Lulu’s Fashion Lounge Makes Executive Moves As Economy Tightens (NASDAQ:LVLU)

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A Quick Take On Lulu’s Fashion Lounge

Lulu’s Fashion Lounge (NASDAQ:LVLU) went public in November 2021, raising approximately $92 million in gross proceeds from an IPO that priced at $16.00 per share.

The firm sells fashionable clothing and related accessories to younger demographic women.

My outlook is pessimistic on LVLU’s prospects in the near future due to both internal and external conditions, so I’m on Hold for the stock in the near term.

Lulu’s Fashion Lounge Overview

Chico, California-based Lulu’s was founded to develop a digitally-native fashion brand aimed at selling affordable luxury clothing and related products to Millennial and Gen Z women.

Management is headed by Chief Executive Officer David McCreight, who has been with the firm since April 2021 and was previously CEO of Anthropologie, a clothing retailer, and president at Under Armour.

The process by which the firm launches new products includes:

  • Product curation

  • Customization

  • Customer testing

  • Reorder and ramp-up

The company seeks customers through its owned digital media assets, working with influencers to promote its brand on various social media platforms and paying for search results placements on search engines and social platforms.

Lulu’s Market & Competition

The global market for selling clothing online is extremely large, in the hundreds of billions of dollars, and has been growing quickly.

The online clothing industry has continued to grow during the Covid-19 pandemic, although it has been hampered to some degree by logistical challenges.

The industry has also been challenged by the rise of “fast fashion” companies, which can produce and sell clothing rapidly and cheaply.

However, the online clothing market is still growing and is expected to continue to grow in the future.

According to a 2029 market research report by Digital Commerce 360, online apparel sales represented 38.6% of total U.S. apparel sales in 2019 and accounted for all of the growth in retail clothing sales.

This growth is being driven by several factors, including the continued growth of e-commerce, the increasing popularity of athleisure wear, and the rise of online-only apparel brands.

Also, the market share of the industry has grown steadily in recent years, as the report chart below shows:

Ecommerce Market Activity

Ecommerce Market Activity (Digital Commerce 360)

Major competitive or other industry participants include:

  • a.k.a. Brands

  • The RealReal (REAL)

  • Revolve Group (RVLV)

  • Farfetch (FTCH)

  • Other online retailers

Lulu’s Recent Financial Performance

  • Total revenue by quarter has risen according to the following chart:

9 Quarter Total Revenue

9 Quarter Total Revenue (Seeking Alpha)

  • Gross profit margin by quarter has varied as follows:

9 Quarter Gross Profit Margin

9 Quarter Gross Profit Margin (Seeking Alpha)

  • Selling, G&A expenses as a percentage of total revenue by quarter have trended higher in recent quarters:

9 Quarter Selling, G&A % Of Revenue

9 Quarter Selling, G&A % Of Revenue (Seeking Alpha)

  • Operating income by quarter has trended lower recently:

9 Quarter Operating Income

9 Quarter Operating Income (Seeking Alpha)

  • Earnings per share (Diluted) have remained positive in five of the last six quarters, as the chart shows here:

9 Quarter Earnings Per Share

9 Quarter Earnings Per Share (Seeking Alpha)

(All data in the above charts is GAAP)

Since its IPO, LVLU’s stock price has fallen 70.6% vs. the U.S. S&P 500 Index’s drop of around 13.1%, as the chart below indicates:

52 Week Stock Price

52 Week Stock Price (Seeking Alpha)

Valuation And Other Metrics For Lulu’s

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]

Amount

Enterprise Value / Sales

0.4

Enterprise Value / EBITDA

13.8

Revenue Growth Rate

33.6%

Net Income Margin

0.0%

GAAP EBITDA %

3.1%

Market Capitalization

$157,180,000

Enterprise Value

$192,200,000

Operating Cash Flow

$1,440,000

Earnings Per Share (Fully Diluted)

-$4.32

(Source – Seeking Alpha)

As a reference, a relevant partial public comparable would be a.k.a. Brands (AKA); shown below is a comparison of their primary valuation metrics:

Metric [TTM]

a.k.a. Brands

Lulu’s Fashion Lounge

Variance

Enterprise Value / Sales

0.6

0.4

-23.2%

Enterprise Value / EBITDA

9.4

13.8

47.5%

Revenue Growth Rate

43.2%

33.6%

-22.1%

Net Income Margin

-0.4%

0.0%

–%

Operating Cash Flow

-$8,080,000

$1,440,000

–%

(Source – Seeking Alpha)

A full comparison of the two companies’ performance metrics may be viewed here.

Commentary On Lulu’s

In its last earnings call (Source – Seeking Alpha), covering Q3 2022’s results, management highlighted the leadership changes at CEO and CFO levels.

Crystal Landsem, current CFO and co-president will take the CEO job and the firm plans to announce a CFO successor in ‘early 2023.’

The firm produced growth in customer count of 29% year-over-year and the average order size rose 6% on a 12-month basis due to improvement from both existing and new customers in this regard.

However, management said the customer base has produced ‘inconsistent’ behavior, with ‘volatile traffic trends and conversion, which are most likely due to macro pressures that are negatively impacting her desire to spend.

As to its financial results, total revenue dropped slightly year-over-year, while gross profit margin fell materially.

Management did not disclose any company customer retention rate information.

Operating income dropped significantly year-over-year, as did earnings per share.

For the balance sheet, the firm ended the quarter with $12.5 million in cash and equivalents and $15.0 million in long-term debt.

Inventory valuation has risen markedly in recent quarters, leading some analysts, such as Cowen, to downgrade the stock on margin concerns due to the likely need to discount over the holiday season in order to move bloated inventory.

Over the trailing twelve months, free cash use was $1.3 million, of which capital expenditures accounted for $2.7 million cash used.

Looking ahead, management reduced its revenue and adjusted EBITDA forward guidance.

Regarding valuation, the market is valuing LVLU at a lower EV/Revenue multiple than AKA as the firm is growing at a slower rate of growth.

Primary risks to the company’s outlook include its inventory overhang and a slowing macroeconomic environment where the consumer has less discretionary money to spend.

My outlook is pessimistic on LVLU’s prospects in the near future due to both internal and external conditions, so I’m on Hold for the stock in the near term.

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