Lulu’s Fashion Lounge: 2022 Guidance Looks Solid (NASDAQ:LVLU)

When Lulu’s Fashion Lounge Group (NASDAQ:LVLU) went public in November of last year, I concluded that I was not going to shop here. The company saw a disappointing public offering, with investors arguably questioning if current profitability could be maintained. While I was compelled to the strong recovery of the business, I failed to see enough of a differentiating factor.

Expectations have been reset quite a bit ever since, despite a recent recovery, amidst a solid outlook for 2022 which is increasing appeal a great deal, as I fail to have conviction yet amidst uncertainty on the stock-based compensation expense.

Former Take

Lulu has an aim to become the most beloved women’s brand for affordable luxury, offering exclusive products at reasonable prices, combined with superior customer service and personalized shopping experiences.

The company is a customer-driven and digitally-native brand, serving Millennials and Gen Z women, as the company has gained great traction with more than 7 million followers across the most popular social media outlets. Being an avid user of customer data itself, Lulu has been focusing on quick product creation and short cycles, in order to avoid the traditional trap of having to offer huge discounts to get rid of unwanted inventory.

The company went public at $16 per share, at the low end of the preliminary offering range set between $16 and $19 per share. With 37 million shares outstanding, the company has been awarded a $595 million equity valuation, as net cash balances are close to flat.

This nearly 600 million valuation was applied to a business which generated $370 million in sales in 2019 on which a $15 million operating profit was reported. Revenues fell to $249 million in 2020, for obvious reasons, as strict cost control made that operating losses were controlled at around $5 million.

Lulu has seen a strong recovery with revenues up 23% in the first half of 2021, as revenues rose to $172 million. More impressive, a $7 million operating loss turned into a near $18 million operating profit, as operating margins of 10% are superior to margins of around 4% reported in 2019. Moreover, preliminary third quarter results indicated revenues of $105 million, yet EBITDA of $11 million suggests that the profit run rate is only in line with the profitability reported in the first half of the year. Analyzing the results, I pegged revenues at $350-$400 million; operating profits at around $35 million; and net earnings at $0.75 per share.

With shares trading at around 20 times earnings, the valuation looked reasonable, but I recognized that operating margins of around 10% were historically high, as the differentiated company profile makes it hard to compare this business to some of its peers. Shares fell to $13 in the first days after the offering and while value increased on the back of the move lower, I wondered how margins would look like in the intermediate term, and how the business will be positioned in relation to a traditional tough industry.

What Happened?

Since the initial offering, shares have come under pressure as shares ended the year around the $10 mark, at a time when many technology and recent IPO names were selling off. Revenues even fell to just $5 in March, before delivering upon a big recovery, now trading at $9 and change again.

In December, the company posted third quarter results which were in line with expectations. Revenues rose 95% to $106 million and change, amidst easy comparables as EBITDA of $11.9 million came in at the high end of the range as well. The company guided for a somewhat softer fourth quarter as the midpoint of the full year revenue guidance at $371 million which reveals an expected $92 million in fourth quarter revenues. Worrisome was that fourth quarter EBITDA is only set to come in at $3-$4 million, marking a dramatic deleverage on a sequential basis.

In March, the company posted its fourth quarter results as revenues came in at nearly $97 million, a bit stronger than guided for, as EBITDA was stronger than guided for as well at $6.4 million. While this is better than the guidance, it marks a dramatic decline from the third quarter results, of course. The real question mark is of how the P&L will look like going forward as a quarterly stock-based compensation of $9.6 million reveals real economic losses. The question is how large these losses will be in the future, or if they are elevated here, given the IPO. Fortunately, the earnings call seemed to indicate that the increase in stock-based compensation is likely a one-time item.

The company guided for 2022 sales to rise by nearly 30% to $480-$490 million, as EBITDA is seen between $48.5 and $50 million, which quite frankly I find a comforting guidance. This guidance includes nearly 5 million in costs incurred as a publicly traded business, yet it is unclear, of course, how large the stock-based compensation expense will be. With shares trading comfortably below 1 times sales here, the valuation looks very reasonable at around 8 times EBITDA. Yet, the question is how distorted this EBITDA number will be.

With EBITDA trending at $50 million, I am hopeful that $25 million in operating earnings might be in the works, as this might still result in earnings close to $0.50 per share, while the valuation remains justifiable. Amidst all this, I see appeal improving as the 2022 guidance looks solid. Yet, I fail to have conviction amidst the ambiguity on the real margin profile now.