Lulu's Fashion Lounge Holdings, Inc. [LVLU] Filings

10-Q 1 tmb-20230702x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 2, 2023


☐	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: 001-41059

Lulu’s Fashion Lounge Holdings, Inc.

(Exact Name of Registrant as Specified in its Charter)


Delaware	20-8442468
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
195 Humboldt Avenue Chico, California	95928
(Address of principal executive offices)	(Zip Code)

(530) 343-3545

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	LVLU	Nasdaq Global Market

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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	☐,	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 4, 2023, there were 40,159,169 shares of the registrant’s common stock, par value $0.001, outstanding.

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TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of July 2, 2023 and January 1, 2023	5
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022	6
	Condensed Consolidated Statements of Stockholders’ Equity for the twenty-six weeks ended July 2, 2023 and July 3, 2022	7
	Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 2, 2023 and July 3, 2022	8
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	39
Signatures		40

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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.

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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 Net Debt 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 Net Debt, as well as a reconciliation of net (loss) income to Adjusted EBITDA and a reconciliation to non-GAAP Net Debt from Total Debt. Net (loss) income is the most directly comparable financial measure to Adjusted EBITDA and Total Debt is the most directly comparable financial measure to Net Debt, required by, or presented in accordance with GAAP.

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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)


	July 2,		January 1,
	2023		2023
Assets
Current assets:
Cash and cash equivalents	$	5,947	$	10,219
Accounts receivable		3,111		3,908
Inventory, net		46,232		43,186
Assets for recovery		4,749		3,890
Income tax refund receivable		3,459		4,078
Prepaids and other current assets		4,104		3,738
Total current assets		67,602		69,019
Property and equipment, net		4,134		4,391
Goodwill		35,430		35,430
Tradename		18,509		18,509
Intangible assets, net		3,212		3,090
Lease right-of-use assets		31,119		32,514
Other noncurrent assets		4,696		4,251
Total assets	$	164,702	$	167,204

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	9,235	$	5,320
Accrued expenses and other current liabilities		18,394		17,976
Returns reserve		11,998		9,066
Stored-value card liability		12,356		10,828
Lease liabilities, current		5,054		4,456
Total current liabilities		57,037		47,646
Revolving line of credit		15,000		25,000
Lease liabilities, noncurrent		27,187		29,042
Other noncurrent liabilities		804		623
Total liabilities		100,028		102,311
Commitments and Contingencies (Note 7)

Stockholders' equity:
Preferred stock: $0.001 par value, 10,000,000 shares authorized, and no shares issued or outstanding		—		—
Common stock: $0.001 par value, 250,000,000 shares authorized; and 40,140,911 and 39,259,328 shares issued and outstanding as of July 2, 2023 and January 1, 2023, respectively		40		39
Additional paid-in capital		246,720		238,725
Accumulated deficit		(182,086)		(173,871)
Total stockholders' equity		64,674		64,893
Total liabilities and stockholders' equity	$	164,702	$	167,204

The accompanying notes are an integral part of the condensed consolidated financial statements.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(in thousands, except share and per share amounts)

(unaudited)


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	July 2,		July 3,		July 2,		July 3,
	2023		2022		2023		2022
Net revenue	$	106,122	$	131,512	$	197,098	$	243,414
Cost of revenue		58,726		71,345		111,741		130,269
Gross profit		47,396		60,167		85,357		113,145
Selling and marketing expenses		24,670		25,851		44,159		47,737
General and administrative expenses		24,396		23,392		48,744		51,226
(Loss) income from operations		(1,670)		10,924		(7,546)		14,182
Interest expense		426		157		949		365
Other income, net		(373)		(27)		(446)		(81)
(Loss) income before provision for income taxes		(1,723)		10,794		(8,049)		13,898
Income tax provision		874		4,795		166		5,856
Net (loss) income and comprehensive (loss) income	$	(2,597)	$	5,999	$	(8,215)	$	8,042

Basic earnings per share	$	(0.07)	$	0.16	$	(0.21)	$	0.21
Diluted earnings per share	$	(0.07)	$	0.15	$	(0.21)	$	0.21
Basic weighted-average shares outstanding		39,680,908		38,535,409		39,457,607		38,316,895
Diluted weighted-average shares outstanding		39,680,908		38,992,901		39,457,607		38,555,919

The accompanying notes are an integral part of the condensed consolidated financial statements.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share amounts)

(unaudited)


	For the Twenty-Six Weeks Ended July 2, 2023
				Additional				Total
	Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit		Equity
Balance as of January 1, 2023	39,259,328	$	39	$	238,725	$	(173,871)	$	64,893
Issuance of common stock for vesting of restricted stock units (RSUs)	491,769		1		—		—		1
Issuance of common stock for special compensation award	208,914		—		—		—		—
Issuance of common stock for employee stock purchase plan (ESPP)	47,502		—		269		—		269
Shares withheld for withholding tax on RSUs	(277,606)		—		(662)		—		(662)
Forfeited shares of restricted stock	(2,720)		—		—		—		—
Equity-based compensation expense	—		—		4,892		—		4,892
Net (loss) and comprehensive (loss)	—		—		—		(5,618)		(5,618)
Balance as of April 2, 2023	39,727,187		40		243,224		(179,489)		63,775
Issuance of common stock for vesting of RSUs	634,567		—		—		—		—
Shares withheld for withholding tax on RSUs	(220,843)		—		(558)		—		(558)
Equity-based compensation expense	—		—		4,054		—		4,054
Net (loss) and comprehensive (loss)	—		—		—		(2,597)		(2,597)
Balance as of July 2, 2023	40,140,911	$	40	$	246,720	$	(182,086)	$	64,674


	For the Twenty-Six Weeks Ended July 3, 2022
				Additional				Total
	Common Stock			Paid-In		Accumulated		Stockholders'
	Shares	Amount		Capital		Deficit		Equity
Balance as of January 2, 2022	38,421,124	$	38	$	222,080	$	(177,596)	$	44,522
Issuance of common stock for vesting of restricted stock units (RSUs)	228,387		1		(1)		—		—
Issuance of common stock for special compensation award	208,914		—		—		—		—
Shares withheld for withholding tax on RSUs	(28,295)		—		(265)		—		(265)
Offering costs related to Initial Public Offering (IPO)	—		—		(290)		—		(290)
Settlement of distributions payable to former Class P unit holders	—		—		2,648		—		2,648
Equity-based compensation expense	—		—		5,126		—		5,126
Net income and comprehensive income	—		—		—		2,043		2,043
Balance as of April 3, 2022	38,830,130		39		229,298		(175,553)		53,784
Issuance of common stock for vesting of RSUs	196,808		—		—		—		—
Shares withheld for withholding tax on RSUs	(73,195)				(805)		—		(805)
Forfeited shares of restricted stock	(22,693)				—		—		—
Equity-based compensation expense	—		—		3,447		—		3,447
Net income and comprehensive income	—		—		—		5,999		5,999
Balance as of July 3, 2022	38,931,050	$	39	$	231,940	$	(169,554)	$	62,425

The accompanying notes are an integral part of the condensed consolidated financial statements.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Twenty-Six Weeks Ended
	July 2,		July 3,
	2023		2022
Cash Flows from Operating Activities
Net (loss) income	$	(8,215)	$	8,042
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		2,306		1,850
Noncash lease expense		1,753		1,545
Amortization of debt discount and debt issuance costs		78		79
Equity-based compensation expense		9,029		8,591
Deferred income taxes		(1,569)		(1,298)
Loss on disposal of property and equipment		—		6
Changes in operating assets and liabilities:
Accounts receivable		797		(858)
Inventories		(3,046)		(26,399)
Assets for recovery		(859)		(1,637)
Income taxes payable		1,653		2,845
Prepaid and other current assets		(497)		396
Accounts payable		3,916		4,188
Accrued expenses and other current liabilities		4,756		14,730
Operating lease liabilities		(1,635)		(1,038)
Other noncurrent liabilities		(116)		(454)
Net cash provided by operating activities		8,351		10,588
Cash Flows from Investing Activities
Capitalized software development costs		(1,026)		(1,247)
Purchases of property and equipment		(726)		(1,394)
Other		—		(97)
Net cash used in investing activities		(1,752)		(2,738)
Cash Flows from Financing Activities
Proceeds from borrowings on revolving line of credit		5,000		10,000
Repayments on revolving line of credit		(15,000)		(20,000)
Proceeds from issuance of common stock under employee stock purchase plan (ESPP)		269		—
Principal payments on finance lease obligations		(497)		(344)
Payment of offering costs related to the IPO		—		(542)
Withholding tax payments related to vesting of RSUs		(637)		—
Other		(6)		(23)
Net cash used in financing activities		(10,871)		(10,909)
Net decrease in cash, cash equivalents and restricted cash		(4,272)		(3,059)
Cash, cash equivalents and restricted cash at beginning of period		10,219		11,908
Cash, cash equivalents and restricted cash at end of period	$	5,947	$	8,849

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	$	5,947	$	8,343
Restricted cash		—		506
Total cash, cash equivalents and restricted cash at end of period	$	5,947	$	8,849

			(Continued)

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)


	Twenty-Six Weeks Ended
	July 2,		July 3,
	2023		2022
Supplemental Disclosure
Cash paid during the period for:
Income taxes, net	$	82	$	4,309
Interest	$	918	$	242
Operating leases	$	2,595	$	—
Finance leases	$	549	$	—

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Addition of right-of-use assets, including prepaid rent, net of deferred rent recorded upon adoption of ASC 842	$	—	$	28,018
Addition of lease liabilities recorded upon adoption of ASC 842	$	—	$	28,599
Right-of-use assets acquired under operating lease obligations	$	17	$	1,839
Assets acquired under finance lease obligations	$	983	$	3,763
Purchases of property and equipment included in accounts payable and accrued expenses	$	29	$	188
Offering costs included in accrued expenses	$	—	$	290
				(Concluded)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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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 100% of Lulus LLC’s outstanding common stock in 2014. The Company, through Lulus LLC, is an online retailer of women’s clothing, shoes and accessories headquartered in Chico, CA.

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 second quarter of 2023 as discretionary consumer spending levels and shopping behavior fluctuate with these factors. During the first half 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. Additionally, the COVID-19 pandemic has had and may continue to have a materially adverse impact on the macroeconomic environment.

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 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 July 2, 2023 and its results of operations for the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022 and its cash flows for the twenty-six weeks ended July 2, 2023 and July 3, 2022. The results of operations for the twenty-six weeks ended July 2, 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.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 July 2, 2023 and January 1, 2023, a single wholesale customer represented 12% and 15%, respectively, of the Company’s accounts receivable balance. No customer accounted for greater than 10% of the Company’s net revenue during the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022.

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 (loss) income. Fixed and variable lease expense on operating leases is recognized within operating expenses in the condensed consolidated statements of operations and

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

comprehensive (loss) income. 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 one performance obligation, the sale of the product, at shipping point (when the customer gains control). Shipping and handling costs associated with outbound freight are accounted for as fulfillment costs and are included in cost of goods sold. The Company has elected to apply the practical expedient to expense costs as incurred for incremental costs to obtain a contract when the amortization period would have been one year or less.

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.

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 thirty-six months from the date of issuance. The amount of breakage recognized in revenue during the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022 was not material.

The Company has two types of contractual liabilities: (i) cash collections from its customers prior to delivery of products purchased (“deferred revenue”), which are initially recorded within accrued expenses and recognized as revenue when the products are shipped, (ii) unredeemed gift cards and online store credits, which are initially recorded as a stored-value card liability and are recognized as revenue in the period they are redeemed.

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LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following table summarizes the significant changes in the contract liabilities balances included in accrued expenses and other current liabilities during the thirteen and twenty-six weeks ended July 2, 2023 and July 3, 2022 (in thousands):


	Deferred		Stored-Value
	Revenue		Cards
Balance as of January 1, 2023	$	69	$	10,828
Revenue recognized that was included in contract liability balance at the beginning of the period		(69)		(1,720)
Increase due to cash received, excluding amounts recognized as revenue during the period		122		2,022
Balance as of April 2, 2023		122		11,130
Revenue recognized that was included in contract liability balance at the beginning of the period		(122)		(1,129)
Increase due to cash received, excluding amounts recognized as revenue during the period		98		2,355
Balance as of July 2, 2023	$	98	$	12,356


	Deferred		Stored-Value
	Revenue		Cards
Balance as of January 2, 2022	$	145	$	7,240
Revenue recognized that was included in contract liability balance at the beginning of the period		(145)		(1,786)
Increase due to cash received, excluding amounts recognized as revenue during the period		315		1,838
Balance as of April 3, 2022		315		7,292
Revenue recognized that was included in contract liability balance at the beginning of the period		(315)		(2,330)
Increase due to cash received, excluding amounts recognized as revenue during the period		101		3,140
Balance as of July 3, 2022	$	101	$	8,102

Selling and Marketing Expenses

Advertising costs included in selling and marketing expenses were $19.5 million and $20.2 million for the thirteen weeks ended July 2, 2023 and July 3, 2022, respectively, and $34.5 million and $37.2 million for the twenty-six weeks ended July 2, 2023 and July 3, 2022, respectively.

Net (Loss) Income Per Share Attributable to Common Stockholders

Basic net (loss) income per share attributable to common stockholders is computed using net (loss) income attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share attributable to common stockholders represents net (loss) income 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.

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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 (loss) income per share attributable to common stockholders:


	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 2, 2023	July 3, 2022	July 2, 2023	July 3, 2022
Weighted average shares used to compute net (loss) income per share attributable to common stockholders – Basic	39,680,908	38,535,409	39,457,607	38,316,895
Dilutive securities:
Unvested restricted stock	—	69,519	—	83,329
Unvested restricted stock units (RSUs)	—	286,616	—	1,950
Special compensation awards	—	101,357	—	153,745
Weighted average shares used to compute net (loss) income per share attributable to common stockholders – Diluted	39,680,908	38,992,901	39,457,607	38,555,919

The following securities were excluded from the computation of diluted net (loss) income 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		Twenty-Six Weeks Ended
	July 2, 2023	July 3, 2022	July 2, 2023	July 3, 2022
Stock options	161,397	322,793	161,397	322,793
Unvested restricted stock	57,287	187,635	57,287	187,635
Unvested RSUs	4,033,576	16,950	4,033,576	1,513,510
Performance stock units	1,811,571	—	1,811,571	—
Employee stock purchase plan shares	137,847	—	137,847	—
2023 stock-based bonus plan	210,381	—	210,381	—
Total	6,412,059	527,378	6,412,059	2,023,938

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

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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 July 2, 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 $50.0 million (see Note 5, Debt) approximates its carrying value as the stated interest rates reset daily at the daily secured overnight financing rate (“SOFR”) plus an applicable margin and, as such, approximate market rates currently available to the Company. The Company does not have any financial instruments that were determined to be Level 3.

4.Balance Sheet Components

Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):


	Estimated Useful Lives	July 2,		January 1,
	in Years	2023		2023
Leasehold improvements	3 – 9	$	3,939	$	3,802
Equipment	3 – 7		2,880		2,659
Furniture and fixtures	3 – 7		2,023		1,880
Construction in progress			22		36
Total property and equipment			8,864		8,377
Less: accumulated depreciation and amortization			(4,730)		(3,986)
Property and equipment, net		$	4,134	$	4,391

Depreciation and amortization of property and equipment for the thirteen weeks ended July 2, 2023 and July 3, 2022 was $0.7 million and $0.6 million, respectively and for the twenty-six weeks ended July 2, 2023 and July 3, 2022, was $1.4 million and $1.0 million, respectively.

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):


	July 2,		January 1,
	2023		2023
Accrued compensation and benefits	$	5,897	$	6,751
Accrued marketing		4,933		3,206
Accrued inventory		3,549		3,411
Other		4,015		4,608
Accrued expenses and other current liabilities	$	18,394	$	17,976

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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 $50.0 million (the "Revolving Facility"). During the term of the Credit Agreement, the Company can 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 (“Letter of Credit”). During the twenty-six weeks ended July 2, 2023, the Company borrowed $5.0 million under the Revolving Facility and repaid $15.0 million of the outstanding balance. The Revolving Facility matures on November 15, 2024, while the Letter of Credit matures on November 8, 2024. As of July 2, 2023, we had $0.3 million outstanding under the Letter of Credit. As of July 2, 2023, we had $34.7 million available for borrowing under the Revolving Facility and $7.2 million available to issue letters of credit.

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 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%). Additionally, a commitment fee of 37.5 basis points will be assessed on unused commitments under the Revolving Facility, taking into account the sum of outstanding borrowings and Letter of Credit obligations. As of July 2, 2023, the interest rate for the Revolving Facility was 7.0%. During the thirteen and twenty-six weeks ended July 2, 2023, the weighted average interest rate for the Revolving Facility was 7.8% and 7.3%, respectively.

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 2.0% above the rate that would be otherwise applicable. As of July 2, 2023, management has determined that the Company was in compliance with all financial covenants.

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 (loss) income. 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 July 2, 2023 and January 1, 2023, unamortized debt issuance costs recorded within other non-current assets were $0.2 million and $0.3 million, respectively.

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

Table of Contents

LULU’S FASHION LOUNGE HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

among other practical expedients, includes the option to retain the historical classification of leases entered into prior to 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 and $0.6 million remaining obligations for the base rent related to the short-term leases as of July 2, 2023 and July 3, 2022, respectively.

The Company also leases equipment under finance lease agreements expiring on various dates through May 2028.

As of July 2, 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 six months)	$	2,597	$	832	$	3,429
2024		5,283		1,502		6,785
2025		5,844		1,502		7,346
2026		4,605		250		4,855
2027		5,138		73		5,211
Thereafter		11,632		8		11,640
Total undiscounted lease payment		35,099		4,167		39,266
Present value adjustment		(6,811)		(214)		(7,025)
Total lease liabilities		28,288		3,953		32,241
Less: lease liabilities, current		(3,505)		(1,549)		(5,054)
Lease liabilities, noncurrent	$	24,783	$	2,404	$	27,187

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.

Table of Contents

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		Twenty-Six Weeks Ended
		July 2,		July 2,
		2023		2023
Finance lease cost
Amortization of ROU assets	$	344	$	648
Interest on lease liabilities		34		61
Operating lease cost		1,348		2,696
Short-term lease cost		—		12
Variable lease cost		210		426
Total lease cost	$	1,936	$	3,843

Lease cost included in cost of revenue	$	1,624	$	3,011
Lease cost included in general and administrative expenses	$	312	$	832

Weighted-average remaining lease term - finance leases		36 months		36 months
Weighted-average remaining lease term - operating leases		81 months		81 months
Weighted-average discount rate - finance leases		3.63%		3.63%
Weighted-average discount rate - operating leases		6.50%		6.50%

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, 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 July 2, 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.

Table of Contents

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 10,000,000 shares of preferred stock having a par value of $0.001 per share. The Company’s board of directors has the authority to issue preferred stock and to determine the rights, preferences, privileges, and restrictions, including voting rights, of those shares. As of July 2, 2023 and January 1, 2023, no shares of preferred stock were issued and outstanding.

9.Common Stock

The Company has authorized the issuance of 250,000,000 shares of common stock, $0.001 par value ("common stock") as of July 2, 2023 and January 1, 2023, respectively. Holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders of the Company. Subject to the preferences that may be applicable to any outstanding share of preferred stock, the holders of common stock are entitled to receive dividends, if any, as may be declared by the board of directors. No dividends have been declared to date. As of July 2, 2023, the Company has reserved 161,397 shares of common stock for issuance upon the exercise of stock options, and 1,862,587 shares of common stock available for future issuance under the Lulu's Fashion Lounge Holdings, Inc. Omnibus Equity Plan (the “Omnibus Equity Plan”) and 1,473,106 shares of common stock available for future issuance under the 2021 Employee Stock Purchase Plan (the “ESPP”), respectively. Both equity plans are further described in Note 10, Equity-Based Compensation.

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 3,719,000 shares of common stock for future issuance under the Omnibus Equity Plan, including any shares subject to awards under the 2021 Equity Incentive Plan (the “2021 Equity Plan”) that are forfeited or lapse unexercised. The number of shares reserved for issuance under the Omnibus Equity Plan will automatically increase on the first day of each fiscal year, starting in 2022 and continuing through 2031, by a number of shares equal to (a) 4% of the total number of shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year or (b) such smaller number of shares as determined by the Company’s board of directors.

Under the ESPP, the Company initially reserved 743,803 shares of common stock for future issuance. The number of shares of common stock reserved for issuance will automatically increase on the first day of each fiscal year beginning in 2022 and ending in 2031, by a number of shares equal to (a) 1% of the total number of shares of the Company’s common stock outstanding on the last day of the immediately preceding fiscal year or (b) such smaller number of shares as determined by the Company’s board of directors.

On April 1, 2022, the Company filed a Registration Statement on Form S-8 with the SEC for the purpose of registering an additional 5,921,056 shares of the Company’s common stock, inclusive of 1,536,845 and 384,211 shares associated with automatic increases that occurred on January 3, 2022 under the Omnibus Equity Plan and ESPP, respectively. This registration also included 3,200,000 and 800,000 shares for the Omnibus Equity Plan and the ESPP, respectively, representing two years’ worth of estimated future automatic increases in availability for these plans.

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 twenty-six weeks ended July 2, 2023, equity-based compensation expense for the 2023 Bonus Plan was $

Lulu's Fashion Lounge Holdings, Inc. [LVLU] Filings
10-Q	[2023-08-08]
10-Q	[2023-05-09]
10-K	[2023-03-14]
10-Q	[2022-11-15]
10-Q	[2022-08-16]
10-Q	[2022-05-17]
10-K	[2022-03-31]
10-Q	[2021-12-16]
S-1	[2021-10-12]