Q4 2020 Stitch Fix Inc Earnings Call

Good day, everyone and welcome to today's statistics fourth quarter 2020 earnings call Today's conference is being recorded.

Let's turn the conference over to Mr., David Pearce, Vice President of Investor Relations. Please go ahead.

Thank you for joining us on the call today to discuss the results for fourth quarter in Seoul, Cisco's year for 2020, joining me on today's call are Katrina late founder and CEO Statistics, Olivier <unk>, President and Mike Smith, President COO and interim CFO.

I would also like you mentioned that you're joining us.

Oh my goodness.

It's supposed to complete Q4 full year financial results in our shareholder letter on the IR section of our website investors stopped it shakes out.

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

We would like to remind everyone.

Forward looking statements on this call, which involve risks and uncertainties actual results could differ materially from those contemplated by the <unk> looking statements.

<unk> results should not be considered as an indication of future performance. Please review our filings with yet.

For a discussion of the factors that could cause the results to differ also note that the forward looking statements on this call are based on information available to US as of today's date, we disclaim any obligation to update any forward looking statements, except as required by law.

During this call we will discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter.

These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally this call in its entirety is being webcast on our 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 thank you for joining us after the market close today, we issued our quarterly shareholder letter with more details on our results and strategy.

I guess, you're today, our business ended Q4 in a position of strength and we're excited about the opportunities that lie ahead in fiscal 2021.

Specifically there four themes on today's call first we navigated the Kobe trough and have to emerge even stronger.

Second our business is healthy with strong underlying fundamentals.

Third we are well positioned strategically and financially to take market share and play offense in 2021.

And finally, we are accelerating the expansion of our consumer experience given the momentum we've seen across our fixed indirect bio friends come.

Buying these things give us confidence and optimism for the year.

With that I'd like to remind the scripts you talk about the first point and take a picture of where we were when we last night in June.

Our distribution centers were recovering from significant disruption due to the cold the crisis.

At one point half of our warehouse now it's very close we're operating at nearly 30% the film study.

Our supply constraints, we're not limited to our warehouses as we spoke about last quarter. We had also pulled back on inventory both in the interest of conservative spend as well as relevant as we anticipated and would see very significant changes in the types of apparel that consumers are looking for.

Given this constrained environment, we dramatically reduced our marketing spend from late March April and Internet to ensure our limited capacity could be used to serve the demand we are seeing from existing customers well, while minimizing the risk that we would spend to acquire new customers into a sub optimal potentially disappointing to find.

While we recognize that the decision to limit new clients during the time, what impact or subsequent fixed demand in the quarter. If that followed it was the right decision to prioritize the long term success happiness and profitability of our client cohorts.

Emerging from the peak of the crisis in the spring we began to play often we rapidly strengthened our foundation and adapted to the consumer.

And the new work from home backdrop, we realigned our assortment to what was relevant enjoyable for our clients, we unveiled new experiences to our active x. clients, but directbuy and we ramped up our marketing spend in June as we gain confidence Africa filament strengthening consumer such that.

With that backdrop, we're really pleased that we didn't just managed to survive the deepest trough, though the crisis that we delivered results that we are very proud of and Q4. We returned she had positive year over year top line growth grew gross margin by over 400 basis points from Q3 and delivered over 50 million in free cash flow. These.

These results are all the more notable when compared to many apparel retailers reporting double digit declines for the same time period.

We are particularly excited about our new client to match.

As our distribution center capacity rebounded in late June we gals marketing back off in July we saw 50% year over year increase in our first fit shipments and we saw elevated growth continued through the month of August.

This is the highest sequential first fixed gross rate we've seen in the last three years. So much. So that we had some higher than average fixed wait times as we catch it support this windfall of new client demand.

We believe this elevated first fixed demand will also drive incremental steps. The quick fix all you in the quarters ahead, given that the majority of our clients choose to receive fixed it on a recurring basis.

Flexibility in our model allowed us to meet the consumer and the smell bad, but our overall value proposition anchored on the convenience of shopping at home and by adapting our inventories are what is most relevant to that.

We will continue to pursue this path and adaptability and personalized relevant which had been central to switch back since the beginning now more than ever it will help us capitalize on a forever changed apparel retail environment.

Before I discuss our Q4 results I want to provide a quick reminder, that Q4 19 consisted of 14 weeks, which resulted in a fiscal 2019 being a 53 week year assets. When we refer to adjusted growth rate and this call. We're noting that we've removed the impact of the extra week in any given quarter or year attrition.

Are you a comparison that we believe more accurately reflect on it.

With that I'm pleased to share that in Q4, we generated net revenue of 443 million, reflecting 11% adjusted year over year growth and 19% sequentially from Q3.

We delivered a net loss of 44.5 million and adjusted EBITDA loss of 8.3 million, our adjusted EBITDA, Excluding SBC was positive 11.8 million.

During the quarter, we grew our active client count to 3.5 million. This represents a year over year increase of 286000 clients and 9% growth in.

In addition, net revenue per active client increased 2% year over year on an adjusted basis.

Now turning to our second theme I'd like to share more color on how we deliver this Q4 performance and the strike you are seeing across target that.

Over the last few months, our business I would say that some of the strongest followed the performance we've seen since going public each of our major categories performed well and we saw notable tailwind and demand including increased adoption of our offerings are.

Our first fixed shipments accelerated and we saw continued strong retention of our auto ship consumer base.

We also saw growing momentum in women's imply continued growth in men and notably real gains in both the scale and margin profile of our most nascent kids and UK businesses.

On top of all that our expansion into direct by a critical part of our feature that show unabated growth, both pre and post cobot and we believe it will unlock our total addressable market, new and very material ways.

With that I'll now provide some updates on each of our client categories to give you expenses the momentum we're seeing.

One of the main contributors to strengthen overall fixed trends has been the health and heightened demand and when we see an ongoing improvement in the last few months and in Q4 Women's first six sales grew approximately 25% year over year on an adjusted basis.

We've also shifted volume out of categories like workwear, and blazer, they've been hit harder by cobot and into more in demand product categories like athleisure I wouldn't.

Our womens activewear assortment in particular cash Thursday in demand in the past few months as clients seek apparel that balances comfort and style and.

In the last few years, we expanded our activewear mix, which has allowed us to capitalize on recent trends and work from home mandate.

Q4 women's active where revenue grew by over 350% year over year on an adjusted basis.

Benefiting from strength across those fixes and dropped by we also.

We also delivered year over year growth and success rate and client satisfaction in Q4.

He brands, such as Reebok and beyond yoga resonated with clients and we feel well positioned to continue serving clients activewear needs in the months ahead.

In Q4, our women's category also benefited from accelerated growth and plus offering.

While we believe tossed I'd have historically been an underserved market by traditional retail it's one that we serve well due to our understanding of fit and sizing and our ability to address client preferences through our exclusive assortment and strong market vendors.

As traditional plus channel contraction due to store closures, we saw higher demand in Q4 with cost first fixed growth exceeding 35% year over year on an adjusted basis.

<unk> also benefited from year over year growth and success rate and average order values in Q4, and not quite 20, as we broadened our assortment across price points and and he said well cost represents a low double digit percent of women clients. Today, we think it comprises 40% of our women's addressable market and we plan to invest aggressively in class and then.

Tori and act like 21 to support further acceleration.

Similar to what is our men's category benefited from the surge in demand for active wear and drove improvement in first fixed demand in Q4 in particular, we saw brands like new balance and public rack resonate with clients as well as our own exclusive active wear brand Oh, one algo and we're broadening our assortment in fiscal 2021 beyond women than men.

We drove much of in our more nascent kids and you can't category during the last quarter.

In Q4, we celebrated the second anniversary of kids, which has been especially resilient during cobot with kids, surpassing even our pre cobot expectations for the year.

As kids have scale to leverage client feedback data to improve our personalization capabilities and strengthen our inventory assortment and the two years since launching Ted we've improved success rate by over 15% in Q4, our chip client kept the highest proportion of items in their fixes to the category to watch. These improved outcomes has also been a.

Function of our enhanced exclusive brand assortment with sales of our exclusive kids product doubling on an adjusted basis year over year and ask why 20 and fueling the category year over year gross margin expansion.

Well kids just still in its early days it is quickly scaling and on a similar profit trend line as our larger offering underscoring why were so excited for this emerging category.

We also recently celebrated the one year anniversary of our UK watch six months ago. When we discuss the UK. We highlighted a few of our early challenges and uncertainty around break that now six months. Later, we are optimistic about our you kept your factory as with our other Rollouts, we've taken a watch and learn approach and the UK and have focused on collecting client b.

Back and leveraging learning to improve our recommendation buying and merchandising strategies.

These enhancements resulted in UK success rate and average unit retail price each growing by approximately 20% year over year and I fly 22.

Translating to a lift in average order value of over 40%.

These improvements meaningfully strengthen our unit economics in margin, but also demonstrate how quickly we're learning and refining our UK offering and.

In Q4, we also saw a highly efficient client acquisition trend, which we believe are a function of strong organic and referral demand as well as the broader pullback in digital spend by other retailers well.

While our UK offering is still in its early innings, we believe its momentum validate the viability and strength of our personalization model in other geographies and we remain very excited by the progress we're seeing in this promising new market expansion across.

Across the board, we're excited by the health and momentum were seeing across the business and the opportunities that lie ahead.

With that I'll hand, it over to Elizabeth to share more on our future dropped by ramp up and how we plan to take share in the year.

Thanks, Katrina and Hello to all of you on the line on top of the company's success Katrina shared this moment in history is a once in a lifetime opportunity and the shift of apparel retail and we are playing offense.

Consumers are rapidly moving their apparel buying online approximately three times faster than in pre cobot period.

Well overall demand for apparel is undoubtedly not what it was just because it depends on if it's completely resetting enduring client behavior.

Consumers are changing their habits and we are here to help them establish these new shopping behavior provide.

Providing the personalized discovery and guidance that was previously that offline.

We were also able to rapidly toggle our inventory to what is most relevant right now as it was.

As a result now is our moment to define the new apparel model as the traditional apparel retail after shakes out.

We saw this shift is very much underway in Q4 and into Q1 with the surge in growth in our new customer shipments.

As traditional retailers close their doors consumers are shifting to stitch fix as evidenced by our increased demand and growth validating that we're taking share.

When retail spend rebounds in the coming months, we expect more than 30 billion of market share to move online over a 12 to 18 month period.

Anticipate capturing more than our fair share of the skin and the relevance of our model, particularly with the expansion of Directbuy.

We will be focused on the consumer segment categories and elements of our offering that we believe will enable us to take disproportionate share and this time.

Now, let me share how we started to play offense in Q4 with the results we delivered through Directbuy and by enhancing our experience jokey all to a greater set of purchase occasion.

In June we launched trending for you, which expands our feed it based shopping experience, enabling more shoppable luck widening the breadth of item too much clients can choose to purchase and removing the requirement that clients have purchased with us in the past.

This will set the stage for a nudist statistics customers engaging with us through directbuy in the quarters ahead.

And the first two weeks of introducing trending for you our weekly Directbuy orders grew by over 30%, suggesting that as we add features and brought in ways to engage and shop, we will be able to capture a greater share of wallet with clients.

This expansion is part of our robust product roadmap that will continue to get clients more reasons to engage with us and broaden our offering to appeal to a larger consumer set.

We are preparing for more of these enhancements and ask why 21 to widen product discovery for both inspiration base as well as higher intent purchases.

In July we also introduced an algorithmic recommendation engine exclusively pretty rock by clients that uses our direct five dataset to more fully capture clients interactions and preferences.

Compared to our prior fixed based recommendations clients purchase more items on average bought products with higher average prices and converted at higher rate. This.

This new engine with also built to work in real time with clients, who are onboarding directly into shop, and we plan to attack. This cold start recommendation capability in Q1.

Now I'll share a few updates on direct <unk> financial performance in Q.

In Q4, it continue to meaningfully outperform our expectations driven by faster existing client adoption higher purchase rates per client and greater levels of engagement well we.

Well, we won't share directbuy penetration every quarter well note that women penetration grew into the high teens percent well men screw into the high single digits with both categories, demonstrating strong traction, but also meaningful headroom for growth.

We also achieved very high success rates driven by our ability to pair data driven recommendation with clients high intent to purchase decision.

As a result return rates associated with Directbuy has been less than half that found in traditional apparel ecommerce.

These client outside of Cook led to strong repeat purchase behavior from the.

From the launch of Directbuy through the end of Q4, nearly two thirds of clients, who completed the directbuy purchase returned to make a subsequent purchase.

These factors have reinforced direct guys impressive unit economics with the offering delivering contribution margins that are already at parity with our offering.

In addition in August we introduced our shopping bag functionality to all direct by clients and we believe that this car like feature which combine multiple items. If your shipments will drive incremental cost savings and that further margin expansion.

[music].

Offerings like Directbuy, which we believe can offer a step change in our growth trajectory bolster our belief that the investments, we're making in our people and across our business will result in an outsized market share gains.

Many in our industry pulled back their growth investments in response to covert we did.

We did the opposite and receivers all share gain and adoption of new experiences.

We continued investing across engineering data science and product she brought in our experience and innovate our personalized shopping experience that complements our unique first lifestyle in service.

We've made significant progress in demonstrating a real gains in our new direct five platforms as well look at early stages of testing and piloting of enhancements to our fixed offering which we believe is more relevant than ever at consumer shop from home.

With our fixed form factor, we're enhancing the client experience to leverage our differentiated skyline team to deliver stronger client outcome.

One initiative that is currently in flight in the UK enables clients to engage directly with skyler to select the anchor items and they're sick and identify other ways. They have like stylus support before the fix ships.

This data has driven strong early results and we believe this approach appeals to an even broader set of clients as customers seek higher attach engagement, especially while reducing their frequency of shopping in store.

Based on the results of this initiative to date, we plan to introduce it to U.S. clients in the quarters ahead.

Beyond product innovation, we're also investing in our distribution center to support higher levels of demand.

As we continue to expand our offering we believe these investments will help to remove a limiting factor is tied to capacity constraints and allow us to fulfill higher demand in conjunction with our more aggressive marketing strategy.

We're very excited about the opportunity that lies ahead and we're confident that we're well positioned to expand our market share with that.

With that I'll hand, it over to Mike to provide more on our financial performance and our outlook.

Thanks, Elizabeth and Hello to everyone on today's call first I'll share more detail on our results from the quarter and full fiscal year Didnt.

In Q4, we generated net revenue of $443 million, representing 3% growth year over year or 11%, excluding the impact of the extra week in Q4 of Nike.

Fiscal 20, net revenue was $1.7 billion growing 9% over the prior year or 11% on an adjusted basis, yes.

In the quarter, we grew active clients to 3.5 million. This refers.

This represents a year over year increase to 286000 clients and 9% growth.

Q4, net revenue per active client was approximately flat year over year, and a 53 week basis and grew 2% on an adjusted basis.

Note that the net revenue per active client was based on the last four fiscal quarters, such that Q4 20 revenue per ask acquired a $486 is not impacted by the extra week from Q4, but Pete.

Q4 gross margin was 44.9% represented 410 basis point increase quarter over quarter, driven by a reduction in our inventory reserve as we stabilized our inventory position we're.

We're proud of this large sequential margin improvement and our ability to execute against a directional guidance you provided during June which.

Full year gross margin was 44.1% or 50 basis points worse than last year.

Advertising it was 9.9% of net revenue in Q4 compared to 9% in Q4 of my team and was 9.8% of net revenue in fiscal 2008 compared to 9.6% discipline like GE.

Other restaurant <unk>, excluding advertising was 38.3% of net revenue in Q4 compared to 34.6% in Q4, my team and was 37.3% for the full year compared to 33.4% in fiscal my team.

This reflects ongoing investments in technology talent and the associated SBC expenses.

Q4, adjusted EBITDA loss was $8.3 million in fiscal 20, adjusted EBITDA loss was 29.1 million. This.

This performance was in line with our expectations and reflects lower gross margins in Q3, 20, as well as ongoing strategic investments, we made to support long term growth.

In fiscal 20, these investments totaled approximately $110 million.

And included $60 million and stock based compensation as we invested in technology challenge, roughly 25 million and supporting our UK category hasn't scales and nearly $15 million in one time covidien related expenses.

Adjusted EBITDA, excluding SBC was $11.8 million in Q4 and $38.4 million in fiscal 20.

Q4, net loss was 44.5 million and diluted loss per share was 44 cents for fiscal 20 net loss was 67.1 million and diluted loss per share was 66 days.

And finally in Q4, we delivered free cash flow of $51.8 million and ended the quarter with no debt and $381.6 billion in cash cash equivalents and a highly rated securities.

Before I discuss our outlook on those one change we're making enough why 21 on how we report EBITDA.

As we look ahead stock based compensation will remain an important lever for us as we invest in growing our data science and engineering teams. We also know that most comparable companies exclude SBC for me that though as a result going forward, we will only provide adjusted EBITDA, excluding SBC as we believe it more closely.

Reflects our operating performance.

Now on to our outlook. That's Katrina mentioned, we've been very pleased with first fixed demand trends in July and August, which we believe will bolster our active client growth in the year ahead.

One prevailing trend. She also mentioned as lower subsequent pitch volumes impacted by our demand side pull back in Q3 a 20.

Let me explain this temporary phenomenon in greater detail.

As we shared in Q3 20 are covered related fulfillment challenges, let us to pull back significantly on marketing for nearly eight leach, which we knew would lower our active client count and the subsequent base of clients. We served in the quarters thereafter.

Given the fact that repeat clients comprise such a large portion of our business. We expect the loss of those new March through May clients, who would on average received multiple fixtures and spend hundreds of dollars with us in their first year will roll forward and particularly impacts such that fixes in the first half of fiscal 21.

However, as we enter the second half we struck the effects of the temporary pullback in marketing to subside, giving us confidence in our accelerated growth for the year ahead.

In addition, as Katrina referenced earlier, we're playing catch up to support the renewed surge in client demand.

As such in Q1, we expect to deliver mid to high single digit revenue growth, which reflects robust recent demand trends offset by lower such that pitch volumes I just mentioned.

It also reflects some of the benefit from our new client growth moving into Q2.

Given the uncertain macro environment. We also think it's prudent to hold off on providing specific full year guidance at the start. However, we do expect year over year revenue growth to accelerate meaningfully in the second half of fiscal 21 as the impact of covert stay at home or this just shy.

Now I'll sure, how we're thinking about our investments and implied margins and that's why 21.

2019, and 2020 were heavier investment years for us as we invested in initiatives that will fuel long term growth such as our kids and UK categories as well as data science and engineering challenge.

In fiscal 2021, we plan to continue investing in growth opportunities like the UK, but at lower levels than last year as the category continues to gain traction and scale.

Even with this continued investment we plan to begin showing expense leverage in our adjusted EBITDA excluding SBC.

Only caveat this by saying that we'll be flexible in how we allocate marketing dollars enough why 21, and if we see the opportunity to invest to drive outsized share gains we may take advantage of that.

In line with Elizabeth earlier comments, we plan to invest higher levels of Capex, and therefore 21 to increase our operating capacity, which should mitigate gross constraints and also drive leverage in our model over time.

Capex has historically comprised less than 2% of revenue and it at 421, we expect it will increase by 100 to 200 basis points over historical levels. This.

This is part of our longer term investment in our inventory management strategy, which we will share more about in the quarter circle.

In summary, we're proud of the results are delivered and that's why 20 and our ability to return to generating positive topline growth in Q4.

We have a healthy cash position no debt and undrawn revolving credit facility and we're generating cash flow as we look into 2021, we believe that our strategic and financial position will allow us to capture outsize share gains while we also deliver accelerated year over year growth and can.

Renewed profitability with that we're ready to open it up for questions operator over to you.

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

Hey, good evening guys. Thanks for taking the question I guess first on the success of Directbuy, obviously lots of great commentary, we appreciate that with with the basket sizes wondering if that's changed now that you have the shopping bag capability, where are you seeing kind of the benefit I think in August and post that and then as a follow up my guess is your meds.

And in the release about the inventory reserve releases that helped gross margin as we build inventory or does that way and the piano. Thanks.

Thanks for the questions I will have a wasn't that's probably answer the question on Directbuy and then make it could take the one on inventory.

Yeah, Hi, there. This is is that and you know I think we've been really pleased to see the momentum that you mentioned with Directbuy and in terms of the shopping cart, we had it in a beta mode for a few months and we just very recently launched the truffle clients that so in terms of the kind of Incrementality that I think you're asking about a little bit early days to share it.

I mean, I think one thing that's interesting is even pre having a shopping cart, we had clients converting to multiple purchases even true the buy now feature.

And so I think we'll know more in the months to come I think what we're excited about is that you know the gross margins of Directbuy, we're already at security with artists offering and now with that kind of benefit of consolidated shifting that will be incorporating we would expect to see margin enhancement as well as other new features that were launched.

And with the card, where you know something ends up being out of stock. We can you know help recommend items that are buying similar to consumers. So more to come as the the card is in place for a longer period of time, but we were seeing people buy multiple items pretty hard as well.

And Hey, Ed This is like Oh, yeah. The inventory reserve, we feel pretty confident about where we are relative to managing inventory. There's a couple of things I'd note. One is just given the surge in demand that we're seeing there's a chance we'll chase into you know more inventory to accomplish kind of meeting client demands.

And but I would say that where we are from a gross margin perspective without guiding to gross margin. We feel really good about sort of what we did in Q4 and you know in and around that number for the rest of the year and retail inventories and then is in great shape.

Great. Thank you guys.

Well hear next from Ross Sandler with Barclays.

Oh, Hey between you know just had a question about the first six to pursue a versus b.

The two or these moves from six customers will be comparable to your customers you brought it up.

Time periods.

You guys are having the same success converting them to you or auto ship long or sort of what they were preparing to eat.

In the environment that was kind of more of a woman dumping all going to be trying to kind of reconcile that.

You know the guidance my views on for sales in second half and then like on truck. So.

This is actually going into a automation and if so I guess, what what we've gotta, while I'm still choose to do today or in the future. This that you're not doing today in terms of just improving your own processing time and dealing with.

During which we can enjoy good.

Thanks for the question, Josh and Yeah on the first on the first question, we're seeing really great trends on the client demand side and and you know we really see this is just on confirmation that you know right now the model of trying and buying personalized selections of clothing on at home on this you know this way of shopping is more relevant.

Than ever and so when we in terms of like in the dynamic between repeat and new client you know as a reminder, in Q3, we pulled back pretty significantly on marketing and would that mean that you know in our business and the clients that we acquired don't just generate revenue in the quarter that we acquire them, but they actually generate revenue over a much longer.

Period of time, so which means that in Q3, we acquired fewer clients will see the impact of that temporarily this quarter next quarter, but that you know the flip side of that is that the really good trends that we're seeing on new client acquisition will also sustained for multiple quarters had and so and you know what we're seeing where the client trends that we're seeing.

Meanwhile, we haven't shared anything specific as to auto ship or opting in what we have shared is that weve seen you know almost kind of best ever or trends in terms of people on locating staying on auto ship in terms of on the dynamics, we're seeing within the fixes and and we don't see any reason to believe that that will change and but right now I think.

At a place where we're looking at kind of a first half that really is kind of anniversary ing. Some of the client demand trends that we saw in Q3 and what that looks like for a temporary effects that really optimistic as you think about the trends that we're seeing now and as you know in July and and kind of what that goodness will look like in the back half of the year.

Mike Why don't you take the question about Capex.

Sure and there's a few things going on rosters well.

One that you know we can add more automation to your point and improving efficiency. So that was what is one area that we're going to continue to invest and nothing you know.

Nothing other than improving efficiency within the four walls that we just the second thing is we need more space to name yeah, given demand trends in some of the things I was with touched on in the last two quarters in terms of new inventory models, we need more space. So there's there's a combination as an efficiency within the four walls and more square footage.

Well move next to Mark Mahaney with RBC.

[noise]. Thanks, I want to ask a question about direct by the impact and of course about the UK.

I want to talk to the impact of the direct part functionality would have been kind of in order increased retention increase spend per customer and then only at a distance would have been kind of an impact on bringing in new customers, but it almost sounds like you're seeing it kind of evenly balanced across those across all three of those areas can you just just just.

Comment on that.

Let's talk a little bit harder.

Stretch here I guess to it really kind of convincing people to come up with just comment on the impact at all three levels of customer acquisition and retention and it real quickly on the UK is there something new that you've been able to do there or do you think you'd just finally reach some critical mass or I know you had some marketing issues I think early on just just talk about where you think you are in terms of the play book in reaching.

Accessing that market. Thanks, a lot.

Great and just wasn't that Mark I can answer both of those line directbuy and that the impact of your questions around retention, rather relative to spend per customer and new customers. You know it's interesting because you know as we've said we've not yet unleashed there so to speak to brand new customers, we did a very.

The small amount of testing with the Influencer program that we did in June but that was very much on a small scale relative to the big ideas. So far which is just driving incremental spend on our existing customers and I do think it's it's probably you know something another reason to stay longer or stay more or less the check. So I think the majority of what you're seeing is actually really more.

On retention and spend per customer that that new customer demand that Katrina was talking about that 50% year on year fixed growth within July and into August I mean that is clients opting into fixes opting into auto ship on behalf. The benefit is now as soon as they come in we are very much marketing our shop offering to them as well.

But the spend per customer I think is is really what we've seen today and just penetrating our existing base and when we have done some work already and beginning to do dormant reactivation of historic clients and on the early read on those tests have been quite successful. So we'll continue doing that as well as clients that we consider to be prospects, meaning those who shared a lot.

Of information with us in the past, but not yet converted and so those are attractive pools that we won't be going after but that new customer ideas actually the big White space ahead of us.

And then on your you pick question on critical mass I mean, I think we're just seeing a lot of really good thing is that the the learning over the last year has really benefited us so on as Katrina mentioned in the call earlier, we've seen you know 20% year on year improvements in both.

And the average they know the irrs that were seeing as well as keep rates per customer isn't that's translating to this 40% and you'll be improvement and what that means is just we're really getting on the glide path of great contribution margin and something that gets us excited about the growth I also just think our model has really been relevant in this moment and the customer after.

Addition, that we saw I'd say starting in kind of mid to late April and throughout the last few months just has had great momentum both on the organic and referral side as well as on on paid acquisition, where we think you know a number of our you know the competitive set has probably just had to pull back and then just some creative things we've got to just.

Educate more about all our offerings. So we introduced a stylist ambassador program, where Weve you know helped our stylist really a math Marshall on Instagram following and using that vehicle to help customers really better understand the best model, which I think now that it's gaining more awareness, we're just seeing greater traction.

Thank you Liz.

From Piper Sandler well hear next from Erinn Murphy.

Great. Thanks, good afternoon, I'm talking about.

A couple of questions, maybe first for Elizabeth or Cat just following up on the surge of first Vic I demand that you saw in August and July and August can you just share kind of what you're seeing from him what type of customers. The power that different from an age demographic how did the mix breakdown for what you've seen historically when you've seen a surge and first.

Demand and then a second question on the shift of stylist I believe last quarter, you guys had planned to see it shifted about 1400 silence into lower cost regions, just would love an update there how easy has that been has there been any sticky points are kinda challenges I guess, if you had done that thank you.

Yeah. Thanks for the Great question, you know I think on firstly on first fixed demand you know what we're seeing we're right. We're seeing really we're seeing a lot of strength on women's and kids and I think of women's that's been really exciting is really think that strengthened by size and and you know I see that as though it's just a reflection of what's happening in the plus side.

Market, which was historically very dependent on physical and store experience and then and kind of our ability to we have to be able to capture some of that demand and I think it's also it's also I think a testament to just like that you know the convenience of our model and really being right where the customer wants on it they were really.

Really thrilled about kind of what we're seeing there and you know I don't think that there's a time in terms of like hobbies. How did these clients look different from past clients, but I mean, I think qualifies as one place that you know we're pretty excited about and actually one last thing I'd add on the plus two is that you know, we really feel good about inclusive inclusivity and marketing and the imagery that you'll see and I think that's another.

That's another thing that's now hoping that on that side of the business and so on so that's kinda that's definitely some of what we're excited about with on first fix it and on the styles side and we had and so far it's been great. You know right now we have a lot of open racks and then any other geography that we hire stylist such as Minneapolis in Texas.

In Ohio, and and you know the site hiring a stylist has never been a challenge for US. We really have found that there is a really really great labor pool to draw from and and you know we had that you said kind of hiring at scale in hiring high volumes and so you know we are currently hiring about 2000 will be hiring about 2000 stylists.

Profit geography, then and you know we feel pretty good about our ability to onboard them seamlessly and that they'll be great demand on the on the stylist front for us to draw from.

Great. Thank you.

What furnace from Heath, Terry with Goldman Sachs.

Great. Thank you.

I wanted to dig a little bit further into or into the comments you made around advertising you mentioned the decline in advertising spend that weve talked kind of quarter over quarter or just if you can quantify for US you know kind of what you. What you mean by that just given the increase that we saw in absolute dollar spend and then as we.

As we think about the.

As we think about the the second half recovery that you're seeing or expect to see as we get into the next year.

How much of that do you expect this to be just recovery, an overall average or apparel spend versus a.

A significant increase in the the wallet share that your bigger seeing with your with your customers. You know, particularly you know relative to you know kind of what you're seeing out along that dynamic now of apparel spend versus versus wallet share.

Yeah, I'll take a stab at it and at the first part on marketing and the second question is really been kind of wallet share and and so I'll take a stab at those to anything close this Mike if I Miss anything you can jump in on that you know that the marketing pull back was really speaking to Q3, primarily where.

For about eight weeks and we pulled back pretty significantly in marketing and that was really because of supply side constraints that we had during that time period and I'm pulling back during those eight week has a knock on effect because the clients that we that we acquired during his eight weeks don't just generate revenue then, but they actually generate revenue for the weeks and months and years to come on.

And so we're talking about the pullback, we're really talking about that and then we are as we kind of moved out of our backlog at the end of June July August we've been able to turn marketing pretty fully back on and we've been really really pleased that we've been seeing on that front and we've already talked about the 50% year over year first fixed rates are first fixed growth that we've seen.

And and that's really been the result of being able to trend out marketing engine fully back on.

In terms of you know our expectations around where that spend is going to come from I mean, there's yeah definitely all the dynamics that you spoke to I think this is you know this is undoubtedly a strange time in that and people are buying less apparel for very good an obvious reason they are still buying apparel. However, and you know I think one of the really great benefits of our model is that.

We've been able to you we've been able to shift our assortment to what clients need and you know you may not have thought the statistics would be known for active wear and athleisure, a year or two years ago and now we're really on able to sell that really effectively to our clients and really be able to meet our clients where they are and so you know I think I'd people's apparel needs change.

Our able to shift the assortment appropriately to where they are and I do think that you know we will continue to see people more comfortable buying both online and people more committed to continuing to buy clothes online and so you know while this is a very challenging time for apparel retail in general as people you know.

You know behaviors are changing dramatically and people are buying less volume today <unk>. Yeah, we really do believe that the behavior shifts that are happening today are going to be permanent and that and those will be pretty significant tailwinds and Ben and Dennis I guess benefits to our business long term.

Great. Thanks, Chris.

Well move onto Cory Carpenter with J.P. Morgan.

Great. Thank you. So just wanted to dig in a bit more on margins on the relative to the strategic investments you called out last year.

In the shareholder letter could you just talk about your your biggest priority this year and how is it different from last year and then you know where you expect to see the better leverage and really driving the margin expansion you guided to and then as a follow up you mentioned still playing catch up on that to me on the supply side you should actually.

In sum around where are you in in the constraints and your ability to address those neogen engine.

Yeah, why don't I think the first one about supply constraints and then Mike. It's so hard and you can't see each other in the room nights will take the question around margins will do a little bit in reverse order, but on supply constraints. On you know we have largely worked through a lot of the supply constraints that we talk to you talked about were ones that were temporary.

At the time period that you really were coded related we had shared and our approach in prior quarters that we had given our warehouse that flexibility with four weeks of additional P.T. O to be able to you know to be able to stay out of our facilities that they needed to and you know now we're in a place where where we feel pretty.

Better about our ability to be able to coexist with a threat of coal bed in our warehouses and so weve really figured out how to systematize and operationalize and operate safely and so you know while they're there of course could be small disruptions in the future. We don't anticipate significant disruption on and then the second one is really around the inventory you know we canceled a lot of receipts we moved.

Around a lot of or see it on and that was really I think you know one out of conservatism I'd just like you know not knowing how demand is going to materialize and the second part was really around relevancy and and you know we're quite glad he did that you know obviously the consumer has changed at time in terms of what he or she is looking for and so being able to shift receipt side of things.

Like work, where I think that we knew were not going to be relevant and into more relevant categories with super important for us, but also you know that that takes some time and so those are really the primary supply constraints that we that really you know we see those those are pretty much behind us I'm you know now we've actually been seeing such great demand on that.

First fixed side that we actually see some elevated wait time, you know, which means that you know, we're a little bit about kind of where we anticipated being but of course, that's a really nice problem to have and and you know we feel good about our supply side operations I feel good about that the inventories on onex and inventory that we have coming in outdoors right now and so you know largely I think.

Worked through a lot of the supply side constraints.

So Mike why don't I have you take the question about margin yeah.

Hey, Corey I mean, there's kind of three big things. One is what we went for instance, all the growth in the back half of the year. So just you know expected higher revenue numbers against a cost basis that we're <unk> from where we are today and the second was just scale of the business you continue as we grow the business or you know the.

Sales finds opportunities to get leverage in certain cost parts of our business and so scale helps kind of add on inventory costs. As an example, and in other parts of our variable expenses and that's doing is what we referenced on the call which is just the way you know businesses like the UK and.

Kids are scaling and that and the improvement in contribution margins that were seeing in those businesses as they grow and we're excited about that and so you know like I said 19, and 20 were heavier investment years, we've talked about that with with you guys for a long time, we knew 21 would likely be a little bit less though we also felt like now.

I was at times it continue doing best because of things like Directbuy and things that are driving other you know better client experience is that it makes sense to continue to invest in those but it's really you know growth scale and the glide path of those investments that I mentioned.

Thank you.

Oh Trust Securities, we'll move next to use of Squali.

Great. Thank you very much two questions for me. Please on that $30 billion that you talked about in your prepared remarks and also in the letter Ah that's likely to move on one in next 12 to 18 months, how much of that is truly relevant to you today and as you look into the opportunity of taking more than your fair.

Or do you feel that it's more happening or it's going to happen on the fixed side that your traditional business model or is it going to happen longer the direct supply side and then how will you be going out around the direct side.

Oh, it's trended for you kind of want to get into two pieces, there and I'm like when they may be for you with all the cost adjustments you made for coal that does that change your 11% to 13% long term EBITDA margin target, which you shared with us capacity I know the older to 13% that's inclusive.

SBC. So if we were to exclude as we see what would that new target look like if you could if you could provide an update thank you.

Thanks for the question do you Seth and I will happy I have my take the second part of the question on on the person to $30 billion. That's moving online you know I mean, I think a large portion of that is pretty involved in class I mean of course today as we think about where are the places that we don't play you know we don't play as much.

And on the very low value price point on and in the very high end, but you know candidly a lot of where we are but where we play right. Now is in the it's profitable every day I'm very democratic price points, and so you know <unk> from that lands I think you know a lot of that market share is available to us and from a category perspective on I think you would get.

Talked about how we've been able to shift our assortment from you know one where you get a jeans in tops and on things for work, where things that we sold a lot of chips a place where we're now selling a lot of comfortable clothes, and athleisure and sport and so you know I think from a category assortment perspective, we actually have I'm, a pretty wide playing field and the ability to put it into anything that.

It really highly relevant in and where the customer wants to be and so you know I think we see that opportunity is as a pretty compelling one and in terms of how we think about the business all working together I mean, I would love to see a feature where we're really talking about such because the personalization engine and spending less time around the channel or whether it's direct fire fix it.

You know what we've learned is that they really work together really well I mean, a lot of our guidance.

Talked about the really strong growth that we're seeing in Texas right now because I still a really significant growth engine for us and you know what we're finding right now is it fixes are a great way to get somebody to get acquainted with fish sticks get somebody to understand such like some of the Directbuy is a great way to be able to to get to know them, even better and to be able to fill even more of that.

Their needs and then as Elizabeth alluded to over time, we believe that direct I can also potentially an acquisition vehicle, but we really see all of these as I'm kind of building blocks on top of this personalization capability that and you know that can kind of get people owe a lot of different ways to be able to engage with us and so on and so you know I think right now in the.

Near term, we see fixes as being a primary way that we're acquiring clients, bringing people into our ecosystem and then being able to up sell and capture a greater share of wallet. They would drop by but there's so much potential let directbuy and that we could see those kind of engagement different ways over time.

So hope that answers most of your heart I go and it's one that if you went away and if I Miss anything.

No I think that was a great I mean overall exactly where we're headed I mean, I guess the one thing use if it's just you know historically kitchen citrix has not been able to participate in things like exzeo and bringing customers and if they were looking for a particular product category and as we expand on our shopping experience to be something that customers.

Let's start with that part of that overall personalization engine I kind of describing that allows us to have that as an entry point rather than simply as an add on and that's where we get really excited about the expansion of our Cam and really you know largely tapping to the majority of that $30 billion that we talked about and so we view that as a real opportunity for us in the call.

Just a comment we did begin to engage directly actually client.

Yeah, and he is definitely the changes are co that kind of in our cost structure, while it's been hard and we walk through them I don't feel I feel really good about kind of where we are.

Not de leveraging their cost structure. So to answer your question directly me, 11% to 13% with US we see still represents what we believe is a lighter and all margin targets. Oh, you know, there's just more tailwinds in the business that we're seeing that gives us even more confidence about those targets, we have not given sort of you know.

Cadence or talked much about what that number might look like with without a without a species.

Okay for the two of the fuel.

Well move onto canal Mastercard with Deutsche Bank.

Hi, Thanks for taking the questions a couple if I may one looking Uh huh as you see the.

As you see the harder because we see that decline in total revenue per doctor.

Every new product or customer how much was that was because you know.

You list a comfortable maybe purchases for a few subscribers Ward says Oh, you know people kind of bring door on the subscriptions themselves.

That's one and second is with regard to harden follow.

Or a follow up to your subscription rate though.

Those off a bit on your marketing message.

So as you go out and regard good because coty billion opportunity, all but youre marketing lives there would be more focused on the subscription side opened it'd be more focused on the on the bright side, but.

Yeah, I think set of questions and I think again when you're talking about sales per active client are you are you talking about sales and sales per active client not growing as fast as it has in prior quarters just to specify because we like it we actually Didnt show a decline.

So what I did was I do but you know the proportional big bars are a big part is being taught agreement as you know is high single digits for bids not me did advise probably about 10% of revenue. So good probably 10% of revenue or then that means that the 46 on a GAAP basis, we're probably be more like.

Were 46 horses.

Forces last year, I see what you're saying right. So I mean, what we've seen in aby passes that we see in that giving people access to directbuy actually increases the total amount that they spend with respect to your point. This definitely can be that like people. There are some people who are spending a lot more on directbuy and lasting fix it and there are some people that might be spending.

Lightly more on Directbuy, but net net what we know from the past that we ran with it with statistical significance Directbuy with increasing our wallet penetration until we are able to serve our clients better we're able to serve more of their needs and so it's I think that's the that's the kind of broader trend that you're talking about and I you know I think over time.

We're not super worried honestly, if like there is going to be some people who are going to be spending a lot of money in direct buy we actually see that as a really good thing and you see those clients that we may not have been able to serve really well with gen xers and so I think it's really just a testament to the model being able to be flexible to be able to serve people who want to shop in different ways and and then.

The second part of your question around marketing message as we think about how to move forward from here. You know we will we think about fixed says yeah, we probably don't think of it as a subscription we really think of this I'm statistics as being that high revenue engagement model and so you know people who choose to get fixes on it you know on a quarterly basis or an ABL.

The other month basis, not just a convenient way for them to be able to have access to the personalization that they want directbuy is another way that allows them to be able to engage with us in a more our cart way and of course, you can get fix is all a card as well and so we really see all of these things as ways to drive engagement <unk> waste to drive revenue engagement wasted right LTV over time.

And the marketing message is really habit last without that you know the cadence of that and they are you know marketing messages have really never been around the cadence and and you know using any subscription language that has really been around the personalization and and our ability to meet them where they are at yeah. We definitely saw on the women's business as an example.

We the team was really really on top of changing the marketing message isn't the imagery to better reflect where customers are today and I work from home environment in a much more casual environment and we saw that working and Ricky that working now. So you know of course, our marketing messages will evolve as we you know as the world changes as we understand where customers are in their job.

Any but.

Fundamental marketing message, that's really around personalization that is really around on us really getting to know people and finding them what they want but that's definitely not going to change.

Great. Thank you so much from BC.

Thank you.

Well hear next from Dana Telsey with Telsey Advisory group.

Good afternoon, everyone. I do you think about the plan for fiscal 21, and showing the expense leverage and in adjusted EBITDA.

Levers are you working with in order to get that leverage.

Investment versus sand there was a top line and then on the product side would be increasing penetration of active how does that differentiate in terms of margin and what percentage of the business and think it goes too. Thank you.

Yeah. Thanks for the questions then I'll probably take your first one around the active and you know we are active business actually has really great. Gross margin you know we have and in some of our business lines within men's as an example, we have an exclusive brand called a one although that's been doing really well that you know that had great margin.

The exclusive brand of ours, and and we actually yeah, we have a pretty good balances on <unk> branded product he be lesser known active brands as well as the after brands that people know that we've talked about and so and you know I I don't active I think we'll continue to contribute to the margin profile. There's nothing were concerned about their I'll have my take.

That's kind of the first part of your question around kind of more broadly where where we're seeing that leverage come from.

Yeah, we do know and if there's a few things you you called it out that top line is probably the biggest driver of it but there is just less hiring and they will be doing in fiscal 21, It's always what we've talked about you know when when you know when it doesn't when we don't need to hire against Amazing initiatives, then we won't all but.

We always have like a whole steady state of amazing things to do but I think it's mostly type one and that's what's driving it and just running the business better I mean, we've had leverage in past years, almost every year and variable expenses, we called out before as places that we've gotten leverage I think every year that I've been at the company. So it's running a business better but.

Mostly coming out of top one.

Thank you.

And from Baird, we'll hear from Mark Altschwager.

Hi, good afternoon. Thanks for squeezing me in so that's one of the follow ups on the marketing backdrop, maybe first can you talk about some of the efficiencies you're seeing in the various channels or maybe are you feeling about our lives relative to earlier this summer.

And then separately just give him its unique moment here with customers accelerating the adoption of online shopping maybe perhaps haven't refreshed their mortgage in a while given the pandemic and will come home just curious if there's any change to your approach to advertising over the fall and holiday this year versus how you approached it historically been separately just for Mike.

When you spoke to leverage you have the caveat in there that you'll be responsive to opportunities on the advertising front curious if your thoughts on that money to seven 9% to 11% range that changed at all I guess you were slightly below the midpoint of that in fiscal 2020, So I'm trying to get a sense of how much of the swing factor that could be in fiscal 2021. Thank you.

Yeah, Thanks for the questions art.

You know anything we've seen like this is the efficiencies that we're seeing in June and are in July August I mean, this is really an ads, we've been able to ramp up marketing again, and and you know that I'm spending less in June may in those prior months is actually not a result of efficiency, but it was really about our capacity and so.

And you know I think what we're seeing is that you know since the pandemic and send people see this as being you know kind of a less temporary way of living that there is more and more demand for an offering like ours and that our messaging around being able to have personalized selections and apparel to be able to shop from the comfort.

Your own home that that value proposition is really resonating and we're seeing that really across kind of all of our channels and and you know I think it and its luiz alluded to I think one of the opportunities even incrementally to all of it is as we think about having directbuy and having having products that it's kinda.

Standing alone outside of our site and we would actually be able to use on channels like FCO in ways that we haven't historically and so those are I think other reasons that we're optimistic on the marketing front.

But you know given this at your question around like are we going to change any of our approach in terms of channel shift on marketing and you know every day. We're always looking at ROI is we're always looking at you know where were seeing better ROI is on different messaging and where we're seeing a different channels and so and it wasn't big data science team that's devoted to this on dairy exercise and.

We are always looking at our channels I understand are there you know channels that are doing better or worse or places, we should invest more in and so you know we will continue to do that and so there will undoubtedly be shift that happens in between channels and that you know I don't think that there's nothing really big significant changes that were anticipating now and that you know the fact that we have.

The very diverse set of channels to to market and to be able to choose from and to be able to shift dollars too in front of me that you know we can always be pretty flexible to make sure that we're taking advantage of channels that they're working really well for us.

And Mike I think there's a second question there around just how we're getting about a long range of marketing spend.

Yeah, I mean look you picked up on it I mean I think.

Katrina talk.

Yeah.

Uh huh.

[music].

Sure.

Understood.

[noise] and the contribution margins she so more to come.

More to come but again, it will likely be opportunistic if we're in the market and we see opportunities to take share and I'm you know on a very comfortable ROI basis.

And that will conclude today's question and answer session. At this time I'd like to turn things back to Katrina for closing remarks.

Thank you everybody for joining us today, we look forward to keeping you up to date on our business in the quarter sometime they say.

And that will conclude todays conference again, thank you all for joining us.

Mm Hmm.

Oh.

Hmm.

Mm Hmm.