Good afternoon, and welcome to Lulu's Fourth Quarter and Fiscal Year 2023 earnings conference call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary, Naomi Beckman-Straus. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss Lulu's fourth quarter and fiscal year 2023 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including, but not limited to statements regarding management's expectations, plans, strategies, goals and objectives and their implementation, our expectations around the continued impact on our business of the macroeconomic environment, consumer demand and return rates, our future expectations regarding financial results, references to fiscal year ending December 31, 2024, including our financial outlook for full-year 2024, market opportunities, product launches and other initiatives and our growth. These statements, which are subject to various risks, uncertainties, assumptions and other important factors could cause our actual results, performance or achievements to differ materially from results, performance, or achievements expressed or implied by these statements. These risks, uncertainties and assumptions are detailed in this afternoon's press release as well as in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with SEC this afternoon, all of which can be found on our website at investors.lulus.com. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net cash, debt, and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO, Crystal Landsem; our CFO, Tiffany Smith; and our President and CIO, Mark Vos. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Looking back at 2023, I'm proud of the strides we made to adjust our business quickly to a highly dynamic consumer and macroeconomic landscape. The initiatives we have implemented in recent quarters and the early progress we've made against them to reinforce our position as one of the most beloved women's brands for attainable luxury fashion through curated exclusive products, superior customer service, and a personalized shopping experience, supporting our customers through all of life's moments. In 2023, our primary focus was on the following: rebalancing inventory assortment between newness, novelty and core reorder product; improving internal processes through optimization and automation leading to reduced operational expenses; establishing a foundation for accelerating brand awareness through new marketing initiatives and product distribution channels; and maintaining a cash flow positive year while not sacrificing on investments in strategic initiatives that support future growth, combined with revolver balance reductions to further position the Company for success. We believe we've executed well on all of our key focus areas in 2023, positioning us for strong growth and profitability, once inflationary pressures abate and consumer spending normalizes. Our strategy has been and continues to be focused on customers who seek out quality over quantity and enduring styles that last beyond a moment in time, allowing us to optimize inventory without the same obsolescence risk that other retailers face. Additionally, traction with broader price ranges, including higher priced items in our legacy categories throughout Q4 reinforces this. As reflected in our Q4 gross margin expansion of 180 basis points combined with an 18% year-over-year reduction of inventory balances. As a business focused on enduring quality versus relying on predicting trends, it can take a few quarters to adapt to more meaningful trend changes. As a result, while we expect to continue rebuilding our assortment in 2024, we believe we will benefit from early assortment updates during the year. We have already seen encouraging sequential upward revenue momentum building at the end of 2023 with further improvements into the first two months of 2024. I'll now briefly touch on our fourth quarter results before discussing the full year in more detail, followed by our 2024 priorities. Our Q4 results were consistent with seasonal trends for Lulu's, which is typically our smallest quarter in terms of both sales and profits. Our special occasions segment continued to be a steadfast driver of sales, constituting a large component of our diversified product mix. We saw positive performance in our new and reorder dresses with notable success in special fabrications and new holiday silhouettes. Occasion dresses have continued to outperform other categories with particularly strong demand for new and novelty dresses and is historically a leading indicator of future growth momentum. With shoppers craving more out-of-home experiences, the December opening of our first retail location in decades is a start towards bridging the gap between online and in-real-life. Our Melrose Avenue location in Los Angeles underscores our presence among premium retailers and helps to position us as a quality-first attainable luxury brand. To that end, in the latter half of January, we opened our first-ever bridal boutique within the Lulu's on Melrose location, rounding out a full end-to-end shopping experience. Positive customer response to the bridal-store launch instilled confidence in the brand activation potential for 2024. Furthermore, Lulu's Melrose has affirmed the opportunity for new customer engagement and marketing strategies with potential to drive interesting new growth prospects. We will continue to take a disciplined and calculated approach to physical retail, applying our test, learn and optimize philosophy to the Lulu's on Melrose store to seamlessly integrate our direct-to-consumer customer experience across all sales channels and optimize how we apply our industry-leading inventory turns in a physical space. The Melrose store opening has also been a great catalyst for momentum in our potential wholesale partnership opportunities. Major retailers, both international as well as domestic, have proactively expressed interest in carrying Lulu's products in store and online. We expect interest to lead to long-term growth opportunities, brand awareness and broader customer reach via these omnichannel opportunities. Next are a few of the areas where we saw positive momentum throughout 2023. We saw strong customer demand for our new and novelty products, resulting in positive double-digit year-over-year growth in our post-return second half merchandise sales for new products, a leading indicator for our future reorder product funnel. As a reminder, our reorder products have consistently contributed over 70% of our net revenue in recent years. We're actively rebalancing our product offerings, new and reorder alike, to restore revenue allocation across new and reorder to pre-pandemic levels and align with evolving yet enduring customer trend changes. Year-end inventory balance was down 18% over year-end fiscal 2022, down $7.7 million, underscoring the agility of our data-driven business model and enduring quality of our reorder products. We believe our 5x inventory turns for the year continue to be industry-leading, reflecting how our strategic and informed approach to product selection is aligned with market demand. As we enter 2024, our overall inventory position is notably healthier and back into chase mode for several of our dress product categories. Continued investments in process automation and robotics contributed to a 15% decrease in variable payroll expenses on a volume-adjusted basis compared to fiscal 2022. Our business continued to generate liquidity and our balance sheet remains strong, enabling us to maintain our investments in strategic initiatives and positioning us for a return to growth. Free cash flow for the year was $11.5 million, an improvement of $10.3 million over fiscal 2022. We successfully implemented technology to better scale both international and wholesale growth, as well as opened our first physical retail store to serve as a testing ground for potential future retail opportunities. The progress we've made on our initiatives over the fourth quarter and full year supported by the strategic addition of talent to our team are starting to show positive signs as we enter 2024. A few things worth noting on trends we saw in 2023 and into the first quarter. New product introductions continue to perform well, supporting our strategy to increase newness and novelty penetration back to pre-pandemic levels in preparation for retiring aging reorder products sooner and beginning to capitalize on the changing fashion cycles within our customers' closets. We are concurrently focused on diversifying product assortment and conversion in our smaller and more under-penetrated categories. With this in mind, in January, we welcomed industry veteran Laura Deady as our new Chief Merchandising Officer and under her stewardship, we anticipate enhancing the performance of all product categories and accelerations in rebuilding newness in our reordering product funnel. On the wholesale partnership front, we're continuing to lay the groundwork for these relationships as a way to deepen our connections with existing customers and introduce our brand to new audiences in an omnichannel setting, ultimately enhancing our online presence. We are being opportunistic about brand-enhancing wholesale partnerships to profitably boost awareness and in-person product experiences, while also leveraging existing infrastructure to maximize cost efficiency and build synergy between digital and physical channels. Wholesale partnerships are typically on a longer lead time calendar and booking much further out in the year than Lulu's e-commerce buying calendar. We believe that much of the progress we've made so far will positively impact future quarters into 2024 and beyond. We look forward to sharing more on our progress throughout the year. Now turning to 2024 recent macro trends and our priorities for the year. As we position for the year ahead, a few industry trends come into focus. Firstly, for direct-to-consumer brands like Lulu's, a digital presence extends beyond direct sales and also captures added benefits of improved margins and broader brand value. As a brand that has spent over 25 years supporting women during pivotal moments in their lives, we believe Lulu's has a competitive edge over fast fashion retailers over the long-term who are less loyalty-driven and have more transactional relationships with customers. Secondly, the volume of engagements and special events in 2024 are increasing as is the average cost of weddings. Special occasion and bridal categories continue to be areas of opportunity for Lulu's. As events become more prevalent and consumers become more discerning about their spending, Lulu's has an opportunity to take market share within this environment. Lastly, there is heightened industry-wide emphasis on more effectively managing return rates, a focus that aligns with our ongoing strategic initiatives, which Mark will dive into more in his prepared remarks. In 2024, we remain focused on closely managing costs and driving efficiencies across our operations to extend our momentum. We are seeing early traction with our optimizations and new customer engagement initiatives that we believe will benefit our brand long-term. This year, our primary focus will be on continued product assortment optimization, including initiatives that support margin expansion, product category diversification, geographical diversification and product sourcing to further reduce potential impacts of external factors related to geopolitical and other uncertainties that could impact our supply chain and returning rate stabilization through product set optimizations and financial impact mitigation tactics. Continued investments in brand initiatives and activations that support customer acquisition and retention as well as reinforcing brand differentiation; and lastly, further technology enablement that supports customer engagement and customer experience across multiple channels. As the year progresses, we expect to stay laser-focused on adapting to the dynamic market changes, building the Lulu's brand, driving cost efficiencies to meet our near-term targets and positioning ourselves for a return to positive growth. I'm confident in our 2024 initiatives and I'm further bolstered by our talented and experienced team, which has adeptly navigated the ebbs and flows of our business for the past several years. With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. He will share an update on customer engagement and a deeper dive into our 2024 priorities.

Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. Although our active customer accounts experienced a decline year-over-year, we are optimistic about our positive quarter-over-quarter last twelve months repeat customer counts, signaling improved customer stickiness. Additionally, in Q4, we saw year-over-year increases in units per transaction and average unit retail, together driving a higher average order value coupled with increased merchandise margins in the quarter. Earlier in 2023, we removed various roadblocks for our international customers. And last quarter, we reported that various countries had shown double-digit growth in unit sales year-over-year. That trend continued in Q4 of 2023, and we believe that we can grow international revenue into a meaningful part of our revenue mix by 2026 by optimizing our current business model of shipping from the United States with selective investments in brand activation. Similarly, on the wholesale side, we see encouraging signals that both department stores and retailers are interested in augmenting their physical retail and online assortment with the Lulu's brand. In 2024, we will continue to make strategic investments in people, process and platforms to further enable this channel and also grow wholesale into a meaningful part of our consolidated revenue mix. As Crystal mentioned, there are three core areas of focus for us in 2024: product assortment optimization. I'd first define our product assortment into casual and sportswear as a key growth strategy in Lulu's long-term plan. We believe deeper penetration in these product categories will fortify the relationship with our customers through increased purchase frequency, improved loyalty incentives and broader customer appeal. Additionally, we are excited about the people investments we have made, including the recent appointment of Chief Merchandising Officer, Laura Deady, as well as investments in tooling and insights to further support product category expansion. Currently, we are actively refining our test, learn and reorder model by incorporating advanced machine learning and predictive AI modeling. This integration combines diverse external data sources with our product and customer data, improving our ability to predict demand, optimize inventory levels and better navigate trend cycles. On previous quarterly calls, we have spoken about our investments in the product costing team, which have resulted in initial product margin improvements to date. We anticipate additional margin expansion in 2024, which is contemplated in our guidance. Additionally, we are consolidating our vendor network to balance our purchasing power per vendor for improved product costs, diversified geographical product sourcing to reduce dependencies on one or more countries of origin and improve consistency in our fabrics and fit. Our goal is to improve on the modest margin expansion in 2024 guidance in 2025 and beyond. Strategic investments will be made to stabilize our return rates and reduce the financial impact of returns to our net contribution margin. On the fit front, we are seeking to reduce fit-related returns by implementing a holistic approach that optimizes the customer shopping experience as well as our bottom line. We have streamlined our product fit collaboration and communication process with major vendors to reduce potential fit discrepancies and design products with enhanced fit tolerance while preserving Lulu's fit expression. Additionally, we have rolled out enhanced fit specifications to our vendors to further increase the fit consistency of Lulu's apparel, and we expect the benefits of these enhancements to begin arriving in Q2 of 2024. We are also excited about potential opportunities to use predictive and generative AI and customer community feedback to improve the fit communication to our customers, as they shop on Lulu's platforms, enabling them to make more informed decisions regarding sizing. We also continue to monitor, evaluate, and enhance our return policy, including the excessive return policy to further reduce abusive return behavior and minimize unprofitable customers.

Thanks, Mark, and good afternoon, everyone. Our net revenue for the fourth quarter was approximately $75 million, down 18% year-over-year, which was in line with our expectations for the quarter. Our fourth quarter adjusted EBITDA loss of $2 million fell short of our Q4 guidance expectation. While we were encouraged to see occasion wear resonate strongly with our customer and comprised a larger part of our sales mix in Q4, we saw higher return rates due to the sales mix shift toward these products with higher return rates, which increased our return-related costs. We also saw a higher concentration of expedited orders, which drove up our outbound shipping costs. Lastly, marketing costs as a percentage of net revenue skewed higher due to the impact of higher return rates, but this was offset by disciplined management of general and administrative expenses. Moving on to the Q4 P&L line comparisons to last year. The 18% decline in net revenue year-over-year was driven by a decrease in total orders of 22%, compared to the prior year, coupled with an increase in return rates that was offset by higher average order values this quarter. As our customers' preferences in Q4 leaned more toward newness and novelty and in particular occasion wear, the resulting product mix and lower final sale ratios drove our overall return rate in the fourth quarter above that of the prior year. However, return rates were lower on a sequential basis in line with typical trends from Q3 to Q4. Gross margin ended the quarter at 39.1%, an increase of 180 basis points compared to the same period last year, driven by higher margin product mix as newness, novelty and our occasion wear continue to resonate very well with our customers. Moving down the P&L, to give some insights into expense line items. Q4 2023 selling and marketing expenses were $15.3 million, down about $1.1 million from Q4 2022 due to lower performance marketing spend and merchant processing fees, partially offset by higher brand awareness investments, including activation spend for the Melrose store opening. As noted, we have increased our investments in more top-of-funnel brand marketing, including our influencer and ambassador programs. General and administrative expenses decreased by about $1.7 million to $21.8 million, a 7% decline compared to Q4 2022. The decrease was primarily driven by a reduction in variable labor costs, driven by the impact of lower sales volume and increased operational efficiencies as well as lower professional services and insurance costs, partly offset by higher stock-based compensation expense, software expenses and costs associated with our newly opened Melrose store. Adjusted EBITDA loss for the fourth quarter was approximately $2 million compared to Q4 2022's adjusted EBITDA loss of $1 million. Our Q4 adjusted EBITDA margin was negative 2.6% compared to negative 1.1% in the same period last year. Interest expense for the quarter was approximately $337,000 compared to $409,000 in Q4 2022. For the quarter, we reported a diluted loss per share of $0.18, which is a decrease of $0.04 compared to a diluted loss per share of $0.14 in the fourth quarter of 2022. Throughout the fourth quarter of 2023, our balance sheet remained resilient, positioning us to execute our long-term growth plans with agility, while adeptly navigating any new or lingering macroeconomic headwinds. Our net cash used in operating activities for the quarter improved by $4.4 million on a year-over-year basis with $5.7 million of net cash used in operating activities in Q4 of 2023 compared to $10.1 million used in Q4 of 2022. Similarly, free cash flow for the quarter improved by $4.7 million on a year-over-year basis. We repaid $17 million of our revolver during 2023 and plan to continue to pay it down. We ended the year with cash of about $2.5 million and total debt position of $8 million, which was the amount drawn on our revolver, resulting in a net debt balance of $5.5 million. Our inventory balance at year end was $35.5 million, down about $7.7 million from the same period last year, bringing our fourth quarter inventory decrease in direct alignment with our sales. As always, our goal is to remain disciplined in our inventory management approach and we strive to enhance efficiency in optimizing inventory levels, balancing markdown risk and prioritizing customer experience. Upholding brand integrity and preserving gross margin levels remain our top priorities as we build upon an already successful buying model.

Thank you, Tiffany. Before we turn it to questions, I want to emphasize our confidence in our ability to return to profitable growth. We firmly believe that our fresh, not fast direct-to-consumer business model, coupled with our adeptness in testing, learning and optimizing within the dynamic retail landscape and a healthy balance sheet positions us well to navigate the near-term stability and trends. Thank you to our brand fans, the LuCrew and shareholders for supporting us in our mission to deliver attainable luxury to our customers, and we look forward to updating you all on our next earnings call. With that, I'll turn it over to questions now.

Thank you. We will now begin the question-and-answer session. Our first question is from Brooke Roach with Goldman Sachs. Please go ahead with your question.

I was hoping you could elaborate on the most important drivers and your confidence in returning the Lulu's brand to growth in 2024. What contribution from new channels such as international, wholesale and physical retail are you expecting within this outlook versus like-for-like growth in the direct online business? And then perhaps for Tiffany, can you help to provide some guardrails on how you're thinking about the cadencing of that revenue growth throughout the year?

Hi, Brooke. Thanks for the question. As it relates to wholesale and international, as we indicated previously, it's just a very small segment of our business and not ready to guide yet. The growth has been positive and we are excited about the momentum; it's still not meaningful to guide on big numbers on small bases. We are though optimistic about the early traction that we're seeing and the product of interest just through these channels and the opportunity to engage and convert with new and existing Lulu's brand fans has been very encouraging. It's significant white space ahead of us, but we're going to be tempering expectations in the near term while these are still small numbers in comparison to our total base. Our guidance is contemplating more of a normalization to our direct-to-consumer business and momentum that we're seeing within the new side that will eventually return the reorder side of the business to grow.

And then, Tiffany, any guardrails that you can provide on how you're thinking about cadencing the revenue throughout the year, perhaps in concert with the comments that you provided on the upward sequential momentum with improvement in the first two months of 2024?

Sure. Yes. Sorry, Brooke. I thought your question was regarding wholesale and international, but just revenue more broadly. I would say, for the guidance that we've put out there, I think I can kind of talk to some of the cadencing that we've seen to date and kind of just give you a sense of how it looks to progress through the balance of this year. One of the things that we saw during Q4 that was particularly encouraging is revenues did start to pace with comps improving each month, particularly in the back half of Q4. We've continued to see top-line transacted revenue, so pre-returns in January and February continuing to improve. On a post-return basis though, we are a little bit more tempered there in our expectations, just because we have seen so much prominence in the mix around special occasion wear, which typically is our higher return rate product. But with that said, we are still seeing improvements in the revenue comps moving from the end of Q4 into the first two months of Q1 of this year. We expect to see the comps steadily improve. As we progress through the year, I would say the comps start to move into more like positive comp territory towards mid to late Q2 and then beyond into Q3 and Q4.

I wanted to ask a bit about the expansion into casual sportswear. Love your thoughts on how big this could be and what the timing might look like, and just kind of what drove you to expand into these categories? Is this something your customer has been asking for? And then on the return rates, how you think about potential for expansion to casual to drive down the return rate percentages since I would assume that's a lower return rate category versus the dress category?

Thanks for the question, Janine. We do absolutely see a lot of opportunity in the casual and sportswear. And what our customer has shown us over time is that it does typically have a lower return rate than our dresses and specifically into our event wear that we're very much known for. So, we're very enthusiastic about the addition of Laura to our team. She comes with a wealth of knowledge in the separate area that I think we've been lacking. And just for guidance and oversight in that area is going to be, I think, an accelerator within those product classes. To that end, what we've seen in our store is a lot more resonance in our separates with our customers in a bricks-and-mortar setting. And that's giving us confidence not only in actual performance but also doubles with the feedback we get online and their desire to see more of our novelty and unique to Lulu, separates and core wear. So, we're actually really excited about that opportunity. It is where we suffered candidly most in Q4 in terms of concentration of business, where our consumer is a little bit more pressured economically and is really focusing their spend on just the newness of got-to-have novelty. We're being very cautious about how we guide towards future separate growth, but we're optimistic about what we're seeing specifically in the positive growth in our newness that we've been introducing.

Okay, great. And then just one more question on some of the INU benefits that you've been seeing. It sounds like you're starting to see those benefits. Any more color on just how meaningful that could be and how we should think about it flowing through over the next several quarters?

Yes. So, we started the enhancements from a costing perspective towards the second half of last year and we saw initial improvements there. As it relates to for this year, various activities there are going to be deployed mostly around vendor consolidation and increasing our power with each individual vendor so that we can be in a better position to negotiate, but also to orchestrate, I think about from a fabric perspective or otherwise. And so, we have some moderate improvements that are part of the guidance. I really think that we will be punching through deeper so to say into 2025 and beyond because these efforts are not immediately reflective of the existing inventory that we have or the time it takes to get additional inventory in. That will just be rolling through the rest of the year into 2025.

As you think about the average order value (AOV), which ticked up from the third quarter, ticked up from last year, with the new category that you're putting in, how do you think about the AOV and what it could look like? And then on the return rate, with the categories that you're introducing, what's your forecast for return rates or what should be a new normal in terms of return? And then just a follow-up.

Great questions, Dana. This is Tiffany. So, with regards to the AOV question, we do expect to see AOV continue to grow throughout 2024, on a full-year basis relative to 2023. However, there’s expected to be kind of typical seasonality around AOV where it's typically more dress-oriented; occasion wear is more heavily concentrated in the middle two quarters of the year. So, typically that's where the AOVs will be at their highest point. But sort of sprinkled throughout the whole year, AOV expectations are that they'll continue to increase, but we do like to also maintain some flexibility in our assumptions, just assuming whether or not we do more shipping-related promotions or other things just because shipping revenue is a component of our AOV. As it relates to return rates, we have spoken to quite a few things on the call, but one of the factors that's baked into the guidance is that we expect our return rates to start to improve a bit in the back half of the year. We expect to see sort of decelerating year-over-year growth in the return rate, as we progress into Q3 and Q4 of this year. And as you noted, a lot of that is potentially category-specific drivers, meaning less dresses, getting more penetration on separates is one of the key areas where we could see mix shift start to benefit the return rate. Also keep in mind, we've highlighted a few initiatives on the call Mark spoke to in-depth around fit and fit consistency basically, we'll call it. And that's one of the factors that is also beneficial to return rates as we move through the year and we're expecting that to have a positive benefit.

Yes. And then adding on to that, we're very excited about our ability because we have so much data essentially from our customers around their fit experience with our products to really turn that into something that customers can use and better tailor for basically to make better fit decisions. And so, we're working on not just how to present that and how to service that but also how to intelligently consume that through AI and other methods to really give that advice. And so that is, I think it's a very exciting opportunity there in front of us that will over time hone itself more accurately and help our customers and subsequently hopefully also our return rate.

Got it. Just one thing on active customers, how are you thinking about active customers given the reduced level of active customers? What's happening on that customer churn rate? And in terms of the new products, are you getting new customers also? What's the profile now and how has it changed basically?

Yes, great question. Although our active customer accounts experienced a decline year-over-year as quarters with pent-up demand fall off the comparisons. What we do see and are very optimistic about is that, for example, quarter-over-quarter, our last twelve months repeat customers improved, which points to that stickiness. Also, the other part where we already spoken to is the increase not just from an average unit retail perspective but also from a units per transaction perspective, those are signals that still speak to that customer engagement. If we could then add in to that what we will be doing this year from a new customer engagement and marketing perspective then I think that if you put that all together, those efforts will support a stabilization if not a return to customer growth in 2024.

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.