Lulu's Fashion Lounge Holdings, Inc. (LVLU) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for being with us today as we go over Lulu's results for the third quarter of fiscal 2026. Before we get started, we'd like to remind everyone that forward-looking statements will be part of this conference call, within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements on this call that aren't about matters of historical fact should be viewed as forward-looking statements, including but not limited to statements about management's expectations, plans, strategies, goals, and objectives, and how those are implemented, including negotiations regarding additional financing. A variety of risks, uncertainties, assumptions, and other important factors apply to these forward-looking statements, and those could cause our actual results, performance, or achievements to differ materially from the results, performance, or achievements expressed or implied by these forward-looking statements. Those risks, uncertainties, and assumptions are laid out in detail 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 28th, 2025, and quarterly reports on Form 10-Q for the fiscal quarters ended June 28th, 2026, and September 27th, 2026, all of which can be found on our website at investors.lulus.com. Today's call will also include references to certain non-GAAP financial information, including Adjusted EBITDA, Adjusted EBITDA margin, net debt, and free cash flow. Non-GAAP measures we use may differ from those used by other companies. Reconciliations of GAAP to non-GAAP measures, along with the description, limitations, and rationale for using each measure, can be found in this afternoon's press release and in our SEC filings. We also use certain key operating metrics, including gross margin, average order value, and active customers. Descriptions of these metrics can likewise be found in this afternoon's press release and in our SEC filings. With me on the call today are our CEO, Crystal Landsem, our CFO, Heidi Crane, and our President and CIO, Mark Vos. With that, I'll hand the call over to Crystal.

Thanks, Naomi, and good afternoon, everyone — we're glad you could join us today. During the third quarter, we kept our focus on the assortment reset and on shoring up the business's fundamentals through disciplined merchandising, inventory management, and operational efficiency. Revenue remained under pressure because past assortment choices affected customer engagement and repeat purchasing, yet we made tangible progress in the areas we consider more important for rebuilding the business over time. Revenue comparisons mirror assortment decisions from earlier product year cohorts, and the biggest headwind came from lower reorder sales volume on 2025 styles. Putting a finer point on it, we didn't fully anticipate the degree to which last year's weak new product launches would weigh on the reorder funnel we have now — both because fewer reorder products are moving through the pipeline and because we get fewer opportunities to add colors to styles that are winning and fewer updates to our bestsellers. Those dynamics accounted for the bulk of the revenue drop this quarter, and Mark will go into more detail on that; even so, 2026 launches continued to demonstrate better productivity and reorder eligibility, our inventory got fresher and more balanced, and we kept our discipline on costs and working capital. Those actions contributed to gross margin expanding 230 basis points and inventory coming down 17% versus a year ago. I'd like to spend a few minutes walking through some key areas where the third quarter showed encouraging progress — and, more importantly, where that progress gives us added confidence in the underlying trajectory of the business. The strongest signal continues to come from how our assortment is composed and how it performs. We delivered yet another quarter of gains in SKU productivity, and a much larger share of the new styles we introduced in 2026 hit reorder thresholds during the third quarter than was the case a year earlier. Separates posted the biggest improvement, with eligibility more than doubling year over year — a clear illustration of how far our team has come in building a cleaner, more focused assortment that delivers better productivity, greater customer relevance, and improved profitability. During the quarter, sales of new full-price ready-to-wear product turned positive, in line with what we had anticipated. Total comps, however, remained negative, which was due to lower markdown revenue. That positive trend is continuing into the early part of Q4. As we continue working to bring our inventory and reorder funnel into full alignment, we are highly encouraged by how customers are responding to the newer assortment in both our core occasion wear business and our casual apparel business. So far this year, new product introductions are converting into reorder-eligible styles at rates that are well ahead of the targets we set internally, which strengthens our confidence that the assortment reset is working and is building a stronger reorder funnel for future periods. As these styles grow into our reorder revenue base, we expect that over time they will contribute to sales in an increasingly meaningful way. We're also seeing better productivity within the reorder business. Even though total true reorder sales are still trailing last year, the productivity of reorder SKUs, including first-time reorders, went up even with a much smaller reorder SKU count. In our view, these trends show that we are getting better at spotting productive styles and building a stronger pipeline of proven product that can carry the business over time, and we also cut markdown sales substantially this quarter. Total markdown sales fell 28% versus the third quarter of 2025, since we lowered both the count of SKUs that needed markdowns and how deeply we discounted. Sales at markdown prices for new products fell 52%, while markdown sales throughout our entire casual apparel category were down 48%. Discounting is spreading more evenly across our assortment, as newer items sell better at full price and require less markdown activity. Even though this shift continues to pose a near-term headwind to revenue comparisons, we see it as reflecting a meaningful improvement in the underlying health and profitability of our business. We anticipate that markdown comparisons will remain difficult through the first quarter of 2027, with stronger regular price sales performance progressively offsetting that pressure as the year progresses. When it comes to casual apparel and footwear, we continue to push for stronger productivity, greater customer relevance, and improved profitability. A cleaner, more focused assortment is supporting that, as we keep cutting back on weaker inventory and making selective investments in the styles that perform best. During the third quarter, inventory in these categories ended much lower than a year earlier — 27% down in casual apparel and 47% down in footwear — and our markdown exposure also came down considerably. Gross margins rose 230 basis points to 44.9%, helped by what we're doing in inventory management, merchandising, assortment optimization, and cost reduction. We're also continuing to build brand awareness and deepen customer engagement by deploying brand marketing spend efficiently, putting priority on high-impact marketing and experiential initiatives throughout the quarter. During this quarter, we marked Lulu's 30th anniversary—a milestone we shared by rolling out a campaign spanning integrated storytelling, social content, creator partnerships, and consumer activations, all aimed at connecting with our customers and being part of their meaningful moments for three decades. Our pop-up at Mall of America, open through the end of November, keeps building awareness while letting customers experience our brand in person, which complements our wholesale and e-commerce businesses. We keep building brand awareness via our strategic partnerships with influencers and ambassadors, backing our brand campaigns, and reinforcing how important it is to grow awareness of the Lulu's brand across digital and physical touchpoints alike. During Q3, our wholesale business kept building steam, and sales for that period rose by a high double-digit percentage compared with the same stretch a year earlier. Moving into Macy's and Bloomingdale's represented one more significant milestone as we develop this channel, giving shoppers fresh chances to find and try the Lulu's brand, and it also drove considerable press attention plus wider visibility for the brand. As we grow our footprint alongside top retail partners, we think wholesale can take on a growing role in broadening our reach, bringing Lulu's to new audiences, and supplementing our D2C operation. In our view, wholesale stays a strategic path that uses capital efficiently to build profitable brand awareness and draw in additional customers. During the quarter, inventory composition kept improving in a meaningful way, coming in 17% below the prior year. That gain came mostly from reduced amounts of slower-turning markdown inventory, together with a more balanced base of reorder inventory, and it was partly offset by a bigger mix of higher price point product classes, which stemmed from a lower ready-to-wear and footwear assortment on hand. In our view, this progress shows the strength of our newer assortment along with improvements in inventory planning, producing a healthier blend of newness and established winners and giving us more flexibility to respond to customer demand. Beyond that, we saw a meaningful gain in aging inventory during the quarter versus the same period a year earlier, which reduced the burden that aging inventory places on us. This improvement in freshness gives us a stronger base for managing the assortment, responding to customer demand, and backing more reg price selling. In summary, product quality continues to rise as productivity and unit economics get better, inventory continues to become healthier, and the brand continues to connect with customers in fresh ways. Even though our results still show the lingering effect of previous assortment choices and the sell-through of older products, what we observe beneath the surface gives us encouragement. Because products launched in fiscal 2025 saw softer reorder results, and because that will likely affect reorder revenue going forward, we made workforce cuts throughout the company in October as part of our continuing cost-reduction work. Those cuts should produce roughly $5 million in annualized savings, and Heidi will cover in a moment how those savings figure into our preliminary fiscal 2027 outlook. We continue to believe there is substantial room to expand Lulu's relevance across additional occasions and life moments—particularly in eventwear and nearby categories, where the brand connects most strongly. While we pursue those opportunities, we remain focused on deepening our bond with customers and providing the style, quality, and experience they've grown to love from Lulu's. Finally, as we announced earlier, the board is reviewing strategic alternatives for maximizing stockholder value. We don't plan to say anything more about that process unless and until further disclosure is warranted. With that, I'll turn the call over to Mark Vos, our President and Chief Information Officer. Mark will share updates on the progress we're seeing in our strategic focus areas. Mark?

Thanks, Crystal. Now I'll bring you up to speed on our strategic priorities, concentrating on the areas that drive the business hardest — better order economics, growth in our wholesale channel, and using technology to boost engagement and run operations more efficiently. Starting with order economics: on last quarter's earnings call, I said we anticipated that new assortment launches in casual apparel and footwear would return to normal levels in the back half of 2026. We moved toward that goal in the third quarter, but new product launches still fell short of our targets. In Q3 2026, we rolled out 27% additional new casual apparel and footwear items and 28% additional new occasion wear items compared with the first and second quarters of 2026, yet new product introductions overall stayed under plan. Going forward, we anticipate continuing to build on that progress. Q4 is seasonally a lighter period for new product launches, so it will have a smaller effect on second half performance. Versus the prior year, in Q3 we introduced 23% fewer casual apparel and footwear products and 14% fewer occasion wear products—better than in the first and second quarters of 2026, though still short of our targets. Crucially, the productivity of the products we have newly launched stays strong. For casual apparel and footwear, SKU productivity kept getting better versus a year ago. Units transacted per new product launched rose 39% in Q3 2026 against Q3 2025, which is very encouraging. Credit goes to our merchandising team for understanding our customers so well and choosing the products they want. A quick reminder: casual apparel and footwear matter a lot in our assortment strategy. They let us connect with customers past event-driven buying and give us chances for more frequent, repeat engagement with the Lulu's brand all year long. These categories could also help drive better order economics and more efficient marketing, since their return rates have historically been lower. We keep seeing chances to grow in those product categories—particularly casual dresses and dressy separates, plus a footwear assortment that rounds out the look and lifts add-to-cart metrics. Now, on the main factor behind our Q3 sales headwind, I'd like to take a few minutes to discuss how our reorder pipeline is impacting the business right now. Identifying products that connect with customers and then scaling those winners over time via reorders and repeat demand is what our business model is built around. New product performance does add to results in the current period, but its bigger worth lies in building the core assortment capable of producing recurring revenue over time. With the gains we're seeing in how well new SKUs perform and the resulting eligibility for reorders, we feel encouraged that the product cohorts we're building now could turn into meaningful contributors to growth down the road. The reverse has held true as well. When fewer new products launched successfully and endured in the back half of 2024 and through much of 2025, those cohorts wound up with less reorder eligibility, and that dragged on revenue throughout all of 2026. Stronger color and performance from our older spring and summer assortment helped offset that pressure in the first half of the year, but as that tailwind faded entering the fall selling season, the impact became clearest in Q3. Since products that reorder well can keep contributing across several years, we expect part of this pressure to extend into 2027, easing as newer products take a bigger share of our mix. We did build the anticipated shortfall in reorder revenue from those earlier cohorts into our revenue and EBITDA outlook, but what we underestimated was the secondary revenue opportunities that successful reorder products also generate. To put it specifically, a smaller base of reorder-eligible products translates into fewer chances to add colors and fabrications to proven winners, and fewer chances to build new evolutions and adjacent styles inspired by those successful products; those downstream effects were underestimated in our modeling. Looking just at Q3, we figure the color and fabrication options we didn't have, together with the reduced reorder base, cost us about $9.8 million in transacted revenue. The key point is that even when new products do better, that can't right away make up for what a mature reorder base brings in. Usually a product's reorder volume peaks during the first year after launch, keeps contributing through year two, and then gradually declines. That's exactly why the improved new product results we're seeing in 2026 matter so much for where the business goes in 2027 and afterward. Looking at the 2026 product cohort, there's potential for contribution not just via reorders during 2027 and 2028, but also from additional colors, fabrications, and evolutions of new styles inspired by those winners — which creates multiple avenues of revenue contribution stemming from a successful initial product launch. Now shifting to wholesale expansion: we kept gaining traction as we expanded that channel. I'm pleased to highlight a few key indicators of this improvement. We went from eight non-specialty wholesale partners in Q3 2025 LTM to nine in Q3 2026 LTM. All told, wholesale revenue for Q3 2026 LTM rose 112%, and healthy growth trends persist across our current accounts, with non-specialty same-account revenue up 35% versus 2025 Q3 LTM. We're also really happy that Lulu's launched inside Macy's and Bloomingdale's locations during Q3, and we're excited about the way both new and existing Lulu's shoppers will be able to connect with our brand in stores throughout the U.S.A. and shop Lulu's nationwide across multiple channels. Finally, let me explain how we're using technology to boost engagement and efficiency. On the performance marketing side, we kept seeing encouraging results in Q3 across both established and newer channels. Affiliate marketing stayed robust, generating 55% traffic growth and 70% sales growth year-over-year; we rolled out OpenAI ads, which drove meaningful year-over-year gains in sessions and sales for the platform, admittedly from a small base, though incremental ROAS analysis points to ongoing room for improvement and future growth. Combined discount and marketing spend as a share of full-price revenue was 26.3%, versus 26.9% last year. All told, these marketing results show we can test and scale new channels while staying disciplined about the total cost of marketing and discounts. Finally, we keep building new tools to boost customer engagement. We've lately introduced the option to issue particular kinds of store credit that carry expiration dates, and that gives us added flexibility when crafting targeted promotions for customers. Alongside helping us foster customer goodwill, this feature creates chances to encourage time-sensitive engagement while keeping better control over our store credit liability. Taken together, these priorities underscore our focused approach to sustainable growth. By reinvigorating key categories that hold substantial long-term potential, broadening our reach via wholesale partnerships, keeping costs in check, and enhancing the customer experience through targeted technology initiatives, we're honing operational execution and further reinforcing the resilience of our business model. I'll now hand things over to Heidi Crane, Lulu's CFO, for more detail on our financial performance.

Thank you, Mark.

For Q3, net revenue came in at $58.6 million, which is down 20% from a year ago. That drop came from fewer total orders placed and higher return rates, though it was partly offset by more wholesale revenue. Gross margin for the quarter reached 44.9%, up 230 basis points versus a year earlier, thanks to a sales mix shifting toward higher-margin products and continued work to drive efficiency throughout the business. On expenses, selling and marketing costs for Q3 were $15.5 million, $1.4 million lower year-over-year, reflecting reduced marketing costs and merchant processing fees. General and administrative expenses fell $1.6 million to $14.7 million in Q3, a 10% year-over-year decline, mainly from lower variable labor and benefit costs tied to reduced sales volumes plus lower fixed labor and benefit costs from a smaller fixed headcount, partly offset by higher other general and administrative expenses, largely from non-recurring costs tied to the strategic alternative process amounting to roughly $500,000 during the quarter. Our net loss in the third quarter was $4.3 million, against a net loss of $2.3 million in last year's same period. Adjusted EBITDA for Q3 was a loss of $1.8 million versus a +$0.4 million in Q3 2025. Adjusted EBITDA margin came to -3.1% compared with +0.5% in the prior year period. For the third quarter, interest expense came in at $370,000, down from $544,000 in Q3 2025. Diluted loss per share during the quarter was $1.48, whereas in Q3 2025 it stood at $0.84. Operating activities consumed net cash of $2.1 million in the third quarter, compared with $1.8 million used during the same stretch last year. Free cash flow for Q3 was -$2.3 million, versus -$2.4 million a year earlier. On a year-to-date basis, free cash flow was positive and showed favorable movement year-over-year. At the quarter ending September 27th, 2026, total debt increased by $0.9 million, reaching $15.3 million, up from $14.4 million when fiscal year 2025 closed. Net debt decreased by $2.9 million, bringing it to $8.8 million, compared with $11.7 million at the close of fiscal year 2025. At the end of the quarter, our inventory balance was $31.9 million, a reduction of $6.5 million, or 17%, from the same period a year earlier. Regarding further financing efforts, we are in active negotiations with our existing lender as well as prospective new lenders concerning additional financing intended to help meet our liquidity needs. Those talks remain underway, no definitive agreement has been reached yet, and we will share an update when appropriate. Moving now to the full year 2026 outlook. We're updating the fiscal 2026 financial outlook we gave earlier. This reflects a bigger-than-expected hit to revenue from past assortment choices—specifically, less reorder activity and fewer chances to build on styles that worked last year by adding colors, fabrications, and product evolutions. We continue to see encouraging productivity gains and strong performance from reorder-eligible products launched in 2026, but the drag from weaker prior-year product cohorts became more pronounced in the second half, and we don't expect that pattern to improve meaningfully before year-end. Looking ahead to Q4, we foresee ongoing year-over-year pressure on revenue much like what we saw in Q3, and both full-year revenue and Adjusted EBITDA will land under the figures we shared earlier. Our attention remains on making inventory more productive, holding the line on expenses, and boosting operating efficiency, which should help us lift bottom-line results and safeguard the business over the long run. Capital expenditures, including capitalized software, are now projected at $1.5 million to $2 million — a better outcome than our earlier outlook and than 2025 levels. Looking forward to fiscal 2027, we anticipate that the pace of revenue decline compared with the prior year will ease, since products launched in 2026 are performing better and will add more meaningfully to reorder activity, helping to counterbalance the ongoing effect of weaker older product cohorts. We likewise anticipate that our wholesale channel will keep growing and support overall revenue performance. A healthier sales mix, the substantial full-year benefit from cost reduction initiatives carried out in late 2026, and better inventory productivity should drive a meaningful gain in profitability; in our view, these recent operational improvements and structural cost reductions mark a significant step toward strengthening financial performance and laying a foundation for long-term sustainable profitability. Crystal, over to you for the wrap-up.

Thanks, Heidi. Our attention stays on making the business stronger and on getting our inventory healthier and more productive, with an eye toward growth that is both sustainable and profitable. We keep pushing operational efficiencies forward while preserving the customer experience that sets Lulu's apart, and in our view that is what will build a solid foundation for the brand's future. We thank our team for their continued dedication and our stockholders for their ongoing support. We stay committed to building on our progress and positioning Lulu's for long-term success.

Thanks very much, everyone, for joining us. That brings today’s teleconference to a close. You may now disconnect your lines, and we hope you have a wonderful day.