Q3 2020 Stitch Fix Inc Earnings Call

Good day, everyone welcome to divest that sticks third quarter 2020 earnings Conference call. Today's call is being recorded at this time I'd like to turn things over to David peers.

<unk> Investor Relations. Please go ahead.

The results for our third quarter fiscal 2020, joining me on todays call or Katrina late founder and CEO of Citrix.

<unk> President and Mike.

Yeah, well in terms yet though.

I would also like to mentioned that we were joining you remote me today [laughter] home office.

I apologize for any technical difficulties this may cause.

We have closed to complete Q3 financial results in our shareholder letter on the IR section never website investors the trick cycle.

Oh linked to the webcast of today's conference call can also be found on our site.

We would like to remind everyone.

And making forward looking statements on this call, which involve risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements.

Reported results should not be considered as an indication of future performance.

Please review our filings with the FTC for a discussion with the factors that could cause results to differ.

Also note that the forward looking statements on this call are based on the information available to us at the today's date, we disclaim any obligation to update any forward looking statements, except as required by law.

During this call will discuss certain non-GAAP financial measures reconciliation to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website <unk> non-GAAP measures are not intended to be a substitute for GAAP results.

This call in its entirety being what casner IR website and a replay of this call will be available on the website. Shortly I'd now like to turn the call over to Katrina.

Thanks, David and thanks for joining us.

After market close today, we issued our quarterly shareholder letter with more details on our result in strategy, which I encourage you to read.

Before we got into the quarter I first wanted to acknowledge the context in which we are speaking with you all today.

The distressing events in the past few weeks are top of mind for everyone here at the checks as I'm sure. They are for you your family loved ones and communities as well.

We have a long and hard work hard and much work to do to create an equal and more just deciding.

But his get any hope during this time to see our employees stand up for what is right and had a strong set of values to lean on I'd be navigate through this together.

With that I'm pleased to hear third quarter results with you today and you sure how we're navigating the effects of cobot could you provide an update on the resilience of book, our clients and our business, but the Q4.

Now more than ever we are confident in our ability to redefine how client shop and find that they love as consumers rapidly shift of course your behavior online at a step change same store right. We believe our model where out before it gets you need to take share, which we began to see play out in Q3 and into early weeks Q4.

Well I'd like to the apparel retail declined by 80% in recent months, we saw only a 9% year over year depth. Thanks to the resilience of our large auto should I say and the strength of dry eye.

Even while we face extreme capacity gap across our network tried to Kobe, which I'll discuss it with you.

These results in the momentum we seen in April and May strengthen our belief that the concept of trying on close from the comfort of your Alex has never been more resonant about an offering that can predict great fit and style do a lot is needed more than ever.

With that I'll turn to our results.

In Q3, 20, we generated net revenue of 372 million a decline of 9% year over year, excluding the impact of our warehouse disruptions from cobot. We believe that we were generated positive year over year revenue growth in Q3.

We delivered a net loss of 33.9 million and an adjusted EBITDA loss at 40.3 million, our adjusted EBITDA. Excluding SBC loss was 20.79 during the quarter. We grew our active client count to 3.4 million, an increase of 285000 clients and 9% year over year end.

In addition, we grew net revenue per active client by 6% year over year, our eighth consecutive quarter of growth and a reflection of our ability to deliver value each work.

We believe this is a very strong signal that speaks to the resilience of our fixed offering a complementary early momentum indirect by and that both deliver value to clients as part of our highly personalized offerings.

Before I get into the details on our quarter's performance I had a few reflections on how we are seeing industry, it's all and what that means for us.

It has obviously been an incredibly challenging time for most players in the broader apparel industry.

In a matter of weeks, we saw rapid and dramatic changing consumer behavior with people spending more time than ever at home limiting their immediate needs for workwear and the latest trend and having very limited access to apparel in stores.

This has led to more shopping done online with 20% of consumer to had not previously bought apparel online doing so for the first time in March and April. However, the most significant result, with the changing consumer behavior will be aggressive in accelerated share shift to online from traditional brick and mortar retail where nearly 80% of U.S. apparel retail.

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Even if stores they get to open up balancing health and safety measures will challenge consumers Receptiveness. The exact features that people watch about stores.

Many consumers will continue to stay home for all non essential purposes, while others would never bought close online, we'll try and will be seeking better ways to buy apparel online surface styles Josh for them.

Our model addresses all of these needs and as a solution that will sustain and enable consumers style preferences in a world with far less ability and appetite for physical retail shopping.

While our store base competitors retrans in the face of negative comp sales and store closings and pulled back their capital investments, we are leaning in and investing in new capabilities like Directbuy and automation that position us to pay greater share in our near future.

In particular, given the momentum we've witnessed with Directbuy frictionless entry point, we think it represents we plan to make it acceptable to new clients as an acquisition vehicle in the country.

With that I'll spend a few minutes discussing the quarter mainly to shrink. This on the first half how we effectively navigate it called big related where how constraints in the back half and ultimately our business momentum entering Q4, we think it's important to sure. This level of detail. This one time as we navigate this evolving business environment.

First I'll start with a distribution side of our business, where we had the majority of our Kobin related challenges in Q3 is that for stage, we had a strong start to the quarter from February through the second week of March no mention across our fixed indirect by offering resulted in that merchandise revenue growth at approximately 20% year over year.

Throughout that time cobot growing global impact had been in the headline. So we were pleased to see such strong ongoing client engagement I'm on my son and healthy demand for our model.

However by mid March in connection with the declaration of a pandemic and state and county issuing shelter in place orders are focused became that of our employee health and safety and ensuring we put appropriate measures in place I stuck in a third week of March we closed our facilities in South San Francisco, Dallas, and Bethlehem, Pennsylvania, meaning that we could now.

But they'll client orders from half of our U.S. warehouses, which resulted in a fixed indirect fire.

By the end of March our U.S. warehouse capacity had fallen by nearly 70% with our backlog doubling week over week in the last two weeks of March.

In conjunction with these government orders, we felt it was the right. If it had to give our warehouse associate up to four weeks. It paid leave it to take care of their families and get flexibility.

Well that resulted in higher near term cost to support our people. We're pleased that this investment help bring our team back with strength and resolve our vision and mission.

At March concluded we began to reopen our previously closed facilities to start shipping fix it and serving our clients again.

On reopening our distribution center stack on an opt in basis, which we believe both the employee right approach, but also meant that we had fewer associates in our warehouses, where do you think fulfillment capacity.

Over the course of April these participation levels improved resulting in higher fulfillment capacity and accelerated that merchandise revenue by the end of Q3 associate participation warehouse capacity and net merchandise revenue all showing meaningful improvement with week over week growth at each of the final four weeks ended the quarter.

As we exited Q3, we were at roughly two thirds capacity that had an aggressive game plan to ensure we drove continued operational improvements throughout the course a day, we're pleased to share that as of today's call, we effectively executed against their strategy and our approaching full capacity with its capacity, we're tracking to eliminate our fixed backlog by the ended June putting us.

More they positioned to play offense in the coming forward.

With that I'll provide an update on what we saw from client in Q3.

In aggregate, we saw healthy client demand throughout February and March with some softness in late March we attribute it to a temporary shifting consumer mindshare as a cold the crisis isolated.

Since then we've seen resilience across our client base, especially among our auto ship in drug product line.

First on auto ship, the large majority of our clients choose to receive fix it on a recurring basis, whether it's every two to three weeks on a monthly or quarterly cadence. This provides us with tremendous visibility into forecasting demand trends buying into inventory and aligning our styling and warehouse workforces to fulfill that men.

In today's challenging macro backdrop. These autoship advantages are very apparent in theory valuable.

In Q3, we saw resilient from this large contingent of loyal and highly engaged quiet in particular, autoship opt out rate, which help us to gauge how while were 13 clients need for remarkably strong and consistent throughout the first half a quarter.

In March week, three we saw an uptick in opt out rate, which began recovering to Bury next week and by late April we achieve its strongest levels of autoship retention in the last three years, we believe that this level of commitment and engagement from the vast majority of our clients built for strong personnel in ongoing relationship evidence that our business model is one.

That will sustain and thrive.

Transitioning to new and manual six clients as we noted our April investor update call. We saw lower conversion trends from these client groups in mid March, which we believe with tied to heighten qubic related uncertainty.

While we saw more consumer optimism in the weeks that followed we chose to pull back on marketing to avoid driving client demand into our fulfillment constraint environment. We also turned off a feature that from clients to order. Another FICC post checkout, which typically comprises nearly one quarter of our manual fixed requests volume.

Well in Q3, we have turned this manual fixed feature back on and we have also began to ramp up our marketing spend to capitalize on improving consumer optimism in the quarter that.

Turning briefly directbuy, even in this incredibly challenging Q3 macro environment. The offering shows no sign of abatement and outpace our pre called the expectations in February March and April it's low commitment and low friction packaway personalized shopping experience represents an important gateway to setbacks and we saw this play out in a quarter with robust decline.

Engagement very lower churn rate and elevated checkout volumes, we see directbuy as a cornerstone of our future experience complementing our fixed experienced for more intent based an impulse purchases that are highly personalized to each of our client.

In summary, we've been very pleased to see the resilience of our auto ship in direct clients that were encouraged more probably by the fact that week over week demand trends improve every week and April you continue to strengthen in Q4.

We're excited to redeploy marketing dollars in the month ahead to capitalize on these trends among existing and new client.

With that I'll hand, it over to Elizabeth to provide an update on all of exciting progress and momentum were seeing in directbuy as well up across our broader company evolution.

Thanks, Katrina and Hello to all of you on the line to those I have not yet had a chance to me I look forward to connecting in the quarters ahead and could not be more excited to have joined the check but this exciting next chapter of our evolution.

Our model, it's highly differentiated and ease of personalization, we deliver to consumers and with the major dislocation. We are seeing right now in retail we have the opportunity to dramatically accelerate share shifts to check.

We believe that more than $30 billion will rapidly shift online, which was three times, what we typically see in one year and we anticipate you'll get more than our fair share again, given the relevance of our model, particularly with the expansion of Directbuy. In addition to continue to enhance the classics offering.

Today I'll discuss a few of the wage we're planning to capitalize on that market opportunity by accelerating directbuy evolving our fix offering and flexing our approached and inventory management.

Together these elements for shadow the key pillars of our evolution as a brand and we believe they create a differentiated flywheel to fuel our growth and reduce the working capital requirements to go revenue.

First as Katrina touched on we believe that Directbuy represents a step change in our ability to further penetrate our addressable market and expand the way we serve our clients by meeting their needs for additional purchase occasion.

As a reminder, our integrated direct by offering allows clients to shop and select items. They love based on our hyper personalized recommendation directly from our website or mobile app.

Operating with made available to all of our active clients in Q3.

We're very encouraged by early success, especially given how nascent an imperfect the offering him.

And yet in Q3, we still thought directbuy revenue more than triple quarter over quarter, but kind of picked up momentum every week throughout that time period.

In addition, directbuy penetration of our existing base of women's clients grew from 5% in February to 13% in May.

I'll now that our testing has shown direct by spending to be highly incremental to Texas.

This signals the strong product market fit this highly personalized shopping experience delivered.

Just a rent them also supports our belief that there was an ongoing structural shift in retail, resulting from coal bed and at our hyper personalized experience will be an essential wake up support client commits new normal.

In light of death, we'd been aggressively hiring additional engineering talent as well as shifting a subset of our engineering team to building the product experience.

We believe Directbuy provides a lightweight entry point for both existing and new clients and complements our kicks offering as a highly personalized avenue for window shopping and seeking out specific purchase needs an impulse buying the we have leveraged the talent to add flexibility across the product.

First today dropped by his showcase highly personalized recommendations to clients based on past item they have purchase.

In an effort to move direct by closer to becoming a client acquisition vehicle in early June we introduced a beta for a new offering.

This new offering, which we called trending for you remove the purchased item requirement and instead allowed men and women clients to shop hyper personalized web based on their style profiled.

This change create more shoppable look meaningfully expanding the breadth of items were much clients can choose to purchase and remove the requirement that clients had purchased with us in the past.

Also later this month, we will watch another collaboration with fashion Influencer Kt Street.

And which we will offer a curated assortment through direct five for much both new and existing limits class can shop.

The assortment will be styled into shoppable outfits with items from our broader inventory pool, showing that we can put items into the context and an outfit that is personalized to each individual clients.

This collaboration which is focused on size inclusivity will serve as a test bed for us to expand the types of looks we show clients and has the potential to create marketing hooks to acquire new clients as we teamed up with brand partners Influencers and showcase our own exclusive brands.

As part of it more extensively for clients to interact with Directbuy. We also developed a new onboarding experience.

Which lays the foundation to onboard future clients directly into all type of direct by experiences such as athleisure or date night that are personalized each of our clients.

Trending pretty you and our Influencer collaboration are prime examples of how we're adding flexibility to the way clients can experience directbuy.

And to more effectively attracting a quiet in.

In addition, we believe it can fuel conversion among clients because historically been on defense.

Over the years, we've had a large number of prospective clients complete our style profile and provide a detail on their side FICC and style preferences, but who have not yet convert it to scheduling effect.

We believe these high probability client as well as during a client supersedes past fixes offer exciting conversion and reengagement opportunities through Directbuy and we plan to begin war aggressively targeting both groups and about that.

Our investment in innovation goes beyond Directbuy as well as we've also begun evolving or fix offering and expanding our approach to carrying inventory.

This better priorities, we believe our critical pillars to expand our offering and to do so with a more capital light approach to bringing consumers that they love.

On fixed because we have pilots and flight in both the U.S. and the UK that provide clients with increased stylus engagement and the opportunity to TLX items and their Texas.

These pilots have shown promising early results, including higher keep right.

We are enabling clients to engage directly with stylists to efficiently select the anchor items, but their fixed and identified other ways they lifestyle its support.

We will share more in the quarters ahead on that we believed that enhance dialing experience will appeal to an even broader set of clients as consumer speaks high touch engagement, while not going into stores.

The feedback data we collect from this experience with stylus is a good example of how our fixed indirect by offerings have formed a virtuous cycle of feedback, which benefits our clients and our business.

Through these two complementary offerings, we enable different purchase occasions, one that is often tied to recurring purchases on flexible cadences with a clear surprise and delight any other serving more lightweight and immediate client needs for higher intent shopping as well as impulse purchases.

We think our ecosystem of experience will help us Phil growing gap in the market as consumers hesitate to shock the way that they have in the path.

Lastly from an inventory standpoint, we believed that the current backdrop provides us with his unique opportunity to lean and two new inventory models to drive better client experiences and business results.

We began to incubate different models to make inventory available to our clients also tying up less working capital as we expand in order to deploy investment in other areas to enable our growth.

The early learnings and added flexibility, we gained permitting will inform our strategy around implementing a more meaningful evolution to our inventory management practices.

If you could see we're actively driving innovation across our business, which is a reflection of all of the opportunities that lie ahead for such back.

While other retailers are currently forced to pull back on investment and innovation, we're leaning and and executing against our product road map in ways that we believe will accelerate our games in the future.

With that I'll have Mike share more on our financial performance and outlook.

Thanks, Elizabeth and Hello to everyone on the line first I'd like a shirt coals from the quarter.

In Q3, we generated revenue of $372 million decline is 9% year over year, driven largely by our covert related fulfillment challenges across her U.S. network.

In connection with our capacity constraints. We also spent last on the advertising during the period, which we believe reduce quite good then.

We grew active clients to 3.4 million increase of 285000 coinage and 9% year over year.

<unk> revenue per active quite grew 6.5% year over year, representing our eighth consecutive quarter of quit.

But the net revenue per active client calculation is based on the last four fiscal quarters and benefits from the extra week in Q4 of like gene well active or answers measured. It look if you choose the 50 Threerd week contributed approximately 2% to net revenue per active coin.

Q3, gross margin was 40.8% 430 basis points lower than Q3 of last year.

This was largely driven by Kogut as we increased our inventory reserves as well as higher coolidge rate due to topline softness.

Partially offsetting this was continued favorable they didn't know each cost.

Q3 advertising was 37.8 dollars a decrease of 25% year over year compared to Q3 of like T.

This reflects our pullback on marketing of approximately $17 million Mcwhorter, which we plan to deployed in future quarters.

Other question <unk>, excluding advertising was 43% affect revenue in a quarter, reflecting investments in talent as well as expenses related to offering our warehouse associates for weeks of paid lead to ensure they stay safe and healthy.

Q3, adjusted EBITDA loss was $40.3 million driven by softer topline performance largely related to fulfillment constraints lower gross margins are additional variable we work senses intervest search and technology total.

Adjusted EBITDA, excluding SBC loss was $20.7 million.

Our Q3 net loss was $33.9 billion and diluted loss per share was 32 cents.

We ended Q3 was zero debt and three other $29 million in cash cash equivalents in highly rated securities while I'm discussing our balance sheet I'd also like the though that in early June we closed a $90 billion revolving credit facility further strengthening our liquidity position.

As we've shared throughout this call we're looking for opportunities to play offense, given what we're seeing across the broader landscape and having with additional capital puts us in a better positioned to do just that.

Now what's your outlook.

While we continue to see momentum across our business. There are too many variables at play to speculate on specific guidance ranges in Q4, instead I'd like to provide an update on specific trends you're seeing play out so far in the quarter and give additional color to help frame how things might evolve.

First I'll discuss topline trends and then we'll move down appeal and provide help these again, what we do not want investors to interpret this as providing guidance. We do want to ship color will be ongoing momentum were seeing across multiple areas of our big.

First our top line performance really meaningful improving over the past several each in April our yet merchandise revenue grew week over week each week in may that looming and continued to deliver positive year over year growth in that merchandise revenue compared to May 20 like GE.

We see this for children to positive growth in Bay as an important milestone and we'll know reflects the resilience of our you wish warehouse network ongoing improvement in quite demand in early momentum, resulting from a much larger migration of retail spent almost.

As a result, we expect these trends will continue and will deliver positive year over year net revenue growth in Q4 adjusted for the impact for the 14th week in Q4 of my team.

Shifting to gross margin bark, usually margin was was used to cross the structural Kobe, we ever Q4 with a more balanced inventory portfolio. So it was aligned to our topline expectations and quite powerful. She's also result, which struck to increase or Q4 gross margins by 200, the 300 basis points quarter over quarter.

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From a marketing standpoint, we've begun to ramp up our Q4 marketing to capitalize on improve CPH range, we're shipping and a growing demand for offer.

We are optimistic that are healthy warehouse capacity levels will allow us to deploy our marketing to capitalize on these trends.

Let us be she or outlook remains in line with what we've shared past quarters as we continue to invest in technology talent to expand our kipp ago isn't in pants or digital experience.

Excluding advertising NSBC, which struck other estimate as a percentage of revenue to lever up quarter over quarter. This will largely driven by variable labor efficiencies and the reduction of onetime cost incurred in Q3 associated with Covance.

More broadly we continue to look at cosh, the way people work and the places they're working and we are committed to driving more leveraging them all overtime.

Sure I, putting all the speed at though we expect adjusted EBITDA, including SBC to be negative in Q4 and for EBITDA. Excluding SBC. The returned to positive levels, Washington, <unk> cash flow businesses improve we watched all generally positive free cash flow in Q4.

We believe it or ability to quickly shift back into driving healthy free cash flow demonstrates the strength of our unit economics and reinforces the confidence we have in our growth investments, which continue to scale and strengthen.

As we look back at Q3, we're proud of the way our team responded quickly and thoughtfully to unprecedented challenges in other decisions, we made to support the health and safety of our employees. During these difficult such as you look ahead, the Q4 and beyond we believe our strong business model and balance sheet uniquely position us to thrive and we're excited to demonstrate that.

In the quarters ahead with that we're now ready for your questions operator, I'll turn it over to you.

Thank you at this time, if you do have a question that will be star one once again star one for questions. We'll hear first today from Edward Yruma with Keybanc capital markets.

Hey, good evening, Thanks for taking the question and hoping junior families are saying states. During this time estimates its existing had been toward the balance sheet. It I know that you didnt get impacted third quarter was merger seeing benefits fourth quarter quarter over quarter, but Ah you reserved against existing inventory do you expect to dispose of it in traditional channel.

And then kind of a bigger picture question you talked a lot about you know for 50 E. Com as you think about direct bye.

Early but so what percent of your overall business do you think this will approximate over time. Thank you.

Thanks, Ed Thanks, very much your questions I think will have Mike why don't we have you talk a little bit about inventory on the balance sheet and gross margin and why we probably won't share do exactly what we're expecting on the direct <unk> direct buy side in terms of percentage I think Elizabeth can share for more color.

Yeah, Hey, Ed This is Mike.

Got it and the strength of the balance sheet is something I'm really proud of and again, we referenced a kind of returned to free cash flow positive levels in Q4, redo reserve against inventory adjusting inventory all we changed the methodology a little bit to represent was is the current thinking and what we're seeing kind of in.

Our inventory levels going into Q4 and into next year that being said I think they talk about what we what I talked about in terms of gross margin improvement quarter over quarter gives me a lot of confidence going into Q4, but our inventories at the right level to serve our clients and so gross margin improvement and get back to the gross margin.

Levels that we've done that you've historically seen from us.

Great and then I'm happy to chime in on the direct by Frank I mean, I think one thing to keep in mind is this a distinction between fixes and Directbuy is a very natural way to talk about things just because that's how our business is evolving but I think over time, we'll see a lot of that becoming a gray area.

Blurring between the two I mean, ultimately what we're doing as we're creating a full suite of personalized shopping experiences for our clients that cover all of their purchase occasions until that gets us. So excited about what we're seeing with dropped by is we're clearly meeting a very complementary set of needs relative to what our fixes offer us to address and allows us.

We believe to cover the full addressable market of apparel Sunday and so you know while this distinction of you know share of wallet gain and sort of the mix of those two it's something we'll talk about for the next few quarters I would imagine that overtime. There is just going to be a total blurring between services that are more engaged with filing support versus areas where currency.

Service can shop and engage yeah anytime that they want to I think we're most excited about is to just see that these two offerings are so highly complementary birth is any sort of cannibalization between the two.

Thanks, so much.

And just as it has Katrina again, just to jump back yet on the inventory side from more of the assortment angle I think you know one thing that and I guess throughout this whole crisis, we've been and really grateful for being a digital first business and on inventory side, that's definitely true too and so I think there's a lot of other retailers that might have kind of inventory orphan orphaned.

In stores or you know kind of inventory that they weren't accesses able to access during this time and and we were you know our buyers works really hard to rightsize our inventory both friend aside the business perspective, and then also from an assortment of what's the most relevant assortment perspective, and so you know I think we we reflected the changes that we saw in our gross margin this quarter, but.

But I think you know relative to a lot of other retailers, we don't quite have as much risk there.

Great. Thanks, Good luck.

Well hear next from Ross Sandler with Barclays.

Great all contribute more to the older should remove the three year old Nukhul can you do long because I think you sort of help with the majority of or rather the size of that bulky pollution manual and then or both of those grower.

July quarter, but he did you comment the bulk of growth rates going forward.

Second question is used Youre experiment you guys are doing it improves your marketing for direct bar you know what are you seem to afford and help it is true approach going forward. If you could prove successful there's a little.

Yeah. Thanks for your thing on your question I'm, All I'll take a first part Ross said, just kind of speaking a little bit to auto ship and then and then we can talk about and I'm, the Influencers and experiment running during a hot probably Elizabeth chime in there.

In terms of what we're seeing on the Autoship side, and then that Weve I think we shared before the majority of our revenue we see that most often people opt into a monthly for women on every other month for men, but that is a majority of our revenue a majority of our clients who will get fix it on some kind of recurring basis.

And and we and we've seen trend be really positive and I think through the end of life or through the end of the quarter. We're talking about and then also I think in the first few weeks as a this quarter and so and you know or that I guess that gives us a lot is and it gives a lot of confidence in the residents are modeled right now and we've been seeing.

Thanks, a lot of growth I'm in both channels and so that thin and very exciting I'm on the in place right part maybe all kinda talk at a high level analysts that can chime in a little chime in on kind of what what it means but I think what's really exciting is as we thought about directbuy on you know directbuy has really been more accessible to its really been.

Oriented around the things that you've already bought and we haven't really had a space for it to be dramatic and for us to kind of on to showcase other perspective than other ways its trading and so I need Elizabeth a hobby share a little bit about what's coming on and then I think what's really exciting is more or what is enabling in terms of on how you could imagine.

This four and factory on being a powerful engagement tool in our service.

Yeah happy to describe it I mean this is we think one specific manifestation of many more things. They can do in the future I think its Katrina mentioned the way we began directbuy has been anchored around items that active clients, if perhaps purchase in the past, which has allowed us to make it an incredibly personalized experience and leveraging our data.

Science to be able to make it is highly relevant as possible. We obviously want to be able to expand on that with clients and they haven't necessarily bought fixes with us in the past and so part of this influencer collaboration that we use a launch or we will be launching in the next couple of weeks, essentially allowing new clients to onboard by telling us a bit about what.

They like about this particular collection and that will then power price I'm a shopping experience that they can immediately dive into and so I'd say, there's really two things that this represents one isn't expansion around the flexibility overall of Directbuy and building more power into our personalization platforms that.

Remove that kept item requirement that we've had in the past and some of the other things that we're doing like trending for you that I mentioned on the call earlier, they both represent ways to be able to bring in new clients without necessarily having that prior purchase experience with that the other thing that it represents is a creative way to think about marketing and expand.

Adding that to either other influencers other brands heart Earth showcasing things like our own exclusive brands that continue to gain great traction and customer success, where it allows consumers to be particularly excited about a product or fashion icon that they view it somebody that they really appreciate so we see it it's really too.

Sold in terms of the flexibility as a platform as well as a excitement around different ways that we can market new experiences.

Well here now from Mahaney with RBC.

Thanks, one or two questions. Please first R&D impacted directbuy.

She had some major events that happened that a maybe a made this part that test, but if you if I think about it in terms of the spend or the loyalty or the engagement tenure of cost of a customer who also use directbuy, what's what's that.

How much incremental revenue that's created isn't where you could quantify that it did you have enough of a sample size and legal shutting that normal conditions to really do that but how much of a boost to company I'm sorry to customer that's already on was already fixed fix the customer having a direct block to what that's gone to that customer and in check.

And when is that if your supply challenges are kind of largely now solved it will be sold by the end of this month I think about into June it's reasonable to assume that you could get back to 20% year over year growth and the October quarter. Thank you.

Thanks, very much for the questions Mark and so on and I think on the impact of Directbuy. So what we have shared 'em. We then it we've been testing to feature for a while now so we do have a reasonable sample size and you know I think what we want to better understand as more of the length of time and so what we share.

Got it it's very incremental on and so we see that people who have access to directbuy I. When we look at it on a pure 80 passed and we have one group that has access and the other but that doesn't the group that has access them more its happier is in glover more revenue to the trucks and so if you were capturing more of their share of wallet.

Right and so on the that that we know we haven't shown any specifics on that I think that's something that we can certainly contemplate for the quarter sitcoms on in terms of the October quarter, Yeah, I think right now we're not in a position to be able to share guidance on that but what I will say that you know through the end of this quarter or through the early weeks at this current quarter we didn't.

Really excited about them I mentioned that we've seen we believe that's going to bring us to positive comps in the next quarter and and he I think longer term. We really do you believe that there's a huge market share capture opportunity and and and I think Ted Mike analysts. This point, we are really gearing up to be playing offense. During this time and this is a time when even in this.

Last quarter, we saw on that entire apparel industry shrink and you know, we and we had been capturing share of that that kind of contracted pie right now with an eye towards as people start spending again in the eyes on ask people have more occasions to be buying for that we can kind of maintaining grow that on that kind of extra part.

To that pie and so you know I think it's too early to share specifics, but on that well we didn't really pleased to the trends that we've seen thus far.

Thank you Richard.

And from Goldman Sachs loved to Heath Terry.

Great. Thanks really appreciate some of the details that you're sharing I'm wondering if you could give us a little bit of the both center sort of what your your expectations or as you move more into some of these customers that had a shelf with you in that in the past.

Or you know.

If you're seeing.

Customers that are that are.

Spell meeting with some of the other ways that they can buy review how your expectations for returns and where it's appropriate keep rates are evolving and then you know with customers that are on automated fixes and had been automated fixes through this this period, where they're lifestyles are obviously changing.

Pretty pretty dramatically I'm curious, what kind of change you've been seeing and keep bridge.

Sure on I think I can answer most of these then I'm a little bit there make me way and or on the first is just how what our expectations around returns and keep raid and whats evolving you know our Northstar is really around how do we help how do we help clients findings that they loved and so.

That kind of naturally always is and driving us towards features and functions and nics and and on ways to be able to deliver more valley for clients and really drive that keep rates and we then just you know that we've been very amazed I think at the very low return rate that we have eat in our in our Directbuy experience, which.

I think is a little bit more like quote unquote normal ecommerce, but I think it's a real testing into that our ability to be able to you and to get size right to get style right in that channel and on the keep rate side as well I think this is a place where I'm a little bit back inside of the testing that we've been doing with stylists and a lot and those tests that have actually.

Had pretty high keep rates attached to them and so and so I think those are I think those are some examples of things that we're doing to ultimately drive. These metrics I think these metrics that people keeping things that they love is ultimately like the true North star of our business, and that's really where where orienting a lot of our efforts again.

And yeah on your second question of tiles and range I can.

Well I would just gonna say that in general we've been really pleased and this time period to continue to see it incredibly low return rates have dropped by that we were seeing even prior to the macro uncertainty and that in general over the last several weeks, we've actually seen on expansion our keep rates both of which we think point to the resilience where model and our ability to adapt to product that.

People are looking for right now, which we have seen you know different requests really escalate on as you might expect things like work from home I think we've measured sort of natural language of those types of requested that as you might anticipate kinex to pre cobot levels and we've been able to really adapt to that to make sure consumers are getting that they want.

Well move next to coordinate let me answer your question for you here.

What turned out from Corey Carpenter JP Morgan.

Hey, Thanks for the questions I'm, just telling jokes body as we roll out to new lapsed customers could you provide some more color.

You're thinking about the timeline on in terms of the roll out for or when the right behind it and start putting marketing dollars. The I mean should do is.

And then maybe for Mike fulfillment would have been some of the biggest constraints or challenges.

Looking back at capacity and once you will see the backlog how do you think about the operating operational environment going forward.

You could potentially expand on we're also planning headcount.

Yes.

Sure Yeah had on Oh, all of that talk a little bit more on the color around Directbuy and and then make out you can take a question on that just on it.

Yeah. Thanks for the question as I mentioned on the call you know, there's there's a few steps on our way to fully opening up Directbuy 10, new clients and so one thing that we've introduced at this concept of trending for you with our current active clients that allows us to how clients shopping if not anchored on prior purchases and instead on.

Data that we haven't things like yourself from Smile and things like style shuffle, and then alter our collaboration on with the Influencers another way to test and learn from a new onboarding experience that does not require prior purchases until we are currently building on both of those things as well as adding more talent onto our team to be able to.

Two more rapidly expand the offering door intent is over the next quarter or two on to fully ramped as such new active clients because you can't imagine there's a fair amount of work to do here and really we hold just a such a high bar of a highly personalized really well dialed in experience and we want to make sure that we have that in a good place as we ramp.

It up and so as we do so we do intend to ramp up marketing alongside it as well and had been actually doing quite a lot of testing on our marketing messages associated with the shopping experience through CRM and other channels with our active clients that have a very good sense of now how to tell that story.

Yeah headquartered in talking about systems on and stuff. So the biggest capacity constraint really was just attendance no Katrina talked about in terms of making sure people were seeing some we ask people to stay home.

But since then as we referenced we're in really good shape in terms of throughput a hand attendance and I think it's because we were very carrying.

About People's season Health Health and just come back into Super excited to serve the mission I'd say the second on changes to the footprint or changes to capacity going forward, there's not a lot I mean in the warehouse it looks different obviously, because it seems we need to do to make sure people are safe and physical distancing in the warehouse, but it shouldn't be you know we've always.

Spent about gaining efficiency and improving throughput and that hasn't changed and so those improvements I think should offset what we're seeing from you know just social for something that we're seeing everywhere else, but so I don't expect that to be a constraint going forward I expect us to continue to improve throughput.

I get leverage and fulfillment overtime.

Great. Thank you and just one quick add to that I think is that one other thing that on the teams have been really created than doing is and certainly figuring out ways that people can be different thing on the warehouse, but also actually adding shifts so that on to that we can kinda minimize the number people in our facilities and so and you know it's I think we so we feel like we have a lot of runway.

And just you know amazed and really proud of how much the team has been able to deliver during this on crazy time.

Well hear next from yourself Wally with Suntrust.

Good figuring or two courses for me. Please Michael was wondering if you could maybe or drew a little deeper into the gross margin maybe help us understand the puts and takes up 40% Ah. This past quarter recover shows some negative leverage even though your revenues were kind of.

Who were you guys were into Q2 of 29 to when your gross margins were more like 44% clause. So we've got mostly related to inventory reserves and write down or is there anything else going on in Q4. I think you guys are talking about revenues snapping back to pre.

Reserve.

Levels were Q4 last years levels why wouldn't gross margin snapped back to the same levels I think your two 300 basis points only implies a wall implies you guys get in halfway there, maybe a little better but not not a fool not back and then lots of course and maybe.

Maybe to use well just in terms of backlog them or delivery delays, how many weeks or are we now running versus say a the trough.

Okay.

Yes, sure you should help to most of those so the gross margin. There is the reserves thing that we talked about what their old you know as we've talked about previously with you guys are we at higher levels inventory levels going into Q3, and we were while we were able to cut some receipts going into Q4 in future quarters with great partners.

It was our vendor base wanted because everything that we won't get cut relative the topline and so those are the big is funny inputs, but if you look at our gross margin contraction versus the rest of reso now she's very proud and when we being down 359 basis points year over year versus the rest of retail felt like it was down.

10 to 15.8 gross margin and then if I look at Q4.

There you know we feel good about the decisions. We made just because of called receipts to sort of align inventory in war with where sales are coming in and to your 0.2 to 300 basis points is a little bit lower than what we have historically seen but we also grows in other parts of our business you know what continues in the UK.

We've seen improvement in those areas net or gross margin can you relative to women's and men's because of the scale that they're out today, we actually think that's good news Gibbons did those businesses ultimately will scale to what we've seen in women's and men's is in Russia excited I'm excited about that and that's your last question I think about you know how clean yard.

On on sort of delays will really clean, though we've caught up on the backlog capacity constraints, there's virtually gone away and so there's no real delay kind of in shipments versus what we saw three children.

Oh it looks like.

Thanks usage.

And from Piper Sandler will move to Erinn Murphy.

Great. Thanks, Good afternoon I've two questions. If I may the first just with respect to silence I believe you like those 1500 pilots in the California area. I guess is the intensive rehire. This thing number budgets and lower cost labor markets or are you finding ways. If you navigate through cobot, 19th impact I'm on the model to you'd see where.

Stylus going forward and then my second question, it's Mike maybe for you. If you can just it's bound on what you saw in the quarter in the UK from a top line perspective and is it following its similar trend quarter to date as your overall business. Thank you.

Thanks, Aaron I can take the one on Stylus then I would make you think they don't want to he tables, if I have a little bit more color. So I think whichever way you guys wants to jump in and but on Silas Yeah, and then we made a very very difficult decision to part ways with on almost 1500 styles here in California.

And yes, the intent is and to to move to effectively moved those jobs to lower cost buckets. So we're offering relocation for stylists, who want to take us up on that we recognize it's a part time job that you know that not everybody will be able to do that but but we styles are still in an incredibly important part of our model we want to continue to.

Or invest in our stylists and but the reality wise as we look at and you know look at kind of our aggressive goals. On this is a decision that was a hard when the one that we needed to make and the in terms of using fewer stylist right. Now we're not you I think right now we're really thinking about how can the stylus I'd add much value as we possibly can I think you know, it's such a differentiated part.

Of our model, especially today and as we're thinking about you know being truly a replacement for going into stores I think that higher touch that high empathy model is really really valuable and you know our efforts now our how can we and you know how can we make the most of that and how can we really continue to innovate on that and all the best.

So to a few test that we're doing which and is leveraging kind of a combination of a stylist working with the client Q and improve outcomes and fixes and that's been a super exciting placement back then and so and so our intention is to continue to invest and stylist styles are still very important part of our model and then I'll have looked a little bit of color on the CAD.

Yeah happy too. So I think we've been really pleased actually to see the momentum in the UK across April and May and just in general that Submarket, where we've seen consumer demands really bouncing back and in general you know if he's the other thing is you know we've now been in that market a little over a year and one of the areas that we've been really.

Working hard at is just continuing to fine tune the model and make sure. We've got the right products for clients RV creates a new market for us and we've been very pleased to see just great momentum on in terms of our key freight there and that's with the obvious their core offering and then Katrina just alluded to we've also been testing and incubating some of our new stylus experience with.

In that market, which has further.

In Hansen shown opportunity on top of that keep grade. So overall you know we've been adding no more brand partners within that market, you know just getting smarter and smarter at our inventory buying the same way that we did over time in U.S. and you know overall both of those things we've seen the results starting to really pay off.

Thank you I appreciate that.

Well move next to I'd first round with Wells Fargo.

Good afternoon, everyone else.

So what others are marker for quite some time to pick on for Mike I think you had mentioned on United spend you guys pull back in the third quarter, you're going to slowly come off a rough doctor groups.

Worsens kind of curious how did that play into your Fourq you spread to them.

I I was next fiscal year kind of develops.

On the gross margin.

Oh for Fourq you I guess my question is do.

Do you expect anymore reserves, you can hear certain to most on you know it's just it sounds like it's going to be one of the most promotional next couple of months.

First off once we told you for the season, given all the reserves taken across all your tone retailer. So I guess, there's more color on your thought process on what you're expecting over the next couple of months, which the important degree but.

Instead of questions I, and maybe actually I'll start out with some color around how we're thinking about promotional activity and then on can probably had Elizabeth weigh in on marketing and then like can can certainly talk about how that affects gross margin as well I mean at a high level we.

A couple things I think we weren't kind of wondering how promotional this environment was gonna be at the reality is actually like things have been pretty promotional for the last few months. Both online and then now we're seeing things happen in stores and even despite the promotional activities online and in towards the last few weeks I'll give much has been holding up very strongly and.

At the end of the day, you know our business has never been one that necessarily is about the absolute Chico's places you know of course, we're always going to be locking prices and making sure. We have the right price, but the reality is people shop with off because they are getting close that fit them really while because they're getting close that fit their occasion really well. So so I think.

That you know that's really the value proposition of our business and its continuing to hold up really well one other piece and you know you may be hearing this from kind of other people in the industry, but one thing. That's been interesting is that you I think we we may have expected that we are a lot of worried a little bit that there would be this huge glut and that everybody will be massively over inventoried and.

You know I do think a lot of people had inventory that is stranded in stores, but in terms of kind of I think a lot of our vendors and a lot of people on the manufacturing side also also shut down or reduce their capacity. During this time period and so I think you know I think my belief is that it's not going to be as much of a crazy over inventoried challenges we may have had.

Past periods, and so I think right now we feel really confident that are offering is going to stand straw that regardless of whats kind of happening externally and I'm and we feel like we've made really a lot of three decisions on the inventory fives, but we can say that weekend that weekend. So yes, we kill for our customers really wall.

Great and on the marketing side, maybe I'll, just give a little bit of color on you know as we mentioned you know we saw some shifting consumer mindshare and kind of mid to late March and then for us for the most part we've been dealing with a very supply constrained environment to isn't very careful to be you know pulling back on spend when we know we.

Can't deliver fixes on time.

But what we've been doing is basically monitoring CPM SCPA trends, we kind of weak for the last couple of weeks and what you know it's been great as we basically saying you know dramatic improvement on those over the course of April and into May and so we have been gradually adding back spend every week as we feel we can fill that demand for consumers.

And in general on what we've observed is actually cpis or below what we would have seen in the same period last year and Saar General approach as you know, we're very lucky in terms of having a really dynamic approach to how we deploy spend we're still actually doing a number of test right now to see where consumers are most responsive bye.

Media channel and in general we've been adding more spend back for the most part I'd say every week since late April with the intent to continue to turn that on has our supplies fully in place and as we continue to see this positive environment in terms of customer acquisition and a moment, where I think in general we just feel like our model is going to.

Continued to be one that attracts new consumers given their desire to now shop more from home.

Got it.

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And from Telsey Advisory group on a go next to Dana Telsey.

Good afternoon, everyone do you think about some of the non apparel items that basically took place that you were getting from direct side and that we're beginning to take hold.

During this year what have you seen so far from that and how do you see that impacting inventory in margin going forward. Thank you.

Well done on Oh, Yeah, I think I can speak in broad terms on that what we've been seeing onto that buys it dropped by overall as a channel and then really successful and has outpace a lot of our expectations for it and I think to that point that we.

Made in earlier calls that means that we're seeing kind of disproportionate in categories like bags and shoes, the successful and those in those channels and so you know I think the strength is direct side on correlate to kind of Sun assortment changes. However, I mean, the broader assortment <unk> assortment differences that we really see.

I mean has then I think he's these types of event tend to accelerate trend. Then you know the biggest assortment trends that we're really seeing is one towards you know I think that ultimate trend of casualization of the workplace is one that we're certainly seeing and so as we and Elizabeth spoke earlier to just how many more reclassed were getting four and you know for more casual.

Apparel and and that's absolutely true in terms of request in terms of shale and and we believe that trend is pretty likely to continue on so that's kind of a broader thing that were a broader theme that we're seeing and you know and yet Luckily yeah, we talked a little bit about kind of our ability to rightsize, our inventory and you know one of the main things that we did when this crisis started.

It was too on to look at our assortment and look where do we want to be enough and more where do we want to be best in Boston. You know we were we are able to get out of a lot of our commitments are on workwear, and we're able to shift a lot of our assortment and stay casual world and so on yes, what we feel really good about our ability to react to that.

Thank you.

And we have time for one other question today that would be from Mark also feature with Baird.

Good afternoon venture taking my question.

First off the returned to growth in the fourth quarter can you just spend a little bit on the drivers there.

Primarily going to be existing customers returning to prequalified spending patterns or would you expect to see Mitch client adds quarter over quarter.

And then separately have direct so I was hoping you could touch a little bit more on the efforts regarding reactivation of coins and went to the timeline looks like there. Thank you.

Thanks, a lot of questions Mark Yeah in terms of it the growth thing and the fourth quarter on we actually our existing clients really have been strong throughout and so we're looking at growth. We are talking about year over year growth that we are expecting to see on that is that is contributed by new clients and so.

Quite we expect that our revenue year over year will increase we also expect clients revenue for client odd that those will also increase as those are all kind of drivers and not and so you know I think the unfortunate part about our model is that we've had this rate existing client base that compete with continuing to be really strong during co bed and.

I think our constraint was really around on acquiring new clients during that time period, because we are supply constrained because we didn't want to be spending marketing dollars to bring people into a supply constrained environment and so that you know the part of our business that was suppressed during that time period is going to be more on the new activity and so now as we on our catching up to.

Our backlog in as on as we are in a more and better position to be playing offense I think that growth is really going to be coming from our ability to move estimable side.

Thank you and then.

Sorry, just on the other part of the question was on the direct fine reactivation opponents. If you could become sir thank you.

Oh, I'm, sorry about [laughter], Yeah, I think once upon a hobby take thought when you're a little closer.

Yeah, absolutely I mean, as we think about who want to be targeting without offering. It's obviously new perspective clients. It's also or active clients, which we've been very successful with today, taking that penetrated dates from 5% to 13% of our women's clients. But then yes. We also have a large group of clients that have signed up.

With their style profile, but not converted to fixes. We also have a group of dormant clients about fixes in the past and we see both of those in population that we want to Reengage. So we've done some testing already have that dormant population and then with a group of people, where we have their style profile. That's a lot of what we're testing right now with things like trending.

For you as I mentioned and live Influencer collaboration to make sure that were really delivering on the highly engaging highly personalized experience, we really like what we're seeing so far on the trending for you and so our intent is to really improve and enhance that experience with the intent to been ramping it up and we have a lot of information on those prior clients that we do and.

Tend to target them in the coming months in quarters. Once we ramped up back up but we view that as well as you know pure in new clients is going to figure is an opportunity.

And at this time I'd like to turn things back to you for Katrina for any closing remarks.

Thank you and thank you everybody for joining us and we wish everyone. The bashed in these very challenging times on they'll look forward to spending time with many of your and weeks to kind of thank you.

And that will conclude today's conference again, thank you all for joining us.

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