Lulu’s Fashion Lounge Holdings (NASDAQ:LVLU), or Lulus as the firm is known, has a Buy investment rating from me. Lulus refers to itself in its press releases as “a customer-driven, digitally native fashion brand for women” that is well recognized for its “bridal concierge,” implying that weddings are a big demand driver for the company.

In the short term, despite a Q1 earnings loss, LVLU has left its 2023 guidance constant, which is a positive indicator. Lulus has been gaining market share at the expense of its competitors in the wedding event product area over the long term, and the company continues to spend to support future growth. Considering Lulus’ short- and long-term prospects, I believe the company’s shares are cheap at 4.8 times EV/EBITDA, which supports my Buy rating for the firm.

The Financial Performance of LVLU in Q1 Was Mixed

On May 9, 2023, after trading hours, Lulus published a press release reporting the company’s financial performance for the first quarter of this year. In terms of both the top and bottom lines, the first quarter of 2023 was a mixed bag for LVLU.

The company’s actual Q1 2023 sales of $91.0 million met market expectations, as the shell-side’s average topline estimate of $91.6 million was only marginally higher. Despite the difficult economic conditions, Lulus’ revenue remained consistent QoQ in Q1 2023 (LVLU’s revenue in Q4 2022 was similarly $91.0 million).

LVLU reported during its Q1 2023 earnings call that its major “wedding-related events product category performed as expected” in the most recent quarter, explaining why the firm was able to achieve in-line revenues for Q1 2023.

On the other hand, the bottom-line performance of LVLU disappointed the market. In Q1 2023, Lulus recorded a net loss per share of -$0.14, compared to positive earnings per share (EPS) of +$0.05 in Q1 2022. To make matters worse, previous to the company’s actual results announcement, sell-side analysts had predicted a significantly narrower first-quarter net loss of -$0.07 per share for LVLU.

Lulus’ gross profit margin shrank by -5.6 percentage points, from 47.3% in the first quarter of 2022 to 41.7% in the most recent quarter. According to the most recent quarterly results briefing, LVLU attributed the company’s lower-than-expected profits for Q1 2023 to “higher markdowns and discounts.” While LVLU beat sell-side forecasts for Q1 revenue, it did so at the expense of aggressive pricing and increased promotions, which damaged its bottom line.

Lulus Had Maintained the Company’s Financial Guidance for 2023

LVLU kept its full-year fiscal 2023 management outlook unchanged, despite results falling short of expectations in the first quarter.

Based on the midpoint of its projection, the firm expects a -4.5% revenue reduction to $420 million in fiscal 2023, which is in line with the market’s consensus topline forecast of $419.2 million prior to the announcement of its most recent quarterly results.

According to Lulus’ 2023 estimate, the company’s normalized EBITDA will fall by -16.1% to $24.4 million in FY 2023. This means the company’s non-GAAP adjusted EBITDA margin will fall from 6.6% last year to 5.8% this year. LVLU stated in its Q1 2023 earnings release that the reduced EBITDA forecast this year is mostly due to “investments in key growth opportunities” such as boosting brand awareness and expanding into new regions, rather than short-term obstacles.

LVLU stated at its first quarter results conference that it has noticed “sequential improvement in business for both revenue and margin trends” in Q2 2023, with similar favorable trends expected to continue for the remainder of 2023. During the last quarterly results conference, Lulus also mentioned that its “spring and summer merchandise sales” in Q1 2023 were unexpectedly impacted by a “more pronounced fall-winter selling season.”

Given the one-time negative circumstances in the first quarter and encouraging indicators of above-expectations topline and profitability in the second quarter, it’s easy to see why LVLU has maintained its earlier full-year FY 2023 revenue and operating profit projection.

A Comparison of the Values of LVLUs and Their Long-Term Growth Prospects

Lulus’ current prices do not reflect the company’s long-term growth prospects, implying that the company’s shares are overpriced.

According to S&P Capital IQ data, the market now values LVLU at 4.8 times the consensus projected next twelve months’ EV/EBITDA. In comparison, the consensus FY 2023-2027 EBITDA CAGR prediction for Lulus from Wall Street analysts is +39.2%. Given its estimated operating profit growth, Lulus might trade at a high single-digit or perhaps low-teens EV/EBITDA ratio in the future.

Two primary elements support LVLU’s positive growth trajectory, as indicated by the strong FY 2023-2027 EBITDA CAGR estimate.

To begin, Lulus has demonstrated a willingness to forego short-term revenue in order to invest in the future. In the prior section, I mentioned that LVLU forecasted a drop in FY 2023 EBITDA due to growth investments.

Second, LVLU provided key figures that lead to the company gaining market share. Lulus particularly noted “meaningful gains in the Lulus’ share of voice across multiple (marketing) channels” during the Q1 2023 earnings call. Separately, the company’s revenue from its main “wedding-related events product category” in Q1 2023 was +29% higher than in Q1 2019 prior to COVID-19. As a result, Lulus’ in-line first-quarter revenue cannot be attributed entirely to the stabilization of sales following the epidemic; rather, the company’s topline has most likely been bolstered by stealing market share away from its competitors.

Final Thoughts

Following the epidemic, LVLU gained market share, as indicated by its topline growth and social media indicators. According to their 2023 EBITDA guidance, Lulus prioritizes long-term growth over short-term profitability, implying that the company is well-positioned to preserve or increase its market share in the future. Lulus has room to extend its value multiples, which warrants a Buy recommendation for LVLU.

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