UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________________ to ___________________
Commission File Number:
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐, |
| ☒ | |
Non-accelerated filer | ☐ |
| Smaller reporting company | |
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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As of November 3, 2023, there were
TABLE OF CONTENTS
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Condensed Consolidated Balance Sheets as of October 1, 2023 and January 1, 2023 | 5 | |
6 | ||
7 | ||
8 | ||
10 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
38 | ||
38 | ||
38 | ||
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39 | ||
39 | ||
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41 |
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the following: our ability to successfully maintain our desired merchandise assortment or manage our inventory effectively and attract a sufficient number of customers or sell sufficient quantities of our merchandise; our ability to anticipate, identify, measure, and respond quickly to new and rapidly changing fashion trends, customer preferences and demands, and other factors; our efforts to acquire or retain customers; our ability to maintain a high level of engagement with our customers and increase their spending with us; our ability to provide high-quality customer support; our ability to maintain a strong community around the Lulus brand with engaged customers and influencers; our ability to operate in the highly competitive retail apparel industry; our ability to successfully implement our growth strategy; our reliance on third parties to drive traffic to our platform; our use of social media, influencers, affiliate marketing, email, text messages, and direct mail; our exposure to international business uncertainties, including inflation, interest rates and fuel prices; our reliance on consumer discretionary spending; system security risk issues, including any real or perceived failure to protect confidential or personal information against security breaches and disruption of our internal operations or information technology systems; any disruption caused by continual updates, augmentation and additions to our technology systems; our reliance on email and other messaging services; risks associated with sourcing, manufacturing, and warehousing; any disruptions to our three distribution facilities; our reliance on independent third-party transportation providers for substantially all of our merchandise shipments and any disruptions or increased transportation costs; risks associated with infringement upon the trademarks, copyrights or other intellectual property rights of third parties, including the risk that we could acquire merchandise from our suppliers without the full right to sell it; the unpredictability and adverse effects of the COVID-19 pandemic; and the other important factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission (the "SEC”). The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
3
BASIS OF PRESENTATION
On August 28, 2017, we executed a reorganization of our corporate structure. Our original parent company was called Lulu’s Holdings, LLC. This entity was converted to Lulu’s Holdings, L.P. (the “LP”). We formed two new subsidiaries, Lulu’s Fashion Lounge Holdings, Inc. and Lulu’s Fashion Lounge Parent, LLC, to sit between the LP and our operating company. Our operating company, previously known as Lulu’s Fashion Lounge, Inc., was converted from a California corporation to a Delaware limited liability company, Lulu’s Fashion Lounge, LLC, an indirect wholly-owned subsidiary of Lulu’s Fashion Lounge Holdings, Inc. In connection with our initial public offering, the LP was liquidated. Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to the terms “Lulus,” “we,” “us,” “our,” or the “Company” refer to Lulu’s Fashion Lounge Holdings, Inc. and its consolidated subsidiaries.
Our fiscal year is a “52-53 week” year ending on the Sunday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. References herein to “fiscal 2023” and/or “2023” relate to the year ending December 31, 2023 and “fiscal 2022” and/or “2022” relate to the year ended January 1, 2023. The fiscal years ending December 31, 2023 and ended January 1, 2023 consisted of 52-weeks.
Throughout this Quarterly Report on Form 10-Q, we provide a number of key performance indicators used by management and typically used by our competitors in our industry. These and other key performance indicators are discussed in more detail in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Metrics.” In this Quarterly Report on Form 10-Q, we also reference Adjusted EBITDA, Adjusted EBITDA Margin and Free Cash Flow which are non-GAAP (accounting principles generally accepted in the United States of America) financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a discussion of Adjusted EBITDA, Adjusted EBITDA Margin and Free Cash Flow, as well as a reconciliation of net income (loss) to Adjusted EBITDA and a reconciliation to non-GAAP Free Cash Flow from net cash provided by operating activities. Net income (loss) is the most directly comparable financial measure to Adjusted EBITDA and net cash provided by operating activites is the most directly comparable financial measure to Free Cash Flow, required by, or presented in accordance with GAAP.
4
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
| October 1, |
| January 1, | |||
2023 | 2023 | |||||
Assets | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
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Inventory, net |
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Assets for recovery |
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Income tax refund receivable |
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Prepaids and other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Tradename |
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Intangible assets, net |
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Lease right-of-use assets | | | ||||
Other noncurrent assets |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
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Returns reserve |
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Stored-value card liability |
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Lease liabilities, current | | | ||||
Total current liabilities |
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Revolving line of credit | |
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Lease liabilities, noncurrent | | | ||||
Other noncurrent liabilities |
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Total liabilities |
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Commitments and Contingencies (Note 7) |
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Stockholders' equity: |
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Preferred stock: $ |
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Common stock: $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
(unaudited)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
October 1, |
| October 2, | October 1, |
| October 2, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||
Net revenue |
| $ | |
| $ | | $ | |
| $ | | ||
Cost of revenue |
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Gross profit |
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Selling and marketing expenses |
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General and administrative expenses |
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Income (loss) from operations |
| ( |
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Interest expense |
| ( | ( | ( | ( | ||||||||
Other income, net |
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Income (loss) before provision (benefit) for income taxes |
| ( |
| | ( |
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Income tax provision (benefit) |
| ( | ( | ( | | ||||||||
Net income (loss) and comprehensive income (loss) |
| $ | ( |
| $ | | $ | ( |
| $ | | ||
Basic earnings (loss) per share | $ | ( | $ | | $ | ( | $ | | |||||
Diluted earnings (loss) per share | $ | ( | $ | | $ | ( | $ | | |||||
Basic weighted-average shares outstanding |
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Diluted weighted-average shares outstanding |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
For the Thirty-Nine Weeks Ended October 1, 2023 | ||||||||||||||
Additional | Total | |||||||||||||
Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance as of January 1, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of common stock for vesting of restricted stock units (RSUs) | | | — | — | | |||||||||
Issuance of common stock for special compensation award | | — | — | — | — | |||||||||
Issuance of common stock for employee stock purchase plan (ESPP) | | — | | — | | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Forfeited shares of restricted stock | ( | — | — | — | — | |||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net (loss) and comprehensive (loss) | — | — | — | ( | ( | |||||||||
Balance as of April 2, 2023 |
| | | | ( | | ||||||||
Issuance of common stock for vesting of RSUs | | — | — | — | — | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Equity-based compensation expense |
| — | — | | — |
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Net (loss) and comprehensive (loss) |
| — | — | — | ( |
| ( | |||||||
Balance as of July 2, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of common stock for vesting of RSUs | | — | — | — | — | |||||||||
Issuance of common stock for employee stock purchase plan (ESPP) | | — | | — | | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Forfeited shares of restricted stock | ( | — | — | — | — | |||||||||
Equity-based compensation expense |
| — | | — |
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Net (loss) and comprehensive (loss) |
| — | — | — | ( |
| ( | |||||||
Balance as of October 1, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
For the Thirty-Nine Weeks Ended October 2, 2022 | ||||||||||||||
Additional | Total | |||||||||||||
Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||
Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||||
Balance as of January 2, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of common stock for vesting of restricted stock units (RSUs) |
| | | ( | — | — | ||||||||
Issuance of common stock for special compensation award | | — | — | — | — | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Offering costs related to Initial Public Offering (IPO) | — | — | ( | — | ( | |||||||||
Settlement of distributions payable to former Class P unit holders | — | — | | — | | |||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net income and comprehensive income |
| — | — | — | | | ||||||||
Balance as of April 3, 2022 |
| | | | ( | | ||||||||
Issuance of common stock for vesting of RSUs |
| | — | — | — | — | ||||||||
Shares withheld for withholding tax on RSUs | ( | ( | — | ( | ||||||||||
Forfeited shares of restricted stock | ( | — | — | — | ||||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net income and comprehensive income |
| — | — | — | | | ||||||||
Balance as of July 3, 2022 |
| | | | ( | | ||||||||
Issuance of common stock for vesting of RSUs |
| | — | — | — | — | ||||||||
Shares withheld for withholding tax on RSUs | ( | ( | — | ( | ||||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net income and comprehensive income |
| — | — | — | | | ||||||||
Balance as of October 2, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Thirty-Nine Weeks Ended | ||||||
October 1, | October 2, | ||||||
2023 |
| 2022 | |||||
Cash Flows from Operating Activities |
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Net income (loss) | $ | ( |
| $ | | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Noncash lease expense | | | |||||
Amortization of debt discount and debt issuance costs |
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Equity-based compensation expense |
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Deferred income taxes |
| ( |
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Loss on disposal of property and equipment |
| — |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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| ( | |||
Assets for recovery |
| ( |
| ( | |||
Income taxes payable |
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Prepaid and other current assets |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Operating lease liabilities | ( | ( | |||||
Other noncurrent liabilities |
| ( |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities |
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Capitalized software development costs |
| ( |
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Purchases of property and equipment |
| ( |
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Other |
| ( |
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Net cash used in investing activities |
| ( |
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Cash Flows from Financing Activities |
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Proceeds from borrowings on revolving line of credit |
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Repayments on revolving line of credit |
| ( |
| ( | |||
Proceeds from issuance of common stock under employee stock purchase plan (ESPP) | | — | |||||
Principal payments on finance lease obligations | ( | ( | |||||
Payment of offering costs related to the IPO | — | ( | |||||
Withholding tax payments related to vesting of RSUs | ( | — | |||||
Other |
| ( |
| ( | |||
Net cash used in financing activities |
| ( |
| ( | |||
Net decrease in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
Reconciliation of cash, cash equivalents and restricted cash | |||||||
Cash and cash equivalents | $ | | $ | | |||
Restricted cash | — | | |||||
Total cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
(Continued) | |||||||
8
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Thirty-Nine Weeks Ended | ||||||
October 1, | October 2, | ||||||
2023 |
| 2022 | |||||
Supplemental Disclosure | |||||||
Cash paid during the period for: | |||||||
Income taxes, net | $ | | $ | | |||
Interest | $ | | $ | | |||
Operating leases | $ | | $ | — | |||
Finance leases | $ | | $ | — | |||
Supplemental Disclosure of Non-Cash Investing and Financing Activities |
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Addition of right-of-use assets, including prepaid rent, net of deferred rent recorded upon adoption of ASC 842 | $ | — | $ | | |||
Addition of lease liabilities recorded upon adoption of ASC 842 | $ | — | $ | | |||
Right-of-use assets acquired under operating lease obligations | $ | | $ | | |||
Assets acquired under finance lease obligations | $ | | $ | | |||
Purchases of property and equipment included in accounts payable and accrued expenses | $ | | $ | | |||
(Concluded) | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
9
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.Description of Business, Organization and Liquidity
Organization and Business
Pursuant to a reorganization, Lulu’s Fashion Lounge Holdings, Inc., a Delaware Corporation (“Lulus”, or the “Company”), was formed on August 25, 2017 as a holding company and its primary asset is an indirect membership interest in Lulu’s Fashion Lounge, LLC (“Lulus LLC”). Prior to the sale of the Company’s Series A convertible preferred stock in April 2018, the Company was wholly-owned by Lulu’s Holdings, L.P. (the “LP”). Prior to the Company’s initial public offering in November 2021, the Company was majority-owned by the LP.
Lulus LLC was founded in 1996, starting as a vintage boutique in Chico, CA that began selling online in 2005 and transitioned to a purely online business in 2008. The LP was formed in 2014 as a holding company and purchased
Impact of Macroeconomic Trends on Business
Changing macroeconomic factors, including inflation, interest rates, and overall consumer confidence with respect to current and future economic conditions, have directly impacted our sales in the third quarter of 2023 as discretionary consumer spending levels and shopping behavior fluctuate with these factors. During the first nine months of 2023, we have responded to these factors by taking appropriate pricing, promotional and other actions to stimulate customer demand. These factors are expected to continue to have an impact on our business, results of operations, our growth and financial condition.
Liquidity
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of October 1, 2023, the Company had total cash and cash equivalents of $
In November 2021 the Company entered into a Credit Agreement to provide the Revolving Facility that provides for borrowings up to $
The Company is evaluating sources of debt financing. However, the Company believes the cash on hand and cash provided by operations in conjunction with certain cash conservation measures to be taken as necessary, including adjustments to marketing and other variable and capital spend, will enable the Company to meet its obligations as they become due within one year. The condensed consolidated financial statements do not reflect any adjustments relating to the outcome of this uncertainty.
2.Significant Accounting Policies
Basis of Presentation and Fiscal Year
The Company’s fiscal year consists of a 52-week or 53-week period ending on the Sunday nearest December 31. The fiscal years ending December 31, 2023 and ended January 1, 2023 consisted of 52-weeks.
The condensed consolidated financial statements and accompanying notes include the accounts of the Company and its wholly owned subsidiaries, after elimination of all intercompany balances and transactions. The accompanying
10
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America (“GAAP”) and the requirements of the SEC for interim reporting. As permitted under these rules, certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The interim condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of October 1, 2023 and its results of operations for the thirteen and thirty-nine weeks ended October 1, 2023 and October 2, 2022 and its cash flows for the thirty-nine weeks ended October 1, 2023 and October 2, 2022. The results of operations for the thirty-nine weeks ended October 1, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other future annual or interim period.
The condensed consolidated balance sheet as of January 1, 2023 was derived from the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 14, 2023.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are consistent with those discussed in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2023, except as noted below and within the "Adopted and Recently Issued Accounting Pronouncements" section.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions made by management relate to sales return reserves and related assets for recovery, lease right-of-use assets and related lease liabilities, and income tax valuation allowance. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and restricted cash. At times, such amounts may exceed federally insured limits. The Company reduces credit risk by depositing its cash with a major credit-worthy financial institution within the United States. To date, the Company has not experienced any losses on its cash deposits. As of October 1, 2023 and January 1, 2023, a single wholesale customer represented
11
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Leases
Contracts that have been determined to convey the right to use an identified asset are evaluated for classification as an operating or finance lease. For the Company’s operating and finance leases, the Company records a lease liability based on the present value of the lease payments at lease inception. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate (“IBR”). The determination of the IBR requires judgment and is primarily based on publicly-available information for companies within similar industries and with similar credit profiles. We adjust the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement. The right-of-use asset is recorded based on the corresponding lease liability at lease inception, adjusted for payments made to the lessor at or before the commencement date, initial direct costs incurred and any tenant incentives allowed for under the lease. The Company does not include optional renewal terms or early termination provisions unless the Company is reasonably certain such options would be exercised at the inception of the lease. Lease right-of-use assets, current portion of lease liabilities, and lease liabilities, net of current portion are included on the condensed consolidated balance sheets.
Fixed lease expense for operating leases is recognized on a straight-line basis, unless the right-of-use assets have been impaired, over the reasonably assured lease term based on the total lease payments and is included in operating expenses in the condensed consolidated statements of operations and comprehensive income (loss). Fixed and variable lease expense on operating leases is recognized within operating expenses in the condensed consolidated statements of operations and comprehensive income (loss). Finance lease expenses are recognized on a straight-line basis. Fixed and variable expenses are captured within interest expense and depreciation expense, which has components within general and administrative expenses and cost of revenue. The Company’s non-lease components are primarily related to maintenance, insurance and taxes, which varies based on future outcomes and is thus recognized in lease expense when incurred.
Revenue Recognition
The Company generates revenue primarily from the sale of merchandise products directly to end customers. The sale of products is a distinct performance obligation, and revenue is recognized at a point in time when control of the promised product is transferred to customers, which the Company determined occurs upon shipment based on its evaluation of the related shipping terms. Revenue is recognized in an amount that reflects the transaction price consideration that the Company expects to receive in exchange for those products. The Company’s payment terms are typically at the point of sale for merchandise product sales.
The Company elected to exclude from revenue taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities. The Company has elected to apply the practical expedient, relative to e-commerce sales, which allows an entity to account for shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only
Revenue from merchandise product sales is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns is included in the returns reserve on its condensed consolidated balance sheets and represents the expected value of the refund that will be due to the Company’s customers. The Company also has corresponding assets for recovery that represent the expected net realizable value of the merchandise inventory to be returned.
12
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company sells stored-value gift cards to customers and offers merchandise credit stored-value cards for certain returns. Such stored-value cards do not have an expiration date. The Company recognizes revenue from stored-value cards when the card is redeemed by the customer. The Company has determined that sufficient evidence exists to support an estimate for stored-value card breakage. Subject to requirements to remit balances to governmental agencies, breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, which is substantially within
The Company has
The following table summarizes the significant changes in the contract liabilities balances included in accrued expenses and other current liabilities during the thirteen and thirty-nine weeks ended October 1, 2023 and October 2, 2022 (in thousands):
Deferred |
| Stored-Value | ||||
| Revenue |
| Cards | |||
Balance as of January 1, 2023 | $ | | $ | | ||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of April 2, 2023 | | | ||||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( | ( | |||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| | | |||
Balance as of July 2, 2023 | $ | | $ | | ||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( | ( | |||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| | | |||
Balance as of October 1, 2023 | $ | | $ | | ||
13
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Deferred |
| Stored-Value | |||
| Revenue |
| Cards | |||
Balance as of January 2, 2022 | $ | | $ | | ||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of April 3, 2022 | | | ||||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of July 3, 2022 | | | ||||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of October 2, 2022 | $ | | $ | | ||
Selling and Marketing Expenses
Advertising costs included in selling and marketing expenses were $
Net income (loss) Per Share Attributable to Common Stockholders
Basic net income (loss) per share attributable to common stockholders is computed using net income (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to common stockholders represents net income (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period, including the effects of any dilutive securities outstanding.
14
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents the calculation of basic and diluted weighted average shares used to compute net income (loss) per share attributable to common stockholders:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||
| October 1, 2023 |
| October 2, 2022 | October 1, 2023 |
| October 2, 2022 | |||
Weighted average shares used to compute net income (loss) per share attributable to common stockholders – Basic | | | | | |||||
Dilutive securities: | |||||||||
Unvested restricted stock | — | | — | | |||||
Unvested restricted stock units (RSUs) | — | | — | | |||||
Special compensation awards | — | | — | | |||||
Weighted average shares used to compute net income (loss) per share attributable to common stockholders – Diluted | | | | | |||||
The following securities were excluded from the computation of diluted net income (loss) per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (on an as-converted basis):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | |||||
Stock options |
| | — | | — | ||||
Unvested restricted stock | | | | | |||||
Unvested RSUs | | | | | |||||
Performance stock units | | | | | |||||
Employee stock purchase plan shares | | | | | |||||
2023 stock-based bonus plan | | — | | — | |||||
Total |
| | | | | ||||
Recently Adopted Accounting Pronouncements
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities from an incurred loss methodology to an expected loss methodology. For assets held at amortized cost basis, the guidance eliminates the probable initial recognition threshold and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses are recorded through an allowance for credit losses, rather than a write-down, limited to the amount by which fair value is below amortized cost. Additional disclosures about significant estimates and credit quality are also required. The guidance is effective for the Company for fiscal years
15
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
beginning after December 15, 2022. The Company adopted this guidance on January 2, 2023, and it did not have a material impact on its consolidated financial statements or disclosure requirements.
Recently Issued Accounting Pronouncements
There are no new recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.
3.Fair Value Measurements
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts payable, accrued expenses and revolving line of credit. As of October 1, 2023 and January 1, 2023, the carrying values of cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximate fair value due to their short-term maturities. The fair value of the Company’s Revolving Facility that provides for borrowings up to $
4.Balance Sheet Components
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
| Estimated Useful Lives |
| October 1, |
| January 1, | |||
in Years | 2023 | 2023 | ||||||
Leasehold improvements | $ | | $ | | ||||
Equipment |
| |
| | ||||
Furniture and fixtures |
| |
| | ||||
Construction in progress |
| |
| | ||||
Total property and equipment |
| |
| | ||||
Less: accumulated depreciation and amortization |
| ( | ( | |||||
Property and equipment, net | $ | | $ | | ||||
Depreciation and amortization of property and equipment for the thirteen weeks ended October 1, 2023 and October 2, 2022 was $
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| October 1, |
| January 1, | |||
2023 | 2023 | |||||
Accrued compensation and benefits | $ | | $ | | ||
Accrued marketing |
| |
| | ||
Accrued inventory |
| |
| | ||
Other |
| |
| | ||
Accrued expenses and other current liabilities | $ | | $ | | ||
16
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5.Debt
Revolving Facility
During November 2021, the Company entered into a Credit Agreement with Bank of America (the “Credit Agreement”) to provide the Revolving Facility that provides for borrowings up to $
All borrowings under the Credit Agreement accrue interest at a rate equal to, at the Company’s option, either (x) the term daily SOFR, plus the applicable SOFR adjustment plus a margin of
Amounts borrowed under the Credit Agreement are collateralized by all assets of the Company and contains various financial and non-financial covenants for reporting, protecting and obtaining adequate insurance coverage for assets collateralized and for coverage of business operations, and complying with requirements, including the payment of all necessary taxes and fees for all federal, state and local government entities. Immediately upon the occurrence and during the continuance of an event of default, including the noncompliance with the above covenants, the lender may increase the interest rate per annum by
Debt Discounts and Issuance Costs
Debt discounts and issuance costs are deferred and amortized over the life of the related loan using the effective interest method. The associated expense is included in interest expense in the condensed consolidated statements of operations and comprehensive income (loss). Debt discounts and issuance costs are presented as a reduction of long-term debt with the exception of debt issuance costs related to the Revolving Facility, which are included in other non-current assets in the condensed consolidated balance sheets. As of October 1, 2023 and January 1, 2023, unamortized debt issuance costs recorded within other non-current assets were $
6.Leases
On January 3, 2022, the Company adopted ASC 842 using the alternative transition method and applied the standard only to leases that existed at that date. Under the alternative transition method, the Company did need to restate the comparative periods in transition and will continue to present financial information and disclosures for periods before January 3, 2022, in accordance with FASB ASC 840, Leases. The Company elected the practical expedient package, which among other practical expedients, includes the option to retain the historical classification of leases entered into prior to
17
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
January 3, 2022, and allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company also elected the practical expedient to combine lease and non-lease components.
The Company is a lessee under various lease agreements. The determination of whether an arrangement contains a lease and the lease classification is made at lease commencement (date on which a lessor makes an underlying asset available for use by the lessee). At lease commencement, the Company also measures and recognizes a right-of-use asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised. For the purposes of recognizing right-of-use assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient of not recognizing a right-of-use asset or lease liability for short-term leases, which are leases with a term of 12 months or less. The Company has multiple finance leases and operating leases that are combined and included in the lease right-of-use assets, lease liabilities, current, and lease liabilities, noncurrent on the Company’s condensed consolidated balance sheets.
The Company primarily leases its distribution facilities and corporate offices under operating lease agreements expiring on various dates through December 2031, most of which contain options to extend. In addition to payment of base rent, the Company is also required to pay property taxes, insurance, and common area maintenance expenses. The Company records lease expense on a straight-line basis over the term of the lease. The Company had immaterial remaining obligations for the base rent related to the short-term leases as of October 1, 2023 and October 2, 2022.
The Company also leases equipment under finance lease agreements expiring on various dates through May 2028.
As of October 1, 2023, the future minimum lease payments for the Company’s operating and finance leases for each of the fiscal years were as follows (in thousands):
Fiscal Year: |
| Operating Leases | Finance Leases | Total | |||||
2023 (remaining three months) | $ | | $ | | $ | | |||
2024 |
| | | | |||||
2025 |
| | | | |||||
2026 |
| | | | |||||
2027 |
| | | | |||||
Thereafter | | | | ||||||
Total undiscounted lease payment | | | | ||||||
Present value adjustment | ( | ( | ( | ||||||
Total lease liabilities | | | | ||||||
( | ( | ( | |||||||
$ | | | $ | | |||||
Under the terms of the remaining lease agreements, the Company is also responsible for certain variable lease payments that are not included in the measurement of the lease liability, including non-lease components such as common area maintenance fees, taxes, and insurance.
18
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following information represents supplemental disclosure of lease costs, components of the statement of cash flows related to operating and finance leases and components of right-of-use assets (in thousands):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||
October 1, | October 1, | ||||
2023 | 2023 | ||||
Finance lease cost | |||||
Amortization of ROU assets | $ | | $ | | |
Interest on lease liabilities | | | |||
Operating lease cost | | | |||
Short-term lease cost | — | | |||
Variable lease cost | | | |||
Total lease cost | $ | | $ | | |
Lease cost included in cost of revenue | $ | | $ | | |
Lease cost included in general and administrative expenses | $ | | $ | | |
Weighted-average remaining lease term - finance leases | |||||
Weighted-average remaining lease term - operating leases | |||||
Weighted-average discount rate - finance leases | |||||
Weighted-average discount rate - operating leases | |||||
7.Commitments and Contingencies
Litigation and Other
From time to time, the Company may be a party to litigation and subject to claims, including employment claims, wage and hour claims, intellectual property claims, privacy claims, contractual and commercial disputes and other matters that arise in the ordinary course of our business. The Company accrues a liability when management believes information available prior to the issuance of the condensed consolidated financial statements indicates it is probable a loss has been incurred as of the date of the condensed consolidated financial statements and the amount of loss can be reasonably estimated. The Company adjusts its accruals to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Legal costs are expensed as incurred.
During the normal course of business, the Company may be a party to claims that may not be covered wholly or partially by insurance. While the ultimate liability, if any, arising from these claims cannot be predicted with certainty, management does not believe that the resolution of any such claims would have a material adverse effect on the Company’s condensed consolidated financial statements. As of October 1, 2023, the Company was not aware of any currently pending legal matters or claims, individually or in the aggregate, that are expected to have a material adverse impact on its condensed consolidated financial statements.
Indemnification
The Company also maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify the Company’s directors. To date, the Company has not incurred any material costs and has not accrued any liabilities in the condensed consolidated financial statements as a result of these provisions.
19
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
8.Preferred Stock
Pursuant to the Company’s amended and restated certificate of incorporation, the Company is authorized to issue
9.Common Stock
The Company has authorized the issuance of
10.Equity-Based Compensation
Omnibus Equity Plan and Employee Stock Purchase Plan
In connection with the closing of the IPO, the Company adopted the Omnibus Equity Plan and ESPP.
Under the Omnibus Equity Plan, incentive awards may be granted to employees, directors, and consultants of the Company. The Company initially reserved
Under the ESPP, the Company initially reserved
On April 1, 2022, the Company filed a Registration Statement on Form S-8 with the SEC for the purpose of registering an additional
On March 8, 2023, the Company’s board of directors approved the Fiscal 2023 Bonus Plan (“2023 Bonus Plan”) that will grant RSUs to eligible employees, instead of the typical cash bonus. For the thirteen and thirty-nine weeks ended October 1, 2023, equity-based compensation expense for the 2023 Bonus Plan was $
20
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
respectively. As of October 1, 2023, the unrecognized equity-based compensation expense for 2023 Bonus Plan is $
On June 29, 2023, the Company filed a Registration Statement on Form S-8 with the SEC for the purpose of registering an additional
As of October 1, 2023, the Company had
The Company’s initial ESPP offering period commenced on August 26, 2022. The ESPP consists of consecutive, overlapping
The Company recognizes equity-based compensation expense related to shares issued pursuant to the ESPP on a graded vesting approach over each offering period. For the thirteen and thirty-nine weeks ended October 1, 2023, equity-based compensation expense related to our ESPP was immaterial and $
The Company used the Black-Scholes model to estimate the fair value of the purchase rights under the ESPP. For the thirteen and thirty-nine weeks ended October 1, 2023, the Company utilized the following assumptions:
Expected term (in years) | ||||
Expected volatility | % | |||
Risk-free interest rate | % | |||
Dividend yield | - | |||
Weighted average fair value per share of ESPP awards granted | $ |
2021 Equity Plan
In April 2021, the Company’s Board of Directors adopted the 2021 Equity Plan. The 2021 Equity Plan provides for the issuance of incentive stock options, restricted stock, restricted stock units and other stock-based and cash-based awards to the Company’s employees, directors, and consultants. The maximum aggregate number of shares reserved for issuance under the 2021 Equity Plan was
21
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Former CEO Stock Options and Special Compensation Awards
In April 2021, the Company entered into an Employment Agreement (the “McCreight IPO Employment Agreement”) with the former CEO, David McCreight, and granted stock options under the 2021 Equity Plan to purchase
Under the McCreight IPO Employment Agreement and subject to ongoing employment, and in light of the closing of the IPO, the former CEO received
Stock Options
A summary of stock option activity is as follows (in thousands, except per share amounts and years):
Weighted- | Weighted- | |||||||||
Average | Average | |||||||||
| Exercise |
| Remaining |
| Aggregate | |||||
| Options | Price per | Contractual | Intrinsic | ||||||
Outstanding | Option | Life (years) | Value | |||||||
Balance as of January 1, 2023 | | $ | | |||||||
Granted |
| — | — |
| — | |||||
Forfeited | ( | $ | ( | — | ||||||
Outstanding as of October 1, 2023 |
| | $ | |
| |||||
Exercisable as of October 1, 2023 |
| | $ | |
| $ | — | |||
Vested and expected to vest as of October 1, 2023 |
| | $ | |
| $ | — | |||
Restricted Stock and Restricted Stock Units (“RSUs”)
Immediately before the completion of the IPO, the LP was liquidated and the Class P unit holders of the LP (current and former employees or service providers of the Company) received shares of the Company’s common stock in exchange for their units of the LP. The Class P unit holders received
22
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
extent as the corresponding Class P units. The Company recorded equity-based compensation expense of $
The following table summarizes the rollforward of unvested restricted stock during the thirty-nine weeks ended October 1, 2023:
Unvested | Weighted- | ||||
Restricted | Average Fair | ||||
| Stock |
| Value per Share | ||
Balance at January 1, 2023 |
| | $ | | |
Restricted stock granted | — | — | |||
Restricted stock vested |
| ( |
| | |
Restricted stock forfeited |
| ( |
| | |
Balance at October 1, 2023 |
| | $ | | |
During the thirteen weeks ended April 2, 2023, the Company entered into employment agreements with Crystal Landsem, the Chief Executive Officer, (the “CEO Employment Agreement”) and Tiffany Smith, the Chief Financial Officer, (the “CFO Employment Agreement”), under which
During the thirteen and thirty-nine weeks ended October 1, 2023, the Company granted
23
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table summarizes the roll forward of unvested RSUs during the thirty-nine weeks ended October 1, 2023:
Weighted- | |||||
Unvested | Average Fair | ||||
RSUs | Value per Share | ||||
Balance at January 1, 2023 | | $ | | ||
RSUs granted | | | |||
RSUs vested | ( | | |||
RSUs forfeited | ( |
| | ||
Balance at October 1, 2023 | | $ | | ||
Performance Stock Units (“PSUs”)
Under the CEO Employment Agreement, Ms. Landsem received a grant of
The following table summarizes the rollforward of unvested PSUs during the thirty-nine weeks ended October 1, 2023:
Weighted- | |||||
Unvested | Average Fair | ||||
PSUs | Value per Share | ||||
Balance at January 1, 2023 | — | $ | — | ||
PSUs granted | | | |||
PSUs vested | — | — | |||
PSUs forfeited | — |
| — | ||
Balance at October 1, 2023 | | $ | | ||
Class P Units
During October 2021, the LP modified the vesting schedule related to
24
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Class P Distributions
Distributions payable to former Class P unit holders (“FCPUs”) triggered upon the completion of the Company’s 2021 IPO were determined to be settled in the thirteen weeks ended April 3, 2022 as a result of agreements reached with the FCPUs, and were recorded as an increase to additional paid-in capital. The agreements provided for contingent payments to the FCPUs of up to $
11.Income Taxes
All of the Company’s income (loss) before income taxes is from the United States. The following table presents the components of the provision (benefit) for income taxes (in thousands):
Thirteen Weeks Ended | |||||||
October 1, | October 2, |
| |||||
| 2023 |
| 2022 |
| |||
Income (loss) before provision (benefit) for income taxes | $ | ( | $ | | |||
Provision (benefit) for income taxes |
| ( |
| ( | |||
Effective tax rate |
| | % |
| ( | % | |
Thirty-Nine Weeks Ended | |||||||
October 1, | October 2, | ||||||
| 2023 | 2022 | |||||
Income (loss) before provision for income taxes | $ | ( | $ | | |||
Provision (benefit) for income taxes |
| ( |
| | |||
Effective tax rate |
| | % |
| | % | |
The Company’s provision (benefit) for income taxes during interim reporting periods has historically been calculated by applying an estimate of the annual effective tax rate for the full year to “ordinary” income or loss (pre-tax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. When projected “ordinary” income or loss for the full year is close to breakeven, the estimated annual effective tax rate can become volatile due to small changes, resulting in an unreliable estimate of tax for the reporting period. In such instances, the Company will calculate the interim income tax provision or benefit using a discrete effective tax rate method, as allowed by ASC 740-270 “Income Taxes, Interim Reporting,” based solely on the year-to-date pretax income or loss as adjusted for permanent differences on a pro rata basis.
We utilized a discrete effective tax rate method to calculate taxes for the thirteen weeks ended April 2, 2023 due to circumstances described above where the estimated annual effective tax rate did not provide a reliable estimate. In the second and third quarters of fiscal 2023, the Company determined that due to updated projected pre-tax results for fiscal 2023 the estimated annual effective tax rate method was no longer subject to the volatility computed in the first quarter.
The Company’s pre-tax loss for the period ended October 1, 2023 relative to the Company’s projected pre-tax income for fiscal 2023 yielded an annual effective tax rate, which was deemed to be appropriate or meaningful. Based on this fact, the Company determined that the historical estimated annual effective tax rate method would provide a reliable estimate and was used for calculating the interim benefit for the period ended October 1, 2023.
The effective tax rate for the thirteen and thirty-nine weeks ended October 1, 2023 differs from the federal income tax rate of
25
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
tax rate of
12.Related Party Transactions
Significant Shareholders
The Company identified
13.Subsequent Events
No material events have occurred that required recognition or disclosure in these financial statements.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, filed with the Securities and Exchange Commission (“SEC”) on March 14, 2023 (the “2022 10-K”). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Item I, Part 1A, “Risk Factors” of the 2022 10-K and other factors set forth in other parts of this Quarterly Report on Form 10-Q. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
Overview
Lulus is a customer-driven, digitally-native fashion brand primarily serving Millennial and Gen Z women. We focus relentlessly on giving our customers what they want. We do this by using data coupled with human insight to deliver a curated and continuously evolving assortment of on-trend, affordable luxury fashion. Our customer obsession sets the tone for everything we do, from our personalized online shopping experience to our exceptional customer service.
Impact of Macroeconomic Trends on Business
Changing macroeconomic factors, including inflation, interest rates, and overall consumer confidence with respect to current and future economic conditions, have directly impacted our sales in the first nine months of 2023 as discretionary consumer spending levels and shopping behavior fluctuate with these factors. During the first nine months of 2023, we have responded to these factors by taking appropriate pricing, promotional and other actions to stimulate customer demand. These factors are expected to continue to have an impact on our business, results of operations, our growth and financial condition.
Liquidity
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of October 1, 2023, the Company had total cash and cash equivalents of $12.9 million and amounts due under the revolving line of credit of $11.0 million.
In November 2021 the Company entered into a Credit Agreement to provide the Revolving Facility that provides for borrowings up to $50.0 million. The credit agreement contains various financial covenants and matures on November 15, 2024 as described in Note 5, Debt.
The Company is evaluating sources of debt financing. However, the Company believes the cash on hand and cash provided by operations in conjunction with certain cash conservation measures to be taken as necessary, including adjustments to marketing and other variable and capital spend, will enable the Company to meet its obligations as they become due within one year. The condensed consolidated financial statements do not reflect any adjustments relating to the outcome of this uncertainty.
27
Key Operating and Financial Metrics
We collect and analyze operating and financial data to assess the performance of our business and optimize resource allocation. The following table sets forth our key performance indicators for the periods presented.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 1, | October 2, | October 1, | October 2, | |||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||
(in thousands , except percentages and Average Order Value) | ||||||||||||||||
Gross Margin |
| 40.3 | % |
|
| 42.1 | % |
| 42.4 | % |
| 45.2 | % |
| ||
Net income (loss) | $ | (3,889) | $ | 929 | $ | (12,104) | $ | 8,971 | ||||||||
Adjusted EBITDA (1) | $ | 972 | $ | 5,364 | $ | 5,207 | $ | 30,068 | ||||||||
Adjusted EBITDA Margin (1) |
| 1.2 | % |
| 5.1 | % |
| 1.9 | % |
| 8.6 | % | ||||
Active Customers |
| 2,960 |
| 3,230 |
| 2,960 |
| 3,230 |
| |||||||
Average Order Value | $ | 133 | $ | 133 | $ | 133 | $ | 131 | ||||||||
(1) | For a reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measure and why we consider them useful, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures.” |
Active Customers
We define Active Customers as the number of customers who have made at least one purchase across our platform in the prior 12-month period. Active Customer count is as of the last day of the relevant period. We consider the number of Active Customers to be a key performance metric on the basis that it is directly related to consumer awareness of our brand, our ability to attract visitors to our primarily digital platform, and our ability to convert visitors to paying customers. Active Customers counts are based on de-duplication logic using customer account and guest checkout name, address, and email information.
Average Order Value
We define Average Order Value (“AOV”) as the sum of the total gross sales before returns across our platform in a given period, plus shipping revenue, less discounts and markdowns, divided by the Total Orders Placed (as defined below) in that period. AOV reflects average basket size of our customers. AOV may fluctuate as we continue investing in the development and introduction of new Lulus merchandise and as a result of our promotional discount activity.
Total Orders Placed
We define Total Orders Placed as the number of customer orders placed across our platform during a particular period. An order is counted on the day the customer places the order. We do not adjust the number of Total Orders Placed for any cancellation or return that may have occurred subsequent to a customer placing an order. We consider Total Orders Placed as a key performance metric on the basis that it is directly related to our ability to attract and retain customers as well as drive purchase frequency. Total Orders Placed, together with AOV, is an indicator of the net revenue we expect to generate in a particular period.
Gross Margin
We define Gross Margin as gross profit as a percentage of our net revenue. Gross profit is equal to our net revenue less cost of revenue. Certain of our competitors and other retailers may report cost of revenue differently than we do. As a result, the reporting of our gross profit and Gross Margin may not be comparable to other companies.
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Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles in the U.S. (“GAAP”). However, management believes that certain non-GAAP financial measures provide investors with additional useful information in evaluating our performance and that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income (loss) provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. These non-GAAP financial measures may be different than similarly titled measures used by other companies.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is a non-GAAP financial measure that we calculate as income (loss) before interest expense, income taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and management fees. Adjusted EBITDA is a key measure used by management to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital.
To supplement our condensed consolidated financial statements which are prepared in accordance with GAAP, we use “Adjusted EBITDA” and “Adjusted EBITDA Margin” which are non-GAAP financial measures (collectively referred to as “Adjusted EBITDA”). Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include:
| ● | Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
| ● | Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| ● | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; |
| ● | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and |
| ● | other companies in our industry may calculate such measures differently than we do, limiting their usefulness as comparative measures. |
Due to these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using these non-GAAP measures only supplementally. As noted in the table below, Adjusted EBITDA includes adjustments to exclude the impact of depreciation and amortization, interest expense, income taxes, and equity-based compensation expense. It is reasonable to expect that some of these items will occur in future periods. However, we believe these adjustments are appropriate because the amounts recognized can vary significantly from period to period, do not directly relate to the ongoing operations of our business and may complicate comparisons of our internal results of operations and results of operations of other companies over time. In addition, Adjusted EBITDA includes adjustments for other items that we do not expect to regularly record. Each of the normal recurring adjustments and other adjustments described in this paragraph and in the following reconciliation table help management with a measure of our core operating performance over time by removing items that are not related to day-to-day operations. Adjusted EBITDA Margin is a non-GAAP financial measure that we calculate as Adjusted EBITDA as a percentage of our net revenue.
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The following table provides a reconciliation for Adjusted EBITDA and Adjusted EBITDA Margin:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||
October 1, | October 2, | October 1, | October 2, | ||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||
(in thousands) | (in thousands) | ||||||||||||||||
Net income (loss) |
| $ | (3,889) | $ | 929 |
| $ | (12,104) | $ | 8,971 |
| ||||||
Depreciation and amortization |
| 1,240 |
| 1,130 |
| 3,546 |
| 2,980 | |||||||||
Interest expense |
| 442 |
| 329 |
| 1,391 |
| 694 | |||||||||
Income tax provision (benefit) |
| (1,158) |
| (678) |
| (992) |
| 5,178 | |||||||||
Equity-based compensation expense (1) |
| 4,337 |
| 3,654 |
| 13,366 |
| 12,245 | |||||||||
Adjusted EBITDA | $ | 972 | $ | 5,364 | $ | 5,207 | $ | 30,068 | |||||||||
Net income (loss) margin | (4.7) | % | 0.9 | % | (4.3) | % | 2.6 | % | |||||||||
Adjusted EBITDA margin |
| 1.2 | % |
| 5.1 | % |
| 1.9 | % |
| 8.6 | % | |||||
(1) | The thirteen weeks ended October 1, 2023 and October 2, 2022 include equity-based compensation expense for RSU awards granted during the period, as well as equity-based awards granted in prior periods. The thirty-nine weeks ended October 1, 2023 include equity-based compensation expense for performance stock units and RSU awards granted during the period, accelerated expense associated with the voluntary forfeiture of stock options, and equity-based awards granted in prior periods. The thirty-nine weeks ended October 2, 2022 include equity-based compensation expense for RSU awards granted during the period, as well as equity-based awards granted in prior periods. |
Free Cash Flow
Free Cash Flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less cash used for capitalized software development costs and purchases of property and equipment. We view Free Cash Flow as an important indicator of our liquidity because it measures the amount of cash we generate.
A reconciliation to non-GAAP Free Cash Flow from net cash provided by operating activities for the thirteen and thirty-nine weeks ended October 1, 2023 and October 2, 2022 is as follows:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | |||||||||
Net cash provided by operating activities | $ | 12,749 | $ | 5,745 | $ | 21,100 | $ | 16,333 | ||||
Capitalized software development costs | (524) | (622) | (1,550) | (1,869) | ||||||||
Purchases of property and equipment | (667) | (508) | (1,393) | (1,902) | ||||||||
Free Cash Flow | $ | 11,558 | $ | 4,615 | $ | 18,157 | $ | 12,562 | ||||
Factors Affecting Our Performance
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors that present significant opportunities for us but also pose risks and challenges, including what is discussed below. See Part I, “Item 1A. Risk Factors” in our 2022 10-K.
Customer Acquisition
Our business performance depends in part on our continued ability to cost-effectively acquire new customers. We define customer acquisition cost as our brand and performance marketing expenses attributable to acquiring new customers, including, but not limited to, agency costs and marketing team costs but excluding any applicable equity-based compensation, divided by the number of customers who placed their first order with us in a given period. As a primarily digital brand, our marketing strategy is primarily focused on brand awareness marketing and digital advertising in channels
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like search, social, and programmatic - platforms that enable us to engage our customers where they spend their time, and in many cases also quickly track the success of our marketing, which allows us to adjust and optimize our marketing spend.
Customer Retention
Our continued success depends in part on our ability to retain and drive repeat purchases from our existing customers. We monitor retention across our entire customer base. Our goal is to attract and convert visitors into Active Customers and foster relationships that drive repeat purchases. During the trailing 12 months ended October 1, 2023, we served 3.0 million Active Customers compared to 3.2 million for the trailing 12 months ended October 2, 2022.
Inventory Management
We utilize a data-driven strategy that leverages our proprietary reorder algorithm to manage inventory as efficiently as possible. Our “test, learn, and reorder” approach consists of limited inventory purchases followed by the analysis of proprietary data including real-time transaction data and customer feedback, which then informs our selection and customization of popular merchandise prior to reordering in larger quantities. While our initial orders are limited in size and financial risk and our supplier partners are highly responsive, we nonetheless purchase inventory in anticipation of future demand and therefore are exposed to potential shifts in customer preferences and price sensitivity over time. As we continue to grow, we will adjust our inventory purchases to align with the current needs of the business.
Investment in Our Operations and Infrastructure
We will continue to invest in our operations and infrastructure to facilitate further growth of our business. While we expect our expenses to increase accordingly, we will harness the strength of our existing platform and our on-trend fashion expertise to make informed investment decisions. We intend to invest in headcount, inventory, fulfillment, logistics, and our software and data capabilities in order to improve our platform, expand into international markets, and drive operational efficiencies. We cannot guarantee that increased spending on these investments will be cost effective or result in future growth in our customer base. However, we set a high bar for approval of any capital spending initiative. We believe that our disciplined approach to capital spending will enable us to generate positive returns on our investments over the long term.
Components of Our Results of Operations
Net Revenue
Net revenue consists primarily of gross sales, net of merchandise returns, international duties and taxes and promotional discounts and markdowns, generated from the sale of apparel, footwear, and accessories. Net revenue excludes sales taxes assessed by governmental authorities. We recognize net revenue at the point in time when control of the ordered product is transferred to the customer, which we determine to have occurred upon shipment.
Cost of Revenue and Gross Margin
Cost of revenue consists of the product costs of merchandise sold to customers; shipping and handling costs, including all inbound, outbound, and return shipping expenses; rent, insurance, business property tax, utilities, depreciation and amortization, and repairs and maintenance related to our distribution facilities; and charges related to inventory shrinkage, damages, and our allowance for excess or obsolete inventory. Cost of revenue is primarily driven by growth in orders placed by customers, the mix of the product available for sale on our site, and transportation costs related to inventory receipts from our suppliers and shipping product to our customers. We expect our cost of revenue to fluctuate as a percentage of net revenue primarily due to how we manage our inventory and merchandise mix.
Gross profit is equal to our net revenue less cost of revenue. We calculate Gross Margin as gross profit as a percentage of our net revenue.
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Selling and Marketing Expenses
Our selling and marketing expenses consist primarily of payment processing fees, advertising, targeted online performance marketing and customer order courtesy adjustments. Selling and marketing expenses also include our spend on brand marketing channels, including compensation and gifted products to social media influencers, events, and other forms of online and offline marketing related to growing and retaining the customer base. As discussed in “Net Revenue” above, in any given period, the amount of our selling and marketing expense can be affected by the use of promotional discounts in such period. We expect our selling and marketing expenses to increase in absolute dollars as we continue to invest in increasing brand awareness.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and benefits costs, including equity-based compensation for our employees involved in general corporate functions including finance, merchandising, marketing, and technology, as well as costs associated with the use by these functions of facilities and equipment, including depreciation, rent, and other occupancy expenses. General and administrative expenses are primarily driven by increases in headcount required to support business growth and meet our obligations as a public company.
Since our IPO, we have incurred significant legal, accounting, and other expenses that we did not incur as a private company. We expect that compliance with the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, will continue to increase our legal and financial compliance costs and will make some activities more time consuming and costly. We expect our general and administrative expenses to increase in absolute dollars as we continue to grow our business.
Other Income (Expense), Net
Other income (expense), net consists primarily of interest expense and other miscellaneous income.
Provision (Benefit) for Income Taxes
The provision (benefit) for income taxes represents federal, state, and local income taxes. The effective rate differs from the statutory rate primarily due to state taxes, non-deductible executive compensation, and non-deductible equity-based compensation expenses. Our effective tax rate will change from quarter to quarter based on recurring and nonrecurring factors including, but not limited to, the geographical mix of earnings, enacted tax legislation, state and local income taxes, the impact of permanent tax adjustments, tax audit settlements, and the interaction of various tax strategies.
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Our Results of Operations
The following tables set forth our consolidated results of operations for the periods presented and as a percentage of net revenue and net income (loss):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
October 1, | October 2, | October 1, | October 2, | |||||||||
2023 | 2022 | 2023 | 2022 | |||||||||
(in thousands) | ||||||||||||
Net revenue |
| $ | 83,118 | $ | 105,275 |
| $ | 280,216 | $ | 348,689 | ||
Cost of revenue |
| 49,593 |
| 60,942 |
| 161,334 |
| 191,211 | ||||
Gross profit |
| 33,525 |
| 44,333 |
| 118,882 |
| 157,478 | ||||
Selling and marketing expenses |
| 16,825 |
| 19,356 |
| 60,984 |
| 67,093 | ||||
General and administrative expenses |
| 21,575 |
| 24,418 |
| 70,319 |
| 75,644 | ||||
Income (loss) from operations |
| (4,875) |
| 559 |
| (12,421) |
| 14,741 | ||||
Interest expense |
| (442) |
| (329) |
| (1,391) |
| (694) | ||||
Other income, net |
| 270 |
| 21 |
| 716 |
| 102 | ||||
Income (loss) before income taxes |
| (5,047) |
| 251 |
| (13,096) |
| 14,149 | ||||
Income tax provision (benefit) |
| (1,158) |
| (678) |
| (992) |
| 5,178 | ||||
Net income (loss) | $ | (3,889) | $ | 929 | $ | (12,104) | $ | 8,971 | ||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||
October 1, | October 2, | October 1, | October 2, | ||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||
Net revenue |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
|
Cost of revenue | 60 |
| 58 |
| 58 |
| 55 |
| |||||
Gross profit | 40 | 42 | 42 | 45 | |||||||||
Selling and marketing expenses | 20 | 18 | 21 | 19 | |||||||||
General and administrative expenses | 26 | 23 | 25 | 22 | |||||||||
Income (loss) from operations | (6) | 1 | (4) | 4 | |||||||||
Interest expense | — | — | — | — | |||||||||
Other income, net | — | — | — | — | |||||||||
Income (loss) before income taxes | (6) | 1 | (4) | 4 | |||||||||
Income tax provision (benefit) | (1) | (1) | - | 1 | |||||||||
Net income (loss) | (5) | % | 2 | % | (4) | % | 3 | % | |||||
Comparisons for the Thirteen Weeks Ended October 1, 2023 and October 2, 2022
Net Revenue
Net revenue decreased in the thirteen weeks ended October 1, 2023 by $22.2 million, or 21%, compared to the thirteen weeks ended October 2, 2022. The decrease is primarily the result of a 19% decrease in Total Orders Placed, as well as higher markdowns and return rates compared to the thirteen weeks ended October 2, 2022.
Cost of Revenue
Cost of revenue decreased in the thirteen weeks ended October 1, 2023 compared to the same period of the prior year by $11.3 million, or 19%, compared to the same period last year, which was primarily driven by the impact of lower revenue along with favorability in shipping costs, which decreased with the lower revenue.
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Selling and Marketing Expenses
Selling and marketing expenses decreased in the thirteen weeks ended October 1, 2023 by $2.5 million, or 13%, compared to the thirteen weeks ended October 2, 2022 due to lower performance marketing spend and favorability in merchant processing fees, partially offset by higher brand marketing spend as we invested more to increase brand awareness.
General and Administrative Expenses
General and administrative expenses decreased by $2.8 million in the thirteen weeks ended October 1, 2023, or 12%, compared to the thirteen weeks ended October 2, 2022. The decrease was primarily due to $0.8 million decrease in fixed labor, due to delayed hiring of fixed headcount, $1.8 million decrease in variable labor and benefits associated with lower sales volume and operational efficiencies, $0.7 million decrease in D&O insurance costs, professional services and supplies. This was partially offset by $0.7 million related to equity-based awards issued through October 1, 2023.
Interest Expense
Interest expense increased in the thirteen weeks ended October 1, 2023 by $0.1 million, or 34%, compared to the thirteen weeks ended October 2, 2022. The increase is attributable to higher interest rates driving increased interest expense and unused fees related to the Revolving Facility offset by lower average borrowings.
Income Tax Benefit
Our income tax benefit in the thirteen weeks ended October 1, 2023 increased by $0.5 million to a benefit of $1.2 million, compared to a benefit of $0.7 million in the thirteen weeks ended October 2, 2022. The decrease was primarily due to a decrease in our income to a loss before benefit for income taxes.
Comparisons for the Thirty-nine Weeks Ended October 1, 2023 and October 2, 2022
Net Revenue
Net revenue decreased in the thirty-nine weeks ended October 1, 2023 by $68.5 million, or 20%, compared to the thirty-nine weeks ended October 2, 2022. The decrease is primarily the result of a 17% decrease in Total Orders Placed, and higher markdowns and return rates, partially offset by a 2% increase in AOV compared to the thirty-nine weeks ended October 2, 2022.
Cost of Revenue
Cost of revenue decreased in the thirty-nine weeks ended October 1, 2023 compared to the thirty-nine weeks ended October 2, 2022 by $29.9 million, or 16%, which was primarily driven by the impact of lower revenue along with favorability in shipping costs, which decreased with the lower revenue.
Selling and Marketing Expenses
Selling and marketing expenses decreased in the thirty-nine weeks ended October 1, 2023 by $6.1 million, or 9%, compared to the thirty-nine weeks ended October 2, 2022 due to lower performance marketing costs as we utilized a higher mix of promotions and discounts as well as lower merchant processing fees. This was partially offset by higher brand marketing spend through the thirty-nine weeks ended October 1,2023 as we invested more in brand awareness.
General and Administrative Expenses
General and administrative expenses decreased by $5.3 million in the thirty-nine weeks ended October 1, 2023, or 7%, compared to the thirty-nine weeks ended October 2, 2022. The decrease was primarily due to a $5.1 million lower variable labor and benefits costs primarily associated with lower sales volume and operational efficiencies, which was
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partially offset by higher equity-based compensation expense of $1.1 million related to equity-based awards issued through October 1, 2023. Additionally, there was a $1.5 million decrease in D&O insurance costs, professional services, supplies and recruiting costs.
Interest Expense
Interest expense increased in the thirty-nine weeks ended October 1, 2023 by $0.7 million, or 100%, compared to the thirty-nine weeks ended October 2, 2022. The increase is attributable to higher interest rates and higher average borrowings driving increased interest expense and unused fees related to the Revolving Facility.
Income Tax Provision (Benefit)
Our income tax benefit in the thirty-nine weeks ended October 1, 2023 increased by $6.2 million to a benefit of $1.0 million, compared to a provision of $5.2 million in the thirty-nine weeks ended October 2, 2022. The decrease was primarily due to a decrease in our income to a loss before provision for income taxes.
Quarterly Trends and Seasonality
We experience moderate seasonal fluctuations in aggregate sales volume during the year. Seasonality in our business does not follow that of traditional retailers, such as a typical concentration of revenue in the holiday quarter. Our quarterly net revenue in 2022 reflected the highest concentrations in the first and second fiscal quarters compared to the rest of the year, as customer demand remained strong for dresses and event wear, carrying forward the trend seen in 2021 with the resurgence of events and special occasions. The third and fourth fiscal quarters of 2022 were impacted by a worsened macroeconomic environment where consumers generally lowered their spending levels and sought higher levels of promotions and discounts which has continued into the first nine months of 2023. The seasonality of our business has resulted in variability in our total net revenue quarter-to-quarter. We believe that this seasonality has affected and will continue to affect our results of operations.
Our quarterly gross profit fluctuates primarily based on how we manage our inventory and merchandise mix and has typically been in line with fluctuations in net revenue. When quarterly gross profit fluctuations have been unfavorable relative to the fluctuations in sales, these situations have been driven by non-recurring, external factors, such as the COVID-19 pandemic and the ensuing macroeconomic slowdown that begun in mid-2022, which led to increased promotional discounts and higher markdowns in order to optimize our inventory mix and quantities. Additionally, gross profit has recently been impacted by decreases in discretionary consumer spending as a result of inflation and macroeconomic conditions, increased promotions and discounts in response to decreases in consumer spending, and trends observed regarding the levels of returns.
Selling and marketing expenses generally fluctuate with net revenue. Further, in any given period, the amount of our selling and marketing expense can be affected by the use of promotional discounts in such period. In addition, we may increase or decrease marketing spend to assist with optimizing inventory mix and quantities.
General and administrative expenses consist primarily of payroll and benefit costs and vary quarter to quarter due to changes in the number of seasonal workers to meet demand based on our seasonality.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash generated from operating activities and borrowings under our Revolving Facility. Our primary requirements for liquidity and capital are inventory purchases, payroll and general operating expenses, capital expenditures associated with distribution, network expansion and capitalized software and debt service requirements.
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Credit Facilities
During November 2021, we entered into a Credit Agreement with Bank of America (the "Credit Agreement") to provide a revolving facility that provides for borrowings up to $50.0 million (the "Revolving Facility"). During the term of the Credit Agreement, we may increase the aggregate amount of the Revolving Facility up to an additional $25.0 million (for maximum aggregate lender commitments of up to $75.0 million), subject to the satisfaction of certain conditions under the Credit Agreement, including obtaining the consent of the administrative agent and an increased commitment from existing or new lenders. In addition, the Credit Agreement may be used to issue letters of credit up to $7.5 million (the “Letter of Credit”). As of October 1, 2023, we had $11.0 million outstanding under the Revolving Facility and had utilized $0.3 million under the Letter of Credit. As of October 1, 2023, we had $38.7 million available for borrowing under the Revolving Facility and $7.2 million available to issue letters of credit.
The Revolving Facility matures on November 15, 2024, and borrowings thereunder will accrue interest at a rate equal to, at our option, either (x) the term daily SOFR, plus the applicable SOFR adjustment plus a margin of 1.75% per annum or (y) the base rate plus a margin of 0.75% (with the base rate being the highest of the federal funds rate plus 0.50%, the prime rate and term SOFR for a period of one month plus 1.00%). The Revolving Facility contains a financial maintenance covenant requiring a maximum total leverage ratio of no more than 2.50:1.00, stepping down to 2.00:1.00 after 18 months. We were in compliance with our debt covenants under the Credit Agreement as of October 1, 2023. While we expect to continue to be in compliance with our debt covenants, any failure to remain in compliance with our debt covenants may materially adversely affect our liquidity. A commitment fee of 37.5 basis points will be assessed on unused commitments under the Revolving Facility.
Availability and Use of Cash
As of October 1, 2023, we had cash and cash equivalents of $12.9 million. We believe that our cash and cash equivalents, cash flows from operations and the available borrowings under our Revolving Facility, will be sufficient to meet our capital expenditures, working capital needs and debt repayments for at least the next 12 months from the date of this Quarterly Report on Form 10-Q. However, we cannot ensure that our business will generate sufficient cash flow from operating activities or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other working capital needs. Actual results of operations will depend on numerous factors, many of which are beyond our control, as further discussed in Part I, Item 1A, “Risk Factors” included in our 2022 10-K.
Cash Flow Analysis
The following table summarizes our cash flows for the periods indicated:
| Thirty-Nine Weeks Ended | ||||||
October 1, | October 2, | ||||||
2023 |
| 2022 | |||||
(in thousands) | |||||||
Net cash provided by (used in): | |||||||
Operating activities | $ | 21,100 | $ | 16,333 | |||
Investing activities | (3,009) | (3,868) | |||||
Financing activities | (15,444) | (11,401) | |||||
Net decrease in cash, cash equivalents and restricted cash | $ | 2,647 | $ | 1,064 | |||
Operating Activities
Net cash provided by operating activities consists primarily of net income (loss) adjusted for certain non-cash items, including depreciation, amortization, equity-based compensation, the effect of changes in working capital and other activities.
During the thirty-nine weeks ended October 1, 2023, net cash provided by operating activities increased by $4.8 million, as compared to the same period in 2022. The increase was largely a result of a decrease of $28.9 million in
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inventory purchases as a result of lower sales in the current year due to the impact of increased macroeconomic pressures, along with an increase of $1.4 million in accounts payable. This was partially offset by a $21.1 million decrease in net income, from net income of $9.0 million during the thirty-nine weeks ended October 2, 2022 to net loss of $12.1 million during the thirty-nine weeks ended October 1, 2023. There was also a $7.9 million reduction in accrued expenses and other current liabilities, mainly related to a $2.1 million decrease in accrued inventory due to lower inventory purchases, a $1.9 million decrease in accrued compensation and benefits due to reductions in medical insurance reserves, accrued bonuses and deferred withholding taxes related to the CARES Act. In addition, there was a $1.7 million reduction in accrued marketing due to reduced performance marketing spend as we utilized a higher mix of promotions and discounts.
Investing Activities
Our primary investing activities have consisted of purchases of equipment to support our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure. Purchases of property and equipment may vary from period-to-period due to timing of the expansion of our operations. We have no material commitments for capital expenditures.
During the thirty-nine weeks ended October 1, 2023, as compared to the same period in 2022, net cash used in investing activities decreased by $0.9 million. This was attributable to $0.3 million less invested in capitalized software development costs and $0.6 million lower capital expenditures for leasehold improvements, construction in progress, and purchases of computer hardware and equipment for our general operations.
Financing Activities
During the thirty-nine weeks ended October 1, 2023, as compared to the same period in 2022, net cash used in financing activities increased by $4.0 million primarily due to $10.0 million lower borrowings on our revolving line of credit facility in the current year as compared to the same period in 2022 offset by $6 million lower repayments on our revolving line of credit facility in the current year as compared to the same period in 2022.
Contractual Obligations and Commitments
There have been no other material changes to our contractual obligations and commitments as disclosed in our 2022 10-K.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our 2022 10-K and the notes to the audited consolidated financial statements appearing elsewhere in our 2022 10-K. There have been no significant changes to our critical accounting policies and estimates as disclosed in our 2022 10-K.
Recent Accounting Pronouncements
See Note 2, “Significant Accounting Policies-Recently Issued Accounting Pronouncements,” in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial position and our results of operations.
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JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period until we are no longer an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period. Accordingly, our consolidated financial statements and our unaudited interim condensed consolidated financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in our exposure to market risk from that discussed in our 2022 10-K.
Item 4. Controls and Procedures.
Limitations on effectiveness of controls and procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 1, 2023, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended October 1, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We are from time to time subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, privacy claims, contractual and commercial disputes and other matters that arise in the ordinary course of our business. While the outcome of these and other claims cannot be predicted with certainty, we do not believe that the outcome of these matters will have a material adverse effect on our business, financial condition, cash flows, or results of operations. We are not presently a party to any legal proceedings that we believe would, if determined adversely to us, materially and adversely affect our future business, financial condition, cash flows, or results of operations.
Item 1A. Risk Factors.
For detailed information about certain risk factors that could materially affect our business, financial condition or future results see “Risk Factors” in Part I, Item 1A of our 2022 10-K. There have been no material changes to the risk factors previously disclosed in our 2022 10-K.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Amendment to the Company's Non-Employee Director Compensation Program
On November 3, 2023 the Board of Directors of the Company (the "Board") approved an amendment to the Company's Non-Employee Director Compensation Program to increase the amount of compensation paid to the Nominating and Corporate Governance Committee chair and to incorporate compensation for the members and chair of the Company's new Technology and Innovation Committee. Some additional changes were made to clarify the timing of payment of the quarterly cash retainers and RSU awards in lieu of quarterly cash retainers.
The full text of the Non-Employee Director Compensation Program is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and incorporated hereto by reference.
Establishment of the Technology and Innovation Committee
On November 3, 2023, the Board authorized and established the Technology and Innovation Committee, effective January 1, 2024, to oversee cybersecurity risks with the Audit Committee. The Board appointed Anisa Kumar to serve as Chair of the Technology and Innovation Committee, and Dara Bazzano, Caroline Sheu and Kira Yugay to serve as committee members.
Securities Trading Plans of Directors and Executive Officers
During the thirteen weeks ended October 1, 2023, none of the Company’s directors or officers
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Item 6. Exhibits.
Incorporated by Reference | Filed/ | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Furnished Herewith | ||||||
10.1 | Amendment to Lulu's Fashion Lounge Holdings, Inc. Non-Employee Director Compensation Program. | * | ||||||||||
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a). | * | ||||||||||
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a). | * | ||||||||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. | ** | ||||||||||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. | ** | ||||||||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document | * | ||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | * | ||||||||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | * | ||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||
104 | Cover Page Interactive Data File (as formatted as Inline XBRL and contained in Exhibit 101) | * | ||||||||||
*Filed herewith.
**Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| LULU’S FASHION LOUNGE HOLDINGS, INC. | |
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Date: November 8, 2023 |
| By: | /s/ Crystal Landsem |
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| Crystal Landsem |
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| Chief Executive Officer |
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| (Principal Executive Officer) |
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Date: November 8, 2023 |
| By: | /s/ Tiffany R. Smith |
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| Tiffany R. Smith |
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| Chief Financial Officer |
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| (Principal Financial and Accounting Officer) |
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