UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________________ to ___________________
Commission File Number:
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐, |
| ☒ | |
Non-accelerated filer | ☐ |
| Smaller reporting company | |
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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As of November 3, 2023, there were
TABLE OF CONTENTS
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Condensed Consolidated Balance Sheets as of October 1, 2023 and January 1, 2023 | 5 | |
6 | ||
7 | ||
8 | ||
10 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
38 | ||
38 | ||
38 | ||
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39 | ||
39 | ||
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41 |
2
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “forecasts,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to statements regarding our future results of operations and financial position, industry and business trends, stock compensation, business strategy, plans, market growth and our objectives for future operations.
The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements, including, but not limited to, the following: our ability to successfully maintain our desired merchandise assortment or manage our inventory effectively and attract a sufficient number of customers or sell sufficient quantities of our merchandise; our ability to anticipate, identify, measure, and respond quickly to new and rapidly changing fashion trends, customer preferences and demands, and other factors; our efforts to acquire or retain customers; our ability to maintain a high level of engagement with our customers and increase their spending with us; our ability to provide high-quality customer support; our ability to maintain a strong community around the Lulus brand with engaged customers and influencers; our ability to operate in the highly competitive retail apparel industry; our ability to successfully implement our growth strategy; our reliance on third parties to drive traffic to our platform; our use of social media, influencers, affiliate marketing, email, text messages, and direct mail; our exposure to international business uncertainties, including inflation, interest rates and fuel prices; our reliance on consumer discretionary spending; system security risk issues, including any real or perceived failure to protect confidential or personal information against security breaches and disruption of our internal operations or information technology systems; any disruption caused by continual updates, augmentation and additions to our technology systems; our reliance on email and other messaging services; risks associated with sourcing, manufacturing, and warehousing; any disruptions to our three distribution facilities; our reliance on independent third-party transportation providers for substantially all of our merchandise shipments and any disruptions or increased transportation costs; risks associated with infringement upon the trademarks, copyrights or other intellectual property rights of third parties, including the risk that we could acquire merchandise from our suppliers without the full right to sell it; the unpredictability and adverse effects of the COVID-19 pandemic; and the other important factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K and our other filings with the Securities and Exchange Commission (the "SEC”). The forward-looking statements in this Quarterly Report on Form 10-Q are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits to this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained in this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
3
BASIS OF PRESENTATION
On August 28, 2017, we executed a reorganization of our corporate structure. Our original parent company was called Lulu’s Holdings, LLC. This entity was converted to Lulu’s Holdings, L.P. (the “LP”). We formed two new subsidiaries, Lulu’s Fashion Lounge Holdings, Inc. and Lulu’s Fashion Lounge Parent, LLC, to sit between the LP and our operating company. Our operating company, previously known as Lulu’s Fashion Lounge, Inc., was converted from a California corporation to a Delaware limited liability company, Lulu’s Fashion Lounge, LLC, an indirect wholly-owned subsidiary of Lulu’s Fashion Lounge Holdings, Inc. In connection with our initial public offering, the LP was liquidated. Unless otherwise indicated or the context otherwise requires, references in this Quarterly Report on Form 10-Q to the terms “Lulus,” “we,” “us,” “our,” or the “Company” refer to Lulu’s Fashion Lounge Holdings, Inc. and its consolidated subsidiaries.
Our fiscal year is a “52-53 week” year ending on the Sunday closest in proximity to December 31, such that each quarterly period will be 13 weeks in length, except during a 53-week year when the fourth quarter will be 14 weeks. References herein to “fiscal 2023” and/or “2023” relate to the year ending December 31, 2023 and “fiscal 2022” and/or “2022” relate to the year ended January 1, 2023. The fiscal years ending December 31, 2023 and ended January 1, 2023 consisted of 52-weeks.
Throughout this Quarterly Report on Form 10-Q, we provide a number of key performance indicators used by management and typically used by our competitors in our industry. These and other key performance indicators are discussed in more detail in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating and Financial Metrics.” In this Quarterly Report on Form 10-Q, we also reference Adjusted EBITDA, Adjusted EBITDA Margin and Free Cash Flow which are non-GAAP (accounting principles generally accepted in the United States of America) financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for a discussion of Adjusted EBITDA, Adjusted EBITDA Margin and Free Cash Flow, as well as a reconciliation of net income (loss) to Adjusted EBITDA and a reconciliation to non-GAAP Free Cash Flow from net cash provided by operating activities. Net income (loss) is the most directly comparable financial measure to Adjusted EBITDA and net cash provided by operating activites is the most directly comparable financial measure to Free Cash Flow, required by, or presented in accordance with GAAP.
4
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts)
(unaudited)
| October 1, |
| January 1, | |||
2023 | 2023 | |||||
Assets | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable |
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Inventory, net |
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Assets for recovery |
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Income tax refund receivable |
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Prepaids and other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Tradename |
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Intangible assets, net |
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Lease right-of-use assets | | | ||||
Other noncurrent assets |
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Total assets | $ | | $ | | ||
Liabilities and Stockholders' Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued expenses and other current liabilities |
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Returns reserve |
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Stored-value card liability |
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Lease liabilities, current | | | ||||
Total current liabilities |
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Revolving line of credit | |
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Lease liabilities, noncurrent | | | ||||
Other noncurrent liabilities |
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Total liabilities |
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Commitments and Contingencies (Note 7) |
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Stockholders' equity: |
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Preferred stock: $ |
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Common stock: $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
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Total stockholders' equity |
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Total liabilities and stockholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except share and per share amounts)
(unaudited)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
October 1, |
| October 2, | October 1, |
| October 2, | ||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||
Net revenue |
| $ | |
| $ | | $ | |
| $ | | ||
Cost of revenue |
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Gross profit |
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Selling and marketing expenses |
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General and administrative expenses |
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Income (loss) from operations |
| ( |
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Interest expense |
| ( | ( | ( | ( | ||||||||
Other income, net |
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Income (loss) before provision (benefit) for income taxes |
| ( |
| | ( |
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Income tax provision (benefit) |
| ( | ( | ( | | ||||||||
Net income (loss) and comprehensive income (loss) |
| $ | ( |
| $ | | $ | ( |
| $ | | ||
Basic earnings (loss) per share | $ | ( | $ | | $ | ( | $ | | |||||
Diluted earnings (loss) per share | $ | ( | $ | | $ | ( | $ | | |||||
Basic weighted-average shares outstanding |
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Diluted weighted-average shares outstanding |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
6
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
(unaudited)
For the Thirty-Nine Weeks Ended October 1, 2023 | ||||||||||||||
Additional | Total | |||||||||||||
Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balance as of January 1, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of common stock for vesting of restricted stock units (RSUs) | | | — | — | | |||||||||
Issuance of common stock for special compensation award | | — | — | — | — | |||||||||
Issuance of common stock for employee stock purchase plan (ESPP) | | — | | — | | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Forfeited shares of restricted stock | ( | — | — | — | — | |||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net (loss) and comprehensive (loss) | — | — | — | ( | ( | |||||||||
Balance as of April 2, 2023 |
| | | | ( | | ||||||||
Issuance of common stock for vesting of RSUs | | — | — | — | — | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Equity-based compensation expense |
| — | — | | — |
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Net (loss) and comprehensive (loss) |
| — | — | — | ( |
| ( | |||||||
Balance as of July 2, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of common stock for vesting of RSUs | | — | — | — | — | |||||||||
Issuance of common stock for employee stock purchase plan (ESPP) | | — | | — | | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Forfeited shares of restricted stock | ( | — | — | — | — | |||||||||
Equity-based compensation expense |
| — | | — |
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Net (loss) and comprehensive (loss) |
| — | — | — | ( |
| ( | |||||||
Balance as of October 1, 2023 |
| | $ | | $ | | $ | ( | $ | | ||||
For the Thirty-Nine Weeks Ended October 2, 2022 | ||||||||||||||
Additional | Total | |||||||||||||
Common Stock | Paid-In | Accumulated | Stockholders' | |||||||||||
Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||||
Balance as of January 2, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of common stock for vesting of restricted stock units (RSUs) |
| | | ( | — | — | ||||||||
Issuance of common stock for special compensation award | | — | — | — | — | |||||||||
Shares withheld for withholding tax on RSUs | ( | — | ( | — | ( | |||||||||
Offering costs related to Initial Public Offering (IPO) | — | — | ( | — | ( | |||||||||
Settlement of distributions payable to former Class P unit holders | — | — | | — | | |||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net income and comprehensive income |
| — | — | — | | | ||||||||
Balance as of April 3, 2022 |
| | | | ( | | ||||||||
Issuance of common stock for vesting of RSUs |
| | — | — | — | — | ||||||||
Shares withheld for withholding tax on RSUs | ( | ( | — | ( | ||||||||||
Forfeited shares of restricted stock | ( | — | — | — | ||||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net income and comprehensive income |
| — | — | — | | | ||||||||
Balance as of July 3, 2022 |
| | | | ( | | ||||||||
Issuance of common stock for vesting of RSUs |
| | — | — | — | — | ||||||||
Shares withheld for withholding tax on RSUs | ( | ( | — | ( | ||||||||||
Equity-based compensation expense | — | — | | — | | |||||||||
Net income and comprehensive income |
| — | — | — | | | ||||||||
Balance as of October 2, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
7
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Thirty-Nine Weeks Ended | ||||||
October 1, | October 2, | ||||||
2023 |
| 2022 | |||||
Cash Flows from Operating Activities |
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Net income (loss) | $ | ( |
| $ | | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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Noncash lease expense | | | |||||
Amortization of debt discount and debt issuance costs |
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Equity-based compensation expense |
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Deferred income taxes |
| ( |
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Loss on disposal of property and equipment |
| — |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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| ( | |||
Assets for recovery |
| ( |
| ( | |||
Income taxes payable |
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Prepaid and other current assets |
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Accounts payable |
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Accrued expenses and other current liabilities |
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Operating lease liabilities | ( | ( | |||||
Other noncurrent liabilities |
| ( |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities |
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Capitalized software development costs |
| ( |
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Purchases of property and equipment |
| ( |
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Other |
| ( |
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Net cash used in investing activities |
| ( |
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Cash Flows from Financing Activities |
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Proceeds from borrowings on revolving line of credit |
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Repayments on revolving line of credit |
| ( |
| ( | |||
Proceeds from issuance of common stock under employee stock purchase plan (ESPP) | | — | |||||
Principal payments on finance lease obligations | ( | ( | |||||
Payment of offering costs related to the IPO | — | ( | |||||
Withholding tax payments related to vesting of RSUs | ( | — | |||||
Other |
| ( |
| ( | |||
Net cash used in financing activities |
| ( |
| ( | |||
Net decrease in cash, cash equivalents and restricted cash |
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Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
Reconciliation of cash, cash equivalents and restricted cash | |||||||
Cash and cash equivalents | $ | | $ | | |||
Restricted cash | — | | |||||
Total cash, cash equivalents and restricted cash at end of period | $ | | $ | | |||
(Continued) | |||||||
8
LULU’S FASHION LOUNGE HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Thirty-Nine Weeks Ended | ||||||
October 1, | October 2, | ||||||
2023 |
| 2022 | |||||
Supplemental Disclosure | |||||||
Cash paid during the period for: | |||||||
Income taxes, net | $ | | $ | | |||
Interest | $ | | $ | | |||
Operating leases | $ | | $ | — | |||
Finance leases | $ | | $ | — | |||
Supplemental Disclosure of Non-Cash Investing and Financing Activities |
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Addition of right-of-use assets, including prepaid rent, net of deferred rent recorded upon adoption of ASC 842 | $ | — | $ | | |||
Addition of lease liabilities recorded upon adoption of ASC 842 | $ | — | $ | | |||
Right-of-use assets acquired under operating lease obligations | $ | | $ | | |||
Assets acquired under finance lease obligations | $ | | $ | | |||
Purchases of property and equipment included in accounts payable and accrued expenses | $ | | $ | | |||
(Concluded) | |||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
9
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1.Description of Business, Organization and Liquidity
Organization and Business
Pursuant to a reorganization, Lulu’s Fashion Lounge Holdings, Inc., a Delaware Corporation (“Lulus”, or the “Company”), was formed on August 25, 2017 as a holding company and its primary asset is an indirect membership interest in Lulu’s Fashion Lounge, LLC (“Lulus LLC”). Prior to the sale of the Company’s Series A convertible preferred stock in April 2018, the Company was wholly-owned by Lulu’s Holdings, L.P. (the “LP”). Prior to the Company’s initial public offering in November 2021, the Company was majority-owned by the LP.
Lulus LLC was founded in 1996, starting as a vintage boutique in Chico, CA that began selling online in 2005 and transitioned to a purely online business in 2008. The LP was formed in 2014 as a holding company and purchased
Impact of Macroeconomic Trends on Business
Changing macroeconomic factors, including inflation, interest rates, and overall consumer confidence with respect to current and future economic conditions, have directly impacted our sales in the third quarter of 2023 as discretionary consumer spending levels and shopping behavior fluctuate with these factors. During the first nine months of 2023, we have responded to these factors by taking appropriate pricing, promotional and other actions to stimulate customer demand. These factors are expected to continue to have an impact on our business, results of operations, our growth and financial condition.
Liquidity
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of October 1, 2023, the Company had total cash and cash equivalents of $
In November 2021 the Company entered into a Credit Agreement to provide the Revolving Facility that provides for borrowings up to $
The Company is evaluating sources of debt financing. However, the Company believes the cash on hand and cash provided by operations in conjunction with certain cash conservation measures to be taken as necessary, including adjustments to marketing and other variable and capital spend, will enable the Company to meet its obligations as they become due within one year. The condensed consolidated financial statements do not reflect any adjustments relating to the outcome of this uncertainty.
2.Significant Accounting Policies
Basis of Presentation and Fiscal Year
The Company’s fiscal year consists of a 52-week or 53-week period ending on the Sunday nearest December 31. The fiscal years ending December 31, 2023 and ended January 1, 2023 consisted of 52-weeks.
The condensed consolidated financial statements and accompanying notes include the accounts of the Company and its wholly owned subsidiaries, after elimination of all intercompany balances and transactions. The accompanying
10
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States of America (“GAAP”) and the requirements of the SEC for interim reporting. As permitted under these rules, certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted. The interim condensed consolidated financial statements are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of October 1, 2023 and its results of operations for the thirteen and thirty-nine weeks ended October 1, 2023 and October 2, 2022 and its cash flows for the thirty-nine weeks ended October 1, 2023 and October 2, 2022. The results of operations for the thirty-nine weeks ended October 1, 2023 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other future annual or interim period.
The condensed consolidated balance sheet as of January 1, 2023 was derived from the Company’s audited consolidated financial statements, which are included in the Company’s Annual Report on Form 10-K as filed with the SEC on March 14, 2023.
Significant Accounting Policies
The significant accounting policies used in preparation of these condensed consolidated financial statements are consistent with those discussed in Note 2 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2023, except as noted below and within the "Adopted and Recently Issued Accounting Pronouncements" section.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The significant estimates and assumptions made by management relate to sales return reserves and related assets for recovery, lease right-of-use assets and related lease liabilities, and income tax valuation allowance. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods. As future events and their effects cannot be determined with precision, actual results could materially differ from those estimates and assumptions.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and restricted cash. At times, such amounts may exceed federally insured limits. The Company reduces credit risk by depositing its cash with a major credit-worthy financial institution within the United States. To date, the Company has not experienced any losses on its cash deposits. As of October 1, 2023 and January 1, 2023, a single wholesale customer represented
11
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Leases
Contracts that have been determined to convey the right to use an identified asset are evaluated for classification as an operating or finance lease. For the Company’s operating and finance leases, the Company records a lease liability based on the present value of the lease payments at lease inception. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate (“IBR”). The determination of the IBR requires judgment and is primarily based on publicly-available information for companies within similar industries and with similar credit profiles. We adjust the rate for the impact of collateralization, the lease term and other specific terms included in each lease arrangement. The IBR is determined at the lease commencement and is subsequently reassessed upon a modification to the lease arrangement. The right-of-use asset is recorded based on the corresponding lease liability at lease inception, adjusted for payments made to the lessor at or before the commencement date, initial direct costs incurred and any tenant incentives allowed for under the lease. The Company does not include optional renewal terms or early termination provisions unless the Company is reasonably certain such options would be exercised at the inception of the lease. Lease right-of-use assets, current portion of lease liabilities, and lease liabilities, net of current portion are included on the condensed consolidated balance sheets.
Fixed lease expense for operating leases is recognized on a straight-line basis, unless the right-of-use assets have been impaired, over the reasonably assured lease term based on the total lease payments and is included in operating expenses in the condensed consolidated statements of operations and comprehensive income (loss). Fixed and variable lease expense on operating leases is recognized within operating expenses in the condensed consolidated statements of operations and comprehensive income (loss). Finance lease expenses are recognized on a straight-line basis. Fixed and variable expenses are captured within interest expense and depreciation expense, which has components within general and administrative expenses and cost of revenue. The Company’s non-lease components are primarily related to maintenance, insurance and taxes, which varies based on future outcomes and is thus recognized in lease expense when incurred.
Revenue Recognition
The Company generates revenue primarily from the sale of merchandise products directly to end customers. The sale of products is a distinct performance obligation, and revenue is recognized at a point in time when control of the promised product is transferred to customers, which the Company determined occurs upon shipment based on its evaluation of the related shipping terms. Revenue is recognized in an amount that reflects the transaction price consideration that the Company expects to receive in exchange for those products. The Company’s payment terms are typically at the point of sale for merchandise product sales.
The Company elected to exclude from revenue taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities. The Company has elected to apply the practical expedient, relative to e-commerce sales, which allows an entity to account for shipping and handling as fulfillment activities, and not a separate performance obligation. Accordingly, the Company recognizes revenue for only
Revenue from merchandise product sales is reported net of sales returns, which includes an estimate of future returns based on historical return rates, with a corresponding reduction to cost of sales. There is judgment in utilizing historical trends for estimating future returns. The Company’s refund liability for sales returns is included in the returns reserve on its condensed consolidated balance sheets and represents the expected value of the refund that will be due to the Company’s customers. The Company also has corresponding assets for recovery that represent the expected net realizable value of the merchandise inventory to be returned.
12
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The Company sells stored-value gift cards to customers and offers merchandise credit stored-value cards for certain returns. Such stored-value cards do not have an expiration date. The Company recognizes revenue from stored-value cards when the card is redeemed by the customer. The Company has determined that sufficient evidence exists to support an estimate for stored-value card breakage. Subject to requirements to remit balances to governmental agencies, breakage is recognized as revenue in proportion to the pattern of rights exercised by the customer, which is substantially within
The Company has
The following table summarizes the significant changes in the contract liabilities balances included in accrued expenses and other current liabilities during the thirteen and thirty-nine weeks ended October 1, 2023 and October 2, 2022 (in thousands):
Deferred |
| Stored-Value | ||||
| Revenue |
| Cards | |||
Balance as of January 1, 2023 | $ | | $ | | ||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of April 2, 2023 | | | ||||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( | ( | |||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| | | |||
Balance as of July 2, 2023 | $ | | $ | | ||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( | ( | |||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| | | |||
Balance as of October 1, 2023 | $ | | $ | | ||
13
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
| Deferred |
| Stored-Value | |||
| Revenue |
| Cards | |||
Balance as of January 2, 2022 | $ | | $ | | ||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of April 3, 2022 | | | ||||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of July 3, 2022 | | | ||||
Revenue recognized that was included in contract liability balance at the beginning of the period |
| ( |
| ( | ||
Increase due to cash received, excluding amounts recognized as revenue during the period |
| |
| | ||
Balance as of October 2, 2022 | $ | | $ | | ||
Selling and Marketing Expenses
Advertising costs included in selling and marketing expenses were $
Net income (loss) Per Share Attributable to Common Stockholders
Basic net income (loss) per share attributable to common stockholders is computed using net income (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share attributable to common stockholders represents net income (loss) attributable to common stockholders divided by the weighted average number of common shares outstanding during the period, including the effects of any dilutive securities outstanding.
14
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
The following table presents the calculation of basic and diluted weighted average shares used to compute net income (loss) per share attributable to common stockholders:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||
| October 1, 2023 |
| October 2, 2022 | October 1, 2023 |
| October 2, 2022 | |||
Weighted average shares used to compute net income (loss) per share attributable to common stockholders – Basic | | | | | |||||
Dilutive securities: | |||||||||
Unvested restricted stock | — | | — | | |||||
Unvested restricted stock units (RSUs) | — | | — | | |||||
Special compensation awards | — | | — | | |||||
Weighted average shares used to compute net income (loss) per share attributable to common stockholders – Diluted | | | | | |||||
The following securities were excluded from the computation of diluted net income (loss) per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive (on an as-converted basis):
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||
| October 1, 2023 | October 2, 2022 | October 1, 2023 | October 2, 2022 | |||||
Stock options |
| | — | | — | ||||
Unvested restricted stock | | | | | |||||
Unvested RSUs | | | | | |||||
Performance stock units | | | | | |||||
Employee stock purchase plan shares | | | | | |||||
2023 stock-based bonus plan | | — | | — | |||||
Total |
| | | | | ||||
Recently Adopted Accounting Pronouncements
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, these consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities from an incurred loss methodology to an expected loss methodology. For assets held at amortized cost basis, the guidance eliminates the probable initial recognition threshold and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses are recorded through an allowance for credit losses, rather than a write-down, limited to the amount by which fair value is below amortized cost. Additional disclosures about significant estimates and credit quality are also required. The guidance is effective for the Company for fiscal years
15
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
beginning after December 15, 2022. The Company adopted this guidance on January 2, 2023, and it did not have a material impact on its consolidated financial statements or disclosure requirements.
Recently Issued Accounting Pronouncements
There are no new recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.
3.Fair Value Measurements
The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts payable, accrued expenses and revolving line of credit. As of October 1, 2023 and January 1, 2023, the carrying values of cash and cash equivalents, restricted cash, accounts payable and accrued expenses approximate fair value due to their short-term maturities. The fair value of the Company’s Revolving Facility that provides for borrowings up to $
4.Balance Sheet Components
Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
| Estimated Useful Lives |
| October 1, |
| January 1, | |||
in Years | 2023 | 2023 | ||||||
Leasehold improvements | $ | | $ | | ||||
Equipment |
| |
| | ||||
Furniture and fixtures |
| |
| | ||||
Construction in progress |
| |
| | ||||
Total property and equipment |
| |
| | ||||
Less: accumulated depreciation and amortization |
| ( | ( | |||||
Property and equipment, net | $ | | $ | | ||||
Depreciation and amortization of property and equipment for the thirteen weeks ended October 1, 2023 and October 2, 2022 was $
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following (in thousands):
| October 1, |
| January 1, | |||
2023 | 2023 | |||||
Accrued compensation and benefits | $ | | $ | | ||
Accrued marketing |
| |
| | ||
Accrued inventory |
| |
| | ||
Other |
| |
| | ||
Accrued expenses and other current liabilities | $ | | $ | | ||
16
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
5.Debt
Revolving Facility
During November 2021, the Company entered into a Credit Agreement with Bank of America (the “Credit Agreement”) to provide the Revolving Facility that provides for borrowings up to $
All borrowings under the Credit Agreement accrue interest at a rate equal to, at the Company’s option, either (x) the term daily SOFR, plus the applicable SOFR adjustment plus a margin of
Amounts borrowed under the Credit Agreement are collateralized by all assets of the Company and contains various financial and non-financial covenants for reporting, protecting and obtaining adequate insurance coverage for assets collateralized and for coverage of business operations, and complying with requirements, including the payment of all necessary taxes and fees for all federal, state and local government entities. Immediately upon the occurrence and during the continuance of an event of default, including the noncompliance with the above covenants, the lender may increase the interest rate per annum by
Debt Discounts and Issuance Costs
Debt discounts and issuance costs are deferred and amortized over the life of the related loan using the effective interest method. The associated expense is included in interest expense in the condensed consolidated statements of operations and comprehensive income (loss). Debt discounts and issuance costs are presented as a reduction of long-term debt with the exception of debt issuance costs related to the Revolving Facility, which are included in other non-current assets in the condensed consolidated balance sheets. As of October 1, 2023 and January 1, 2023, unamortized debt issuance costs recorded within other non-current assets were $
6.Leases
On January 3, 2022, the Company adopted ASC 842 using the alternative transition method and applied the standard only to leases that existed at that date. Under the alternative transition method, the Company did need to restate the comparative periods in transition and will continue to present financial information and disclosures for periods before January 3, 2022, in accordance with FASB ASC 840, Leases. The Company elected the practical expedient package, which among other practical expedients, includes the option to retain the historical classification of leases entered into prior to
17
LULU’S FASHION LOUNGE HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
January 3, 2022, and allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company also elected the practical expedient to combine lease and non-lease components.
The Company is a lessee under various lease agreements. The determination of whether an arrangement contains a lease and the lease classification is made at lease commencement (date on which a lessor makes an underlying asset available for use by the lessee). At lease commencement, the Company also measures and recognizes a right-of-use asset, representing the Company’s right to use the underlying asset, and a lease liability, representing the Company’s obligation to make lease payments under the terms of the arrangement. The lease term is defined as the noncancelable portion of the lease term plus any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised. For the purposes of recognizing right-of-use assets and lease liabilities associated with the Company’s leases, the Company has elected the practical expedient of not recognizing a right-of-use asset or lease liability for short-term leases, which are leases with a term of 12 months or less. The Company has multiple finance leases and operating leases that are combined and included in the lease right-of-use assets, lease liabilities, current, and lease liabilities, noncurrent on the Company’s condensed consolidated balance sheets.
The Company primarily leases its distribution facilities and corporate offices under operating lease agreements expiring on various dates through December 2031, most of which contain options to extend. In addition to payment of base rent, the Company is also required to pay property taxes, insurance, and common area maintenance expenses. The Company records lease expense on a straight-line basis over the term of the lease. The Company had immaterial remaining obligations for the base rent related to the short-term leases as of October 1, 2023 and October 2, 2022.
The Company also leases equipment under finance lease agreements expiring on various dates through May 2028.
As of October 1, 2023, the future minimum lease payments for the Company’s operating and finance leases for each of the fiscal years were as follows (in thousands):
Fiscal Year: |
| Operating Leases | Finance Leases | Total | |||||
2023 (remaining three months) | $ | | $ | | $ | | |||
2024 |
| | | | |||||
2025 |
| | | | |||||
2026 |
| | | | |||||
2027 |
| | | | |||||
Thereafter | | | | ||||||
Total undiscounted lease payment | |||||||||