these changes.

Speaker Change: Also want to make sure that we're reading the business and the macro properly to ensure that we've made sufficient adjustments to adjust our cost structure to better align with our slower than expected sales recovery. But at the same time, because of all the momentum Crystal noted that we're seeing in the business, want to be careful not to pull back too hard on cost reduction and push too hard there and jeopardize the momentum that we're seeing building in the business.

Mark Vos: Our Bestie Step Branch series, which kicked off in Nashville in May, followed by Chicago in June, receives more than 500 RSVPs and effectively bridged our online and in-person brand presence, activating new social and influencer initiatives and celebrating the Lulu's community. The Friends For Life full funnel campaign and real-life activations directly resulted in more than 80% of website visitors. That viewed the campaign were new to the Lulu's brand hub, many of which we converted to first-time new customers.

Tiffany Smith: But at the same time, because of all the momentum, Crystal noted that we're seeing in the business, we want to be careful not to pull back too hard on cost reduction and push too hard there and jeopardize the momentum that we're seeing building in the business.

Crystal Lanson: Just to add to that, I think the way to look at it is our goal is to continue to nurture the areas in our business where we're seeing all the grassy shoes from the positive momentum, but also managing our cash flow prudently in anticipation of a potentially choppy or consumer in house.

Crystal Landsem: Just to add to that, I think the way to look at it is our goal is to continue to nurture the areas in our business where we're seeing all the grassy shoots and the positive momentum but also managing our cash flow prudently in anticipation of a potentially choppier consumer in the back half.

Dana Telsey: Thank you.

Mark Vos: The strongest ever at recall numbers demonstrating a great connection between our differentiating brand message and perspective and existing customers. A full funnel marketing approach that operated at low CTMs and showed promising incremental return on advertising spend in several digital channels. In addition to the campaign success, we gained valuable insights into platform performance and ad formats. We will refine our approach going forward and our confidence in our ability to further improve our brand campaign performance in next campaigns.

Speaker Change: Thank you.

Brooke Roach: The next question will come from Brooke Roach with Goldman Sachs. Please go ahead. Good afternoon, and thank you for taking our question. Crystal, I'm hoping you could dive a little bit deeper on the plans that you have to drive engagement in the marketing expenses in the back half. And are there six versus variable expenses that we should consider within that line at them going forward? Yeah, that's a good question. For us and typically in the third and fourth quarter, when there's more pressure on performance marketing, we tend to pull levers across markdowns, discounts, and paid marketing spend.

Speaker Change: The next question will come from Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach: Good afternoon and thank you for taking our question. Crystal, I was hoping you could dive a little bit deeper on the plans that you have to drive engagement in the back half.

Brooke Roach: and continue the momentum on the sequential recovery in sales. How are you planning selling and marketing expenses in the back half? And are there fixed versus variable expenses that we should consider within that line item going forward?

Mark Vos: In the second quarter and quarter to date, we have announced several exciting third-party partnerships, launched influencer edits, increased social content creation volume, and amplified our reach to earns media and brand relationships. We've ramped up our investments in third-party partnerships, elaborating with iconic and sought-after brands, including Levi's, boys, lie, bands, and an early Q3, the Emilio Foodware. The launch of Levi's was particularly successful, driving sales and quick stockings. In conjunction with these announcements, we've introduced the Lulu's love feature on our website, to highlight these partnerships which have allowed us to expand our reach and enhance brand awareness by leveraging other brand platforms.

Crystal Landsem: Yeah, it's a good question. For us, and typically in the third and fourth quarter, when there's more pressure on performance marketing, we tend to pull levers across markdowns, discounts, and paid marketing spend, and really it's an optimization in the moment based on where the consumer is and where we're getting the best

Crystal Lanson: And really it's an optimization in the moment based on where the consumer is and where we're getting the best use of our cash for that marketing spend. I think the way to think about this for us is we're continuing to invest but prudently on the brand side because we are seeing positive momentum and brand equity and just momentum in general from how our customers are interacting with the brand. But that said, that we have to be very cautious about where we're spending and making sure that the payoff is as much for the near term as it is for the long term.

Crystal Landsem: Use of our cash for that marketing spend. I think the way to think about this for us is we're continuing to invest But prudently on on the brand side because we are seeing possible momentum and brand equity and just momentum in general from how our customers are interacting with the brand But that said we have to be very cautious about where we're spending and making sure that the payoff is as much for the near term as it is for the long term So it expect to see blitz and takes throughout the back half of the year across mark down to count and Marketing spend the way that we've done it in the past which is truly reactionary to the macro and where we're seeing the best banks for the bus

Crystal Lanson: So it expect to see puts and takes throughout the back half of the year across markdowns, discounts, and marketing spend the way that we've done it in the past, which is truly reactionary to the macro and where we're seeing the best bang for the buck.

Mark Vos: We are early on in these brand collaborations and partnerships and look forward to optimizing their impacts on Lulu's brand awareness, relevance, and reaching new potential customers, and ultimately sales. Building on the success of our influencer edits with Kennedy Alliance in Q1, we partnered with Anna Herring and Delaney Childs in Q2, to further drive brand awareness and audiences to the site. Update. Notably, an adherence edit went viral, amassing over 1.5 million views and nearly 40,000 shares.

Brooke Roach: As a follow-up, can you talk a little bit about the levers that you can pull to reduce costs and defend profitability in both the near and medium term beyond the 10 to 15 percent second half operating expense cuts that were announced today? How are you thinking about the range of outcomes on profit margins and free cash low generation for the business? Should the timeline of recovery continue to elongate versus your current expectations?

Speaker Change: As a follow-up, can you talk a little bit about the levers that you can pull to reduce costs and defend profitability in both the near and medium term beyond the 10-15% second half operating expense cuts that were announced today?

Speaker Change: How are you thinking about the range of outcomes on profit margins and free cash flow generation for the business should the timeline of recovery continue to elongate versus your current expectations?

Tiffany Smith: Yep, good question, Brooke. I think for at the current time free cash flow, maintaining positive cash flow is really a big priority for us. And so I think there are, as you said, potentially other levers that we could pull as needed. The ones that we disclose on the call were largely headcount in nature. We have done some headcount reduction in certain areas where we felt we could continue to grow without certain individuals. But I think for the most part, the executive pay cuts have been implemented. A lot of the levers there pulled around headcount are probably pretty limited in terms of what we can continue to do given we are fairly lean team already and have been running pretty lean in most areas.

Speaker Change: Yeah, good question, Brooke. I think for at the current time, free cash flow, maintaining positive cash flow is really a big priority for us.

Mark Vos: We're encouraged by the strong return of these collaborations and we look forward to upcoming influencer collaborations and expanding our creator network. Our diverse influencer strategy has resonated with the Lulu's customer community and we believe further reinforces our mission of being there for all life's moments. In Q2, we also launched a pretty little liar's original sin edit curated by the hit shows wardrobe stylists and features on the show's webpage, leveraging a collaborative media post and giveaway, reaching the show's 12 million followers in addition to ours.

Speaker Change: And so I think there are, as you said, potentially other levers that we could pull as needed. The ones that we disclosed on the call were largely headcount in nature. We have done some

Speaker Change: headcount reduction in certain areas where we felt we could

Speaker Change: continue to grow without certain individuals. But I think for the most part, the executive pay cuts have been implemented. A lot of the levers there pulled around headcount.

Speaker Change: are probably pretty limited in terms of what we can continue to do given we are a fairly lean team already and have been running pretty lean in most areas. There may be a little bit more there, but I doubt it. I think it's going to be more considering other types of G&A spend.

Tiffany Smith: There may be a little bit more there, but I doubt it. I think it's going to be more considering other types of G&A spend, other areas where we can make more meaningful reductions. But I don't have specifics that I think we want to share at this point, given it's a bit fluid. And just as a reminder, our cost structure is highly variable, so if sales were to worsen from our expectations, our cost structure would also be reduced, unfortunately.

Mark Vos: Our media expansion and publicity efforts gained a significant momentum this quarter, doubling press coverage in Q2 on securing placements in top-tier retail, financial, and consumer publications. This boost increased users on Lulu's channels and drew inbound interest from various media outlets. We believe in the strategic value of our brand and customer acquisition initiatives and our confidence in maximizing our reach and impact despite broader cost reduction efforts in Q3. We anticipate continuing to build momentum for the Lulu's brand, increasing awareness, and driving revenue as we execute our strategies.

Speaker Change: other areas where we can make more meaningful reductions. But I don't have specifics that I think we wanna share at this point, given it's a bit fluid.

Speaker Change: And just as a reminder, our cost structure is highly variable, so if sales were to worsen from our expectations, then our cost structure would also be reduced proportionately.

Brooke Roach: Thank you very much. I'll pass it on.

Speaker Change: Thank you very much. I'll pass it on.

Janine Stichter: The next question comes from Janine Stichter with BTIG.

Speaker Change: The next question comes from Janine Stichter with BTIG. Please go ahead.

Janine Stichter: Please go ahead. Hi, everyone.

Crystal Lanson: You got Ethan Saghi on for Janine. I was just wondering, in terms of category trends, I know you highlighted the casual business is seeing some softness. I was just wondering if you could give some more color on what's not working as well in the assortment and strategies you have in place to address those issues. Thanks.

Ethan Saggy: Hey everyone, you got Ethan Saghi on for Janine. I was just wondering in terms of category trends, I know you highlighted the casual business is seeing some softness. I was just wondering if you could give some more color on what's not working as well in the assortment, and the strategies you have in place to address those issues. Thanks.

Mark Vos: Our next priority focuses on driving technology enablement that supports customer engagement and customer experience across multiple channels. We are encouraged by increasing usage of the Lulu's app and its growing share of overall revenue. Year over year Q2 saw healthy growth in app users and improved conversion rates. Additionally, our investment in driving more paid traffic towards the Lulu's app is yielding strong returns. The website redesign featuring larger and more prominent product images and expanded video use has led to the increased engagement on our website, higher conversion rates, and an increase in account registrations. Our engineering and continuous revenue optimization teams have an exciting roadmap to further enhance the shopping experience and product discovery.

Crystal Lanson: Yeah, that's a good question. So, I mean, we had a really robust and record-breaking special occasion in Bryce Mase Business in the second quarter, which is just a testament to customers meaning on us for their special moment, which was great to see. The most pressure that we experienced was more in the casual space, and we were continuing to invest in the recovery of that business. That said, the news side is comping just fine to last year, but we're taking a little bit longer to rebuild the reorder funnel in that space, just given the competitive nature, as well as the consumer pressure that we've been seeing with our customer set.

Speaker Change: Yeah, it's a good question. So, I mean, we had a really robust and record-breaking special occasion in bridesmaids business in the second quarter, which is just a testament to customers leaning on us for their special moments, which was great to see. The most pressure that we experienced was more in the casual space and

Speaker Change: We're continuing to invest in the recovery of that business. That said, the new side is comping just fine to last year, but we're taking a little bit longer to rebuild the reorder funnel in that space, just given the competitive nature as well as the consumer pressure that we've been seeing with our customer set.

Janine Stichter: So, differently, that's going to continue to improve over time, but it's taking longer than we had anticipated. Got it. That's helpful.

Speaker Change: I said differently, that's going to continue to improve over time, but it's taking longer than we had anticipated.

Mark Vos: We are enhancing operational efficiency and strategic investments in automation and robotics in our distribution centers. As mentioned on the last call in Q2, we added automation to our largest distribution center in eastern Pennsylvania and early feedback shows improvements in order accuracy, reduced cycle times, and better unity economics. As you've heard, we continue to make good progress on our strategic initiatives, maximizing our impact in a thoughtful and cost-efficient manner. I'm excited about the team we have in place and their dedication to delivering the right products to our customers.

Janine Stichter: Thank you.

Speaker Change: Got it. That's helpful. Thank you.

Operator: This will conclude our question and answer session, as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Speaker Change: This will conclude our question and answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Tiffany Smith: And now, I'll hand you over to Tiffany Smith, Lulu's chief financial officer to provide more color on our financials. Tiffany? Thanks, Mark, and good afternoon everyone.

Tiffany Smith: Our net revenue for the second quarter was approximately $92 million, a 13% decrease year over year driven by a 14% decrease in total orders placed with increased return rates, partially offset by higher average order values. 2. Markdown sales were down approximately 32% compared to the second quarter of 2023, contributing to the overall net revenue decline and gross margin improvement. We also saw notable declines in our casual business during the quarter. As a result of the implementation of our new return policy, we saw an increase in restocking fee revenue and some improvement in customer return behavior despite our decision to honor exceptions to the previous return policy through part of Q2, the ease customers into the changes which resulted in some top line pressure. Gross margin ended the quarter at 45.5%, an increase of 80 basis points compared to the same period last year driven by lower markdowns and a shift toward higher margin product categories.

Tiffany Smith: This reduction was primarily driven by lower stock crop expenses, as well as lower variable labor and benefits costs which were lower with decreased sales volumes and increased operational efficiencies. Quarterly, G&A expenses included a $423,000 accrual for a pending legal matter. Excluding this non-routine item, we achieved some leverage in the quarter on our G&A cost, resulting in a 14% decline in the remaining G&A expenses compared to the 13% decline in net revenue.

Tiffany Smith: For the quarter, we reported a diluted loss per share of 26 cents, which is a decrease of 19 cents compared to a diluted loss per share of 7 cents in the second quarter of 2023.

Tiffany Smith: Turning to our balance sheet and liquidity, on July 22nd, we finalized amendment to extend our revolving credit agreement with Bank of America, which was originally set to mature on November 15th of this year. The amended agreement now matures on August 15th, 2025 and reduces our revolving facility from $50 million to $15 million, with a future reduction to $10 million on March 31st, 2025. The original $50 million borrowing capacity was partly intended to repay prior debt at our 2021 We believe the reduced borrowing capacity is sufficient in the short-term while we actively work toward a longer-term source of financing. At the end of the second quarter 2024, we remain in compliance with all applicable financial covenants under the amended credit agreement.

Tiffany Smith: In the second quarter 2024, business continued to generate cash with $3.7 million of net cash provided by operating activities, a decrease of $900,000 on a year-over-year basis. Similarly, we generated $3 million of free cash flow for the quarter representing a $900,000 decrease on a year-over-year basis. During the second quarter, we paid off our revolving line of credit balance, ending the quarter in a net cash position of $1.8 million.

Tiffany Smith: As announced last quarter, our Board of Directors authorized a stock repurchased program to repurchase up to $2.5 million of our common stock. In the second quarter, we repurchased approximately $87,000 worth or about 48,000 shares of stock. We will continue to take a holistic view to allocate capital on a quarterly basis, driving for the highest return on our investments while maintaining a healthy liquidity position.

Tiffany Smith: Our inventory balance at quarter-end was $37.7 million, down about $8.6 million from the end-period last year. This 19% inventory decrease year-over-year exceeded our 13% year-over-year net revenue decline as we continue to reduce the lease of supply in our reorder business.

Tiffany Smith: Moving on to guidance.

Tiffany Smith: Given the uncertainty driven by ongoing macroeconomic headwinds and persisting consumer pressures, we are withdrawing the previously-issued full-year net revenue and adjusted EBITDA outlook. We would like to provide some insight into our sales expectations for the third quarter. Our preliminary results for the month of July reflect a net revenue year-over-year comparison in the negative low single digits with sequential improvement in net revenue comps. We expect slightly more challenging August comps due to last year's promotions and the earlier seasonal clearances July with a projected return to negative single digits in September.

Tiffany Smith: For the third quarter, we anticipate net revenue to be between approximately $75 million and $79 million, compared to $83.1 million in the same period last year, reflecting a year-over-year decline of between 5% and 10%. As a result of continued macroeconomic pressures and uncertainty, we are in the process of implementing cost reduction measures to improve our profitability and to better align our current business needs with current sales growth trends. The cost reduction measures include an approximate 10-15% reduction in operating expenses for the second half of 2024, compared to the first half. Better align with the anticipated slower sales recovery. This includes a decrease in fixed payroll costs resulting from reduced fixed-head count combined with pay cuts for our executives and certain members of the management team.

Crystal Lanson: And with that, I'll pass it back to Crystal for closing remarks. Thanks. Thank you, Tiffany.

Crystal Lanson: We are confident that our strategic initiatives in enhancing brand awareness and customer engagement coupled with our diligent cost reduction efforts position us for sustainable growth and improve profitability in the coming year. Our commitment to operational excellence will serve us well amidst ongoing macro volatility. Thank you to our dedicated brand fans, Lulu crew, and shareholders for your unwavering support as we continue to deliver attainable luxury to our customers.

Crystal Lanson: We look forward to updating you on our next earnings call.

Operator: With that, I'll turn it over to questions now. Thank you.

Operator: We'll now begin the question and answer session. If you ask a question, you may press star, then one, on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two.

Operator: At this time, we will pause momentarily to assemble our roster.

Dana Telsey: The first question comes from Dana Telsie with Telsie Advisory Group. Please go ahead.

Crystal Lanson: Hi, good afternoon everyone. Crystal, as you think about the core health of the consumer and what you're seeing out there and the competitive landscape with promotions, what's changing in your business, whether pricing you mentioned some of the categories and how you're planning for the back half of the year in addition to you gave out sales for the third quarter, but not any adjusted EBITDA, any framework you could provide there. Thank you.

Crystal Lanson: Thanks for the question, Dana. I think at a high level, we believe our customer continues to be under pressure due to just various macroeconomic pressures that we've discussed over the last several quarters and is also reflected in withdrawing our full year guidance for EBITDA and also just the conservatism in general of our third quarter guidance. All that being said, we're still focusing on opportunities where we can drive engagement and growth and profitability, especially in this more challenging and volatile environment.

Crystal Lanson: What's been really great for us to see is our business does continue to recover and going into July, we've seen an inflection to roughly flat customer active customers within the month, so we're really encouraged by that. I think the high level take away is that our recovery is well underway. It's just taking longer than we had anticipated because of the consumer backdrop. Got it. And then on the adjusted EBITDA in terms of any framework. Dana, I'll jump in.

Tiffany Smith: This is Tiffany. So we gave the revenue guidance because if we have more confidence, obviously in the third quarter revenue pacing that we've seen today, but given as we announced, we're working through some cost reductions, we announced that during the call. Some of those things are going to have more immediate benefits. Some will have longer-term benefits. We're still working through all of the puts and takes around that. And as we work through this, we want to maintain as much flexibility as possible on the timing of these changes.

Tiffany Smith: Also want to make sure that we're reading the business and the macro properly to ensure that we've made sufficient adjustments to adjust our cost structure to better align with our slower sales, slower than expected sales recovery. But at the same time, because of all the momentum, crystal noted that we're seeing in the business, we want to be careful not to pull back too hard on cost reduction and push too hard there and jeopardize the momentum that we're seeing building in the business.

Tiffany Smith: Just to add to that, I think the way to look at it is our goal is to continue to nurture the areas in our business where we're seeing all the grassy shoes from the positive momentum, but also managing our cash flow prudently and anticipation of a potentially choppy or consumer in House.

Operator: Thank you.

Brooke Roach: The next question will come from Brooke Roach with Goldman Sachs. Please go ahead. Good afternoon and thank you for taking our question.

Crystal Lanson: Crystal, I'm hoping you could dive a little bit deeper on the plans that you have to drive engagement in the marketing expenses in the back half. And are there six versus variable expenses that we should consider within that line at them going forward? Yeah, that's a good question. For us and typically in the third and fourth quarter when there's more pressure on performance marketing, we tend to pull levers across markdowns, discounts and paid marketing spend.

Crystal Lanson: And really it's an optimization in the moment based on where the consumer is and where we're getting the best use of our cash for that marketing spend. I think the way to think about this for us is we're continuing to invest but prudently on on the brand side because we are seeing positive momentum and brand equity and just momentum in general from how our customers are interacting with the brand. But that said that we have to be very cautious about where we're spending and making sure that the payoff is as much for the near term as it is for the long term.

Crystal Lanson: So it expect to see puts and takes throughout the back half of the year across markdowns, discounts and marketing spend the way that we've done it in the past, which is truly reactionary to the macro and where we're seeing the best bang for the buck.

Tiffany Smith: As a follow up, can you talk a little bit about the levers that you can pull to reduce costs and defend profitability in both the near and medium term beyond the 10 to 15 percent second half operating expense cuts that were announced today? How are you thinking about the range of outcomes on profit margins and free cash low generation for the business? Should the timeline of recovery continue to elongate versus your current expectations?

Tiffany Smith: But I think for the most part, the executive pay cuts have been implemented. A lot of the levers there pulled around headcount are probably pretty limited in terms of what we can continue to do given we are fairly lean team already and have been running pretty lean in most in most areas. There may be a little bit more there, but I doubt it. I think it's going to be more considering other types of G&A spend other areas where we can make more meaningful reductions.

Tiffany Smith: But I don't have specifics that I think we want to share at this point given it's a bit fluid. And just as a reminder, our cost structure is highly variable, so if sales were to worsen from our expectations and our cost structure would also be reduced unfortunately. Thank you very much.

Operator: I'll pass it on.

Ethan Saghi: The next question comes from Janine Stichter with BTIG. Please go ahead. Hi, everyone. You got Ethan Saghi on for Janine. I was just wondering in terms of category trends, I know you highlighted the casual business is seeing some softness. I was just wondering if you could give some more color on what's not working as well in the assortment and strategies you have in place to address those issues. Thanks.

Operator: This will conclude our question and answer session as well as conference call. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Q2 2024 Lulu’s Fashion Lounge Holdings Inc Earnings Call

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