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This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
Lulu’s Fashion Lounge has gotten off to a very impressive start as a public company since their $92M IPO in November 2021. Last year we reported on their highly differentiated business that their CEO describes as a “data driven digitally native” model that currently only ships to US-based customers. Our last piece focused on their impressive returns on acquisition spending. Things have gotten even better for the company this year as the return of weddings and other post-pandemic events have driven impressive gains in Revenue, AOV, and Gross Margins in the most recent quarter.
Their stock has been on an impressive run, outperforming the S&P 500 YTD by 30 percentage points and almost tripling from peak to trough since reporting earnings on May 17th. We will also look at their most recent comments on the challenges other retailers are seeing on excess inventory, consumer demand, and logistics challenges (Hint: They aren’t seeing any of these issues).
Growth at Lulu's Fashion Lounge. (via Lulu's Fashion Lounge
Stats from the most recent quarter were unambiguously good. Sales of $111M grew 62% YoY, gross margin of 47.3% was up 220 bps YoY and Adj EBITDA margin expanded to 8.9% vs 7.8% in Q1 of 2021. Management also very modestly raised the FY22 sales guidance by 2.1% to 490M-500M. Annualized inventory turns stand at an extremely impressive 8x, meaning they full turn every 45 days. Luckily Lulu’s executive team has been very busy hitting the Street with interviews and commentary over the last six weeks with their earnings call and attending Retail & Internet conferences with Cowen, Jefferies, and Baird. Their major talking points and initiatives have centered around their data driven buying model, financial flexibility since paying off long-term debt, and substantial supply chain investments.
An income statement and KPIs from Lulu's Fashion Lounge. (Courtesy photo)
Data-driven buying model
Lulu’s leadership team consistently attributes their success to their “low fashion risk” approach that is primarily supported by a process of buying small batches of products and testing consumer reactions. Their design team launches hundreds of SKUs per week and can sell 94% of their “winners” at full price. Non-winners are dropped from the catalog, leading to 70% of revenue coming from reorders recommended by their proprietary algorithm. Lulu’s CFO calls this a “great ability to flex up and down, as we are heavy on variable costs.” Lulu’s doesn’t try to predict the next trend, they will introduce 200 to 250 SKUs across product classes and measure performance by product attributes. This allows them to always know what attributes are trending and then work closely and quickly with their vendors to increase those attributes in the catalog. They key on the term “fresh fashion,” offering longer shelf life, less seasonal risk, and better quality than fast fashion competitors.
Balance sheet flexibility
Lulu’s has smartly used their IPO funding to reduce their long-term debt on the balance sheet. Their $12.8M interest expense in 2021 will decline to 700K in FY22. The CEO told Cowen’s Oliver Chen that months ago they had a “difficult balance sheet.” Before the IPO liquidity event, they had to monitor their cash flow weekly, but their newly gained debt freedom allows them to test new categories and invest in fulfillment center robotics and expansion.
Their CEO spoke about using this opportunity to expand their top of funnel brand marketing. They typically have not spent much in that area, choosing to focus on transactional/performance online advertising primarily “due to balance sheet constraints and the ownership structure.” He called out their relatively low brand awareness, and his interest in driving more awareness from brand spending. This is intended to support what has been a primarily word of mouth driven brand discovery.
The Lulu’s team also chose to invest in a transition to a reward-based discounting program as opposed to coupon-based offers. In March 2022 they relaunched LUV Rewards. The program is intended to provide Lulu with first party data as points are rewarded to customers based on engagement. The flexibility of this new program (relative to coupons) will drive higher customer lifetime value. While customer engagement has increased “right off the bat,” there is no disclosed financial modeling or ROI analysis around this initiative. Leadership told analysts on their earnings call that they are still in test and learn mode.
Supply chain investments
In Q1 2022 Lulu’s also transitioned inbound receiving and product quality control from a 3PL to in house facilities and staff. Their in-house fulfillment centers are in Southern California, Northern California, and Eastern Pennsylvania. In March 2022 they rolled out robotics use in the Eastern Pennsylvania FDC. These decisions have already shown increased efficiencies and lower cost per unit than the third-party provider.
The company also has a full slate of follow-on investments in logistics, including expanding their Southern California center in coming quarters to meet demand in California, AZ, and NV and rolling out robotics in the Northern California facility (included in Capex forecast). The CEO trumpeted their successful robotics rollout that occurred during the peak Spring season, adding that these automation efforts significantly improved employee turnover vs Q1 2021.
Lulu’s management has a clearly differentiated business model that has obviously excited many equity investors that have been downbeat on retail recently. Management plays up balance sheet strength, cash flow, and fast turn of inventory. They offered positive comments on consumer health, seeing more activity from both new and repeat customers while there is little to no reaction from price increases. We will be continuing to follow their story and see how their performance develops as post-quarantine events diminish into year end.
Trending in Operations
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.