Lulu's (LVLU) Fiscal Q2 2026 Earnings Call: Margin Expands as Revenue Falls 17%

Key Takeaways

• Fiscal Q2 2026 net revenue fell 17% year over year to $67.8 million, driven by a 17% decline in total orders placed and higher return rates.
• Gross margin expanded 330 basis points to 48.6%, the highest second-quarter level since 2021, supported by a higher-margin sales mix and freight savings.
• Net loss narrowed to $1.5 million from $3.0 million. Adjusted EBITDA doubled to $1.0 million, while adjusted EBITDA margin improved to 1.5% from 0.6%.
• Quarter-end inventory declined 23% to $28.6 million, with casual apparel inventory down 43% and footwear inventory down nearly 58%.
• New occasion wear generated double-digit year-over-year revenue growth, while total markdown sales fell 38%. Wholesale revenue nearly doubled during the quarter.
• Management maintained its fiscal 2026 outlook for positive adjusted EBITDA and an improved year-over-year net revenue trend compared with the 11% decline recorded in 2025.

Key Financial Results

Business and Operating Performance

Lulu’s said Q2 revenue continued to reflect prior-year assortment decisions, particularly lower reorder sales from 2025 styles. However, products introduced during the first half of 2026 became eligible for reorders at rates well ahead of internal targets. Management expects these newer styles to build the future reorder revenue base.

The new occasion wear assortment—including bridal, bridesmaids, formal and day event products—delivered double-digit year-over-year revenue growth, supported by regular-price sales. Total markdown sales declined 38%, including a 65% reduction in casual apparel markdown sales. Management said the shift reduced current revenue but improved sales quality and profitability.

Casual apparel and footwear launches were reduced by 48% year over year as the company streamlined the assortment. Units transacted per new product increased 28% from Q2 2025 and 29% sequentially from Q1 2026. Management expects product launch volume in these categories to normalize during the second half.

Wholesale revenue nearly doubled during the quarter. On a last-12-month basis, wholesale revenue rose 130%, while revenue from comparable nonspecialty accounts increased 61%. Lulu’s is now available in all Nordstrom locations and doubled its prom assortment presence at Dillard’s to 100 stores. Two additional major wholesale accounts were added early in Q3.

Operating expenses declined 14%, with lower fixed costs and distribution-center efficiencies in outbound processing, returns, refurbishment, click-to-ship times and on-time delivery. Lulu’s also introduced Happy Returns and expanded product exchange options to improve customer experience and retain revenue.

Following quarter-end, the company amended its credit facility to provide additional borrowing availability at key points during the year. It also entered an equity line of credit allowing up to $4.5 million in share sales, with an option for a second facility of up to $5.5 million.

Management Guidance

For fiscal 2026, management continues to expect:

• Adjusted EBITDA to turn positive, compared with negative $1.2 million in fiscal 2025.
• The year-over-year net revenue growth trend to improve relative to the 11% decline in 2025.
• Capital expenditures of $2.0 million to $2.5 million, including capitalized software.
• More and improved new assortment in Q3 and Q4, which management expects to support in-season revenue and help stabilize total active customers by year-end.
• Stronger product foundations established in 2026 to support improving revenue trends, profitability and adjusted EBITDA performance in 2027.

Management expects difficult markdown-sales comparisons to continue through Q1 of next year, while regular-price sales are expected to improve sequentially each quarter and increasingly offset lower markdown volume.

Risks and Areas to Watch

Revenue remains affected by the runoff of older product cohorts and assortment decisions from prior years that management said did not align with Lulu’s core customer.

Return rates remain elevated due to a greater mix of occasion products and higher average unit retail. Management expects improvement as casual apparel and footwear normalize during the second half, but this remains dependent on assortment performance.

The tariff environment remains fluid, with uncertainty around rates, refunds and timing. Lulu’s said it is mitigating the impact through sourcing, vendor negotiations, pricing and assortment management, and does not expect potential refunds to materially affect its outlook.

The board’s special committee continues to evaluate strategic alternatives to maximize stockholder value. These may include a transaction involving the company or continued execution of its standalone strategic plan.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good afternoon, and welcome to Lulu's Second Quarter 2026 Earnings Conference Call. Today's prepared remarks are being recorded. At this time, I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary, Naomi Beckman-Straus. Thank you. You may begin.

Naomi Beckman-Straus

Good afternoon, everyone, and thank you for joining us to discuss Lulu's Second Quarter Fiscal 2026 Results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including, but not limited to, statements regarding management's expectations, plans, strategies, goals and objectives and their implementation.

These forward-looking statements are subject to various risks, uncertainties, assumptions and other important factors, which could cause our actual results, performance or achievements to differ materially from results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our annual report on Form 10-K for the fiscal year ended December 28, 2025, and quarterly report on Form 10-Q for the fiscal quarter ended June 28, 2026, which can be found on our website at investors.lulus.com.

During our call today, we also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings.

We also use certain key operating metrics, including gross margin, average order value and active customers. A description of these metrics can also be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO, Crystal Landsem; our CFO, Heidi Crane; and our President and CIO, Mark Vos. With that, I'll turn the call over to Crystal.

Crystal Landsem

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. During the second quarter, we remained focused on strengthening the fundamentals of the business through disciplined merchandising, inventory management and operational efficiency. While revenue trends were below our historical levels in the second quarter, we continue to prioritize the long-term health of the business over short-term volume.

We continue to see encouraging momentum across several key areas of the business, including progress in our new assortment and reorder funnel, reinforcing our conviction that resetting the assortment around the categories and customers where Lulu's has historically differentiated itself is improving SKU productivity, reorder adoption rates, customer economics and the overall quality of the business. Furthermore, we delivered another quarter of meaningful gross margin expansion, continued improvement in net loss, positive adjusted EBITDA performance and stronger inventory productivity, reflecting continued execution against our turnaround strategy.

Looking more closely at demand trends during the quarter, revenue comparisons continue to reflect assortment decisions from prior product year cohorts, particularly pronounced in the second quarter with lower reorder sales volume from 2025 styles. At the same time, the leading indicators of our assortment reset are increasingly reflecting the progress we are seeing in new styles introduced in 2026. While we are working to fully align our inventory and reorder funnel, we are very encouraged by the response to the newer assortment across both our core occasion wear and casual apparel businesses.

New products introduced during the first half of 2026 are converting into reorder-eligible styles at rates well ahead of our internal targets, reinforcing our confidence that the assortment reset is working and building a stronger reorder funnel for future periods. As these styles build into our reorder revenue base, we expect they will contribute significantly to sales in future quarters and years.

Within our new occasion wear assortment, which includes bridal, bridesmaids, formal and day event categories, we delivered double-digit year-over-year top line growth during the quarter, supported by strong regular price sales. The quarter also reflects a significant reduction in markdown sales with total markdown sales transacted down 38% compared to Q2 2025, including a 65% decline in markdown sales within casual apparel.

While this reduction pressured top line comparisons, we view the shift towards healthier regular price sales as an important part of improving the quality and profitability of the business. We expect the tough comparisons for markdown sales to continue into Q1 of next year with regular price sales sequentially improving each quarter to offset the impact of lower markdown sales.

With that, let me highlight some of the key positives during the second quarter of 2026. New SKU productivity improved during the quarter with a significantly higher percentage of styles reaching reorder thresholds, more comparable to levels we saw in 2021 and prior. These results underscore the impact of our ongoing assortment refinement efforts and provide further evidence that we are improving alignment between our product offering and customer demand.

Gross margins expanded by 330 basis points to 48.6%, our highest second quarter gross margin percentage since 2021. Ongoing gross margin expansion reflects the structural progress we've made across sourcing, assortment optimization and inventory management, driving healthier order economics and supporting improved profitability. We continue to strengthen brand awareness and customer engagement through a series of impactful marketing and experiential initiatives during the quarter. We successfully launched our first Disney collaboration featuring The Devil Wears Prada 2, which drove strong customer response and delivered high conversion, high average order values, strong new customer acquisition and one of our most meaningful brand moments of the quarter.

We also opened our Mall of America pop-up, giving customers an opportunity to experience the Lulu's brand in person while introducing new arrivals and hosting community-focused events. To further amplify these initiatives, we strategically activated influencer partnerships to support these campaigns, extend our reach, drive customer acquisition, and reinforce awareness of the Lulu's brand across both digital and physical touch points.

In April, we launched our 2026 brand campaign anchored by our Summer, Weekend, Wedding edit, which brought our occasion assortment to life through destination wedding storytelling and elevated brand-focused creative. The campaign reinforced our position as a destination for all of life's occasions while supporting brand awareness and customer engagement across all channels. Our wholesale channel continues to see meaningful growth, nearly doubling revenue during the quarter versus the previous year period.

Wholesale continues to complement and amplify our D2C business by meeting customers where they already shop while introducing the Lulu's brand to new audiences. Since the start of Q3, we have launched with 2 additional major partners, further broadening our reach and brand visibility. The in-store experience we gained through these retail partners allows customers to experience firsthand the quality, fit, and value of our assortment, helping deepen brand engagement and trust. We continue to view wholesale as a highly strategic and capital-efficient growth channel that drives awareness and incremental customer acquisition.

Inventory composition improved meaningfully during the quarter, down 23% versus the prior year, with the largest reductions occurring in slow-turning markdown inventory while maintaining a more balanced level of reorder inventory. We believe this reflects the resonance of our newer assortment, combined with a more disciplined approach to inventory planning and a healthier balance between newness and proven winning styles, positioning us to respond more effectively to customer demand.

And finally, we delivered positive adjusted EBITDA of $1 million, which improved significantly year-over-year, reflecting our continued focus on profitability, a lean operating model and disciplined execution across the business. Importantly, the actions we have taken over the last several quarters within casual apparel and footwear are beginning to translate to improved productivity, supported by a cleaner and more focused assortment. This progress reinforces our confidence in the long-term opportunity within these categories.

In the second quarter, we continued to refine our casual apparel and footwear assortments with a disciplined focus on productivity, customer relevance and profitability. We saw encouraging improvements in SKU productivity and right price selling trends, reflecting the benefits of a more curated assortment. In footwear, we further reduced lower-performing inventory and are selectively investing behind top-performing styles. Inventory ended the quarter significantly lower year-over-year, including declines of 43% in casual apparel and nearly 58% in footwear with markdown exposure also meaningfully reduced.

While return rates remain elevated, driven by higher mix of occasion products and higher average unit retail, we continue to expect improvement as our casual apparel and footwear assortments normalize in the back half of the year. All in all, we believe the positive strides made during the quarter further reinforces that we are moving in the right direction and build a stronger foundation for the future. We continue to see opportunities to drive long-term growth by serving our customers across a broader range of occasions and life moments, particularly within wedding-related and adjacent categories that align naturally with the Lulu's brand.

Above all, we remain committed to serving our customers, deepening their connection to the brand and delivering the style, quality, and experience they rely on for life's most meaningful moments. In summary, product is getting better. More new SKUs are reaching reorder thresholds and new occasion wear demand grew double digits across multiple product classes. The reorder funnel is rebuilding quickly. Order economics are getting better. Gross margin is up 330 basis points, adjusted EBITDA doubled and our net losses improved significantly in the quarter compared to last year.

Inventory is getting healthier, down 23% compared to last year, driven primarily from decreases in slow-turning markdown inventory. The brand continues to reach customers in new ways. Wholesale nearly doubled in the quarter, and there were 2 new major retail wholesale accounts added. We are collaborating with new brand partners and increasing our physical activations presence.

Taken together, these results give us increasing confidence in the direction of the business. Revenue is still being affected by the runoff of older product cohorts and the assortment decisions made in prior years that did not align with our core customer, but the leading indicators are moving in the right direction.

One final note before I turn it over to Mark. As previously announced, our Board has formed a special committee of independent directors, which is evaluating strategic alternatives available to us to maximize stockholder value and which may include a possible transaction involving the company as well as continued execution of our stand-alone strategic plan. We do not intend to comment further on special committee unless and until additional disclosure is appropriate.

And with that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer. Mark will provide updates around the progress we're seeing against our strategic focus areas. Mark?

Mark Vos

Thank you, Crystal. I'll take the next few minutes to provide an update on key strategic priorities, which focus on the highest impact drivers of the business: one, improving order economics; two, expanding our wholesale channel; and three, leveraging technology to enhance engagement and operational efficiency. Starting with strengthening our casual apparel and footwear categories to drive improved order economics.

Casual apparel and footwear remain important components of our long-term strategy, helping us engage customers beyond event-driven purchases and creating opportunities for more frequent and repeat interaction with Lulu's brand throughout the year. Beyond driving more frequent customer engagement, these categories have the potential to contribute to stronger order economics and greater marketing efficiency due to their historically lower return rates.

Over the past several quarters, we have taken a more disciplined approach to these categories by refining the assortment, reducing complexity and focusing our investments behind products that better align with customer demand. While these categories in the aggregate continue to operate below historical levels, we are encouraged by the following progress we are seeing. In Q2, to support the reset of this assortment, the number of new product launches in casual apparel and footwear was 48% less than Q2 of last year. At the same time, SKU productivity in these categories continued to strengthen year-over-year and sequentially with a 28% increase in units transacted per new product launched in Q2 2026 compared to Q2 2025 and up sequentially 29% compared to Q1 2026.

In previous calls, I discussed the role of casual apparel and footwear in new customer acquisition. And looking into Q3 through today, we see an improvement in the new customer acquisition contribution of these categories, supporting our belief that our assortment in these categories is resonating with our customers and is turning around as planned. These trends reinforce our confidence that as we move into the back half of the year and casual apparel and footwear product launch volume will normalize, we will begin to return to growth.

As a reminder, our business model is centered on identifying products that resonate with customers and then scaling those winners over time for reorders and repeat demand. While new product performance contributes to current period's results, the greater value is in creating the future core assortment that drives recurring revenue. Given the improvements we are seeing in new SKU productivity and reorder eligibility, we are encouraged that the product cohorts being built today have the potential to become meaningful contributors to future growth.

From a phasing perspective, we continue to expect more and better new assortment in Q3 and Q4 2026 to drive higher in-season revenue contribution, which should have a positive impact on overall return rate, hence new customer acquisition, such that we anticipate our total active customers to stabilize by the end of the year. Starting in 2027, we expect the stronger product foundations and assortment productivity improvements established during 2026 to increasingly support improved revenue trends, expanding profitability and stronger adjusted EBITDA performance year-over-year. We are encouraged by the progress we are making and look forward to updating you on our continued execution in the quarters ahead.

Now turning to our wholesale expansion. We continue to gain traction at expanding our wholesale channel, and I'm pleased to highlight a few key indicators of that improvement. We expanded from 8 nonspecialty wholesale partners in Q2 2025 LTM to 9 in Q2 2026 LTM. Overall wholesale revenue for Q2 2026 LTM increased 130%, and we continue to see healthy growth trends across our current accounts with nonspecialty same account revenue being up 61% compared to 2025 Q2 LTM. As we have previously announced, Lulu's is now available in all Nordstrom doors, and we also doubled our presence to 100 doors with our prom assortment at Dillard's.

And so far in Q3, we have welcomed 2 additional major wholesale accounts. More details to come on these soon. We are excited about how both new and existing Lulu's customers will be able to engage with our brand in stores across the U.S.A.

Last, let me walk through how we are leveraging technology to drive engagement and efficiency. Start with an update on our cost reduction initiatives. In the second quarter, we continued to see a reduction in operating expenses, down 14% with a continued decline in fixed cost. We achieved continued distribution center efficiency gains, which include increased efficiencies in outbound and returns processing, lower refurbishment costs and improvements in our click-to-ship time and on-time delivery.

These major performance improvements have supported our cost efforts, thanks to the great work of our operations teams. I'm also happy to announce that our customers are now enjoying the benefits of having the option to return items via Happy Returns without the need for shipping materials or printing label [indiscernible]. Our customers are adopting Happy Returns at high rates and are clearly appreciative of this service.

Furthermore, the consolidated return shipping to our distribution centers will help offset increases in fuel surcharges. Lastly, we've rolled out additional product exchange options for our customers that encourage revenue retention and improve customer satisfaction. Initial reads show that we are successful in encouraging more customers to exchange instead of simply return and that the revenue retention from exchanges remains substantial, a win for both our customers and our revenue.

The tariff environment remains fluid with ongoing uncertainty around rates, refunds and timing. Through disciplined execution across sourcing, vendor negotiations, pricing and assortment management, we continue to mitigate impacts and do not expect potential refunds to materially affect our outlook or guidance. We remain focused on managing potential demand fluctuations, flexibility and financial discipline.

Collectively, these priorities underscore our focused strategy for driving sustainable growth by revitalizing key categories with significant long-term potential, expanding our reach through wholesale partnerships, maintaining cost discipline and enhancing the customer experience through targeted technology initiatives. We are improving operational execution and further strengthening the resilience of our business model.

I'll now pass it over to Heidi Crane, Lulu's CFO, to provide more color on our financial performance.

Heidi Crane

Thank you, Mark. In the second quarter, net revenue was $67.8 million, a decrease of 17% year-over-year, driven by a 17% decrease in total orders placed and the impact of higher return rates. Gross margin for the quarter was 48.6%, up 330 basis points year-over-year due to a shift in the sales mix to higher-margin products, combined with freight cost savings due to improved shipping rates. On the expense side, selling and marketing expenses in the second quarter totaled $18.4 million, down $3.6 million year-over-year due to a decrease in marketing costs and merchant processing fees.

General and administrative expenses decreased $1.7 million to $15.8 million in the second quarter, a 10% decline year-over-year, primarily due to a decrease in variable labor and benefit costs associated with lower sales volumes, a decrease in equity-based compensation expense, and a decrease in fixed labor and benefit costs driven by reduced fixed headcount, partially offset by an increase in other general and administrative expenses.

Our net loss for the second quarter improved to $1.5 million from a $3 million loss in the same period last year. Adjusted EBITDA in Q2 was $1 million compared to $0.5 million in Q2 2025, a $0.5 million improvement year-over-year. Adjusted EBITDA margin was 1.5% versus 0.6% in the prior year period. Interest expense in Q2 totaled $302,000 versus $856,000 in Q2 2025. Diluted loss per share for the quarter was $0.52 compared to a diluted loss per share of $1.08 in Q2 2025.

For the second quarter, net cash provided by operating activities was $0.6 million compared to $1.4 million used in the same period last year. Free cash flow in the second quarter was $0.1 million compared to free cash flow of negative $1.9 million in the same period last year. As of the quarter ended June 28, 2026, total debt decreased by $3.2 million to $10.1 million and net debt increased by $70,000 to $6 million.

Our inventory balance at quarter end was $28.6 million, a decrease of $8.7 million or 23% year-over-year. Importantly, after quarter end, we completed the following financing initiatives designed to enhance liquidity and financial flexibility. We executed an amendment to our credit facility, which provides additional borrowing availability at key times during the year, giving us greater flexibility to manage inventory and support key merchandising initiatives.

We also entered into a new equity line of credit that gives us the option to sell up to $4.5 million and an option to enter into a second equity line of credit for an additional $5.5 million. Collectively, we expect these actions will provide us with additional liquidity and greater operating flexibility while supporting our efforts to position the business for long-term success.

Turning to the full year 2026 outlook. Our focus remains on reinforcing our leadership position in special occasion, strengthening our business through refining our casual apparel and footwear mix, accelerating our new assortment and enhancing our reorder funnel to better meet customer preferences while supporting profitability. We continue to drive cost efficiencies and optimize our assortment to reposition our inventory and prepare for a stronger second half of the year.

For the full year of fiscal 2026, we continue to expect adjusted EBITDA to inflect to positive compared to negative $1.2 million in 2025 and the net revenue growth trend to improve year-over-year compared to a decrease of 11% in 2025. We also continue to expect capital expenditures to be between $2 million and $2.5 million, inclusive of capitalized software, which is comparable to 2025. And now I'll turn it back over to Crystal for closing remarks.

Crystal Landsem

Thank you, Heidi. We believe the continued progress we made during the quarter reinforces that we are moving in the right direction and building a stronger, healthier business. By remaining focused on disciplined execution, customer engagement and profitable growth, we believe we are creating a solid foundation for the future and unlocking the long-term potential of the Lulu's brand.

I would like to thank our talented team for their hard work and unwavering commitment to our customers as well as our stockholders for their continued trust and support. Together, we remain focused on delivering sustainable long-term value.

Operator

Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.