Q1 2021 Stitch Fix Inc Earnings Call

Good day, everyone welcome to be stitch fix first quarter 2021 earnings call today's call.

Just be reported at this time.

Mr Day appears Vice President Investor Relations. Please go ahead Sir.

Thank you for joining us on the call today to discuss the results from our first quarter.

21, joining me on today's call are Katrina Lake founder and CEO stitch fix that.

<unk>, President and Mike Smith, President COO.

And interim CFO.

Also like you mentioned that you're joining me today.

Yes. It is.

We have posted complete Q1 financial results in our shareholder letter.

Another website investors dot Citrix dot com.

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

We would like to remind everyone that we'll be making.

Forward looking statements on this call, which involve risks and uncertainties.

Actual results could differ materially from those contemplated by airports. These statements from.

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

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

Note that the forward looking statements on this call are based on information available to us as of today's day.

Disclaim any obligation to update any forward looking statements, except as required by law.

During this call, we'll discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

Finally, this call in its entirety is being webcast from the 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 thank you for joining us.

After the market close today, we issued our quarterly shareholder letter with more details on our results and strategies as well as a press release announcing the appointment of data as our new Chief Financial Officer.

Today I'll be sharing our first quarter results and highlighting three key themes that position us to accelerate top line and client growth for the year.

First our business has great momentum and reach several multi year highs in Q1.

Second the secular shift to online shopping and the share gain opportunity. We've discussed in past quarters is well underway and we expect accelerating growth active client growth should play a significant role in our full year outlook.

And third we're enhancing our fix indirect by offering to expand our addressable markets deep in client engagement and grow wallet share.

And grow wallet share over time.

Before I dive into these themes, let me first discuss our Q1 results.

In Q1, we generated net revenue of 490 million, reflecting 10% growth year over year, and 11% growth quarter over quarter. We delivered net income of 9.5 million and adjusted EBITDA of 6.9 million.

During the quarter, we grew our active quite couch in nearly 3.8 million. This represents a year over year increase of 347000 clients are 10% growth and a quarter over quarter increase of 240000, our highest sequential client addition on record.

This surge of new clients, who are still early in their spending journey with US resulted in an expected decrease in year over year net revenue per client flow of course that either.

Even early in her journey with US these new clients have demonstrated very strong purchase behavior in their first fix says that we believe to be a strong signal a feature satisfaction retention and lifetime value.

Q1 was a quarter that saw great momentum in client growth and dinner business more broadly our offering continues to benefit from strong product market fit.

In a time period, where many traditional brick and mortar retailers are still experiencing double digit year over year revenue declines in our most recent quarter. We delivered an increase of over 240000 net after a quiet quarter over quarter I returned to double digit year over year active client growth, which we expect will increase further this fiscal year.

Yeah.

And their very first experience with US. These recently acquired fix customers are demonstrating both strong purchase behavior and satisfaction we.

We previously shared a measure that we internally refer to as a successful first fix which we define as a percentage of clients who purchased at least one item in their first fix and look forward to their stock index.

Each of the last few quarters nearly 80% of our first fix is met this criteria, which is the highest level we've seen in five years.

Even as we acquired a high volume low client, we're very pleased that were able to meet their needs and preferences.

The strength of these recent cohorts are due in part to our ability to shift our inventory to meet the client at the moment, but also our longer term efforts in improving our recommendations by leveraging our growth dataset to bolster our style graft and power algorithmic models.

We believe that establishing a favorable first fix outcome is a strong indicator of future client engagement and retention that will serve as a tailwind in the quarters to GAAP.

We saw strong quite outcomes in our newest client and also in our broader existing client base. We're pleased to share that across our entire fix offering increased success rate every year on record and in Q1, we delivered our highest level yet.

We believe this strength is driven by our ability to leverage data to generate insights that allow us to relentlessly adapter inventory assortment and continually strength in our recommendations.

And women for example, we've grown our athleisure assortment at the percentage of our womens inventory by over 150 per cent compared to pre corporate level, helping.

Helping us Mr. Alan made it an elevated demand for these products and meet our client's work from home needs.

And kids, we view sourcing speak to our advantage, we're now sourcing a meaningful portion of some of our most in demand style using a rapid sourcing model where product a rise to our distribution centers in as little as techniques.

This contributed to a strong back to school season in which we grew first fix shipments by 60% year over year.

We've also reacted to the current environment by expanding our assortment of more affordably priced products across categories, which have resonated well with women and men clients and led to outsize success rate.

As we look ahead, we have growing confidence that our track record of strengthening personalization capabilities paired with our nimble supply chain will allow us to deliver better client and business results.

As we look to the remainder of fiscal 2021, our strong foundation to apply it and business trends sets. The stage for the quarters ahead. We're pleased to reinstate annual guidance that reflects the momentum we're seeing.

As Mike will discuss later, we expect to deliver net revenue growth of 12% to 14% year over year in Q2 that should drive further acceleration in the second half of the year, resulting in full year revenue growth of 20% to 25% year over year.

There are several drivers underpinning this outlook, but most notable is our expectation of further acceleration of our active client growth.

While the apparel industry is currently contracting weighted back to take share and drive higher new client signed up as the relevance of our model of personalized discovery inconvenience gross.

In Q1, we delivered first fix growth exceeding 25% year over year.

As a large majority of our new clients choose to receive fix it on a recurring cadence. We expect this will drive strong engagement and repeat purchase behavior in upcoming quarters.

In addition, we shared in September our plans to hire over 2000 stylists outside of California, and we're pleased to share that you just do just that strong demand for our styling role Weve already met this hiring targets and feel well positioned to serve higher fix the man in the remainder of fiscal 2021.

In addition to our strong outlook for fix demand, we believe that Directbuy will serve as another catalyst as we attract new clients convert prospective clients and reactivate lapsed clients. We've continued to see directbuy penetration growth across our men's and women's client base and we.

Planned to introduce it to new perspective clients later this fiscal year.

These strong trends, we've seen in our business combined with the ongoing market share shifts to stitch fix get less excitement for the quarters ahead.

In Q1, the combination of record quarterly client addition, strong auto ship retention multiyear highs and successful first fix rate and our highest success rate to date demonstrate the resonance of our offering and the power of the personalization engine that fuels our business.

With that I'll hand, it over to Elizabeth to share more on the enhancements, we're making to our directbuy and fix experiences as well as some of the exciting marketing initiatives, we're investing and to capitalize on the retail share shift that is underway.

Thanks, Katrina and Hello to all of you on the line I'd.

I'd like to begin today by share I'm more about how we continue to evolve the offerings within our stitch fix ecosystem, which we believe will give us more wait till then.

Our goal has always been to deliver the most personalized shopping experience I recon.

And what has enabled us to do that so well is nearly 10 year advantage we have building.

Algorithmically driven hedge per highly personalized apparel day shopping.

Oh gosh.

Currently in the midst of further enhancing our core fix experience, which has generated billions of dollars in revenue. So it's a tough action.

In addition, we've embarked on our net form factor Directbuy, which we expect will expand our addressable market deep in client engagement and grow wallet share over time.

Let me begin by sharing more on how we're enhancing our direct flights during inc.

Including leveraging the usage of our proprietary style shuffle experience.

[laughter] squash fall shuffled, it's proving to be a highly engaging experience.

We have collected over 6 billion ratings with millions of clients having played.

During Q1, we've seen on average more than 50% of our App engaged users playing daily with such strong client engagement style shuffle have evolved into a key vehicle for data collection that has strengthened our algorithms and allowed us to build enhanced features that improve quite outcome.

We think these elevated levels of engagement showcased the opportunity that we have to create a powerful skied based commerce experience that allows clients to become a partner and co creator in designing their personalized sketched fix storefront assets.

As such in November we expanded our direct by capabilities with the beta launch of shop by category, which Leverages, our rich style Shapell day as well as the valuable insights we've learned about our clients overtime to create a highly personalized shopping seed for each client.

Underlying these distinctive data assets or the proprietary styles that we leverage for each individual client feet.

Each category shop is built around specific theme like Athleisure fighter force seasonal staples.

Which are traded using each clients real time style shuffle likes along with Algorithmically generated recommendations inspired by these likes.

For this item baseball not clients now have the ability to purchase specific items that they see and style shuffle.

Over time, we intend to algorithmically generate a wide array of categories relevant to each individual client based on signals, we gather from up from down across various facets of all experience.

While still early and available to a limited number of clients.

We have seen strong traction with shopify categories, a day with approximately 80% of clients to engage with the offering completing at least one stops and demonstrating how fun and relevant and personalized shopping experience can be.

It also complements trending for you our outfit based recommendations to eat enabling higher and kept purchase occasions for specific items.

Shop by category is just one example of how we're leveraging our day to fly wheel to create a differentiated engaging and personalized shopping experience.

The operating addresses a broader range of client shopping needs and marks an important step in our evolution of dropped by as we move closer to using it as a vehicle for client acquisition in the quarters ahead.

Specifically, we believe this new category based experience will provide a compelling gateway for the cold start experience, where we can provide relevant personalized recommendation.

Clients as they enter stitch fix for the first time.

With our fix form factor, we're enhancing the client experience to leverage our styling team to deliver stronger outcome.

From a survey of our prospective clients those who have completed our style so foul, but not yet concluded to ordering of checks.

Approximately 45% responded that day, what paper if they had the ability to predict what they might receive from a stylus based experience.

If I lived in size and the magnitude and potential that this prospect base represents we recently rolled out an initiative in the UK called fix preview, where we show clients proposed items for their next fix it.

This new experience enable clients to engage more directly with their fix before it ships and have more agency and selecting the item overseas.

We began testing feature in August and recently introduced it to 50% of UK client based on strong early results that demonstrated higher client satisfaction and retention as well as improvements in cheap rate and average order value.

Based on this early success, we plan to roll out this fix preview capability to 100% of UK client and we have begun catching up with you offline with the intent to learn and scale in the quarters ahead.

We believe fix preview appeals to an even broader set of clients and allows us to drive customer confidence by efficiently showcasing our ability to pair them with the products They will love average.

As a result, we believe that fix preview along with our ongoing momentum from indirect pie will allow us not only to attract high quality clients, but also to convert a large prospect population that we estimate is in the millions.

Clients to wear out the profit, but have not yet converted to stitch fix.

As we continue to focus on accelerating our penetration other redefined apparel retail market with our superior personalized offerings.

I'd like to briefly touch on some of the marketing innovation.

It is allowing us to capture share.

Given ongoing dislocation in the brick and mortar retail space and our belief net increasing relevance of our personalization model.

We're investing in marketing and leveraging our predictive modeling capabilities to capitalize on the share shift underway.

One of these exciting new initiative its fee based product.

Beginning in June we began to rollout switch dynamically match creative selection based on algorithmic recommendation of what will most resonate with each individual user.

To date, we have seen meaningful improvements in E. C. P eight with more than double digit decreases compared to other ad format.

We expect to increase spend in the medium getting efficiencies.

To capitalize on significant store closures as well as in book supplies migrating to online shopping. We're also launching highly targeted campaigns across specific geographies to highlight our value proposition of vs chairs and attract customers who spend is more likely to be up for grabs.

All new we'll continue to test is highly targeted initiative and we plan to share more on our progress in the quarters ahead.

As you can see we remain very excited about the opportunity that lies ahead and our ability to capitalize on a forever changed apparel retail landscape.

Our time is now to connect with new customers understand their individual needs and help them discover relevant radically convenient and find ways to shop and find what they love with.

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. We're pleased with our first quarter results and has continued to see strong momentum across our business what gives us confidence in our Q2 and full year outlook, which I will share in a moment, but first I'll provide more color on our Q1 results in Q.

One we generated net revenue of $490 million, representing 10% growth year over year, and 11% growth quarter over quarter.

During the quarter, we grew active core EPS to nearly 3.8 million assets increased 347000 core EPS and 10% year over year and over 240000 net after college quarter over quarter.

Net revenue per active client afford on 67 declined 3.7% year over year.

That's Katrina referenced earlier this is driven primarily by our recent surge in new client growth.

During periods of elevated growth from quite sure early in their spending journey with cash revenue per client may temporarily lower until these new cohorts requires more time and our platform in.

In addition, the trailing four quarter calculation includes even thought the work Q3, 20, Overdraw, which will be low later this year.

Q1 gross margin was 44.7 per show, representing a 60 basis point decline from the same quarter last year, driven by higher shipping exchange, partially offset by lower inventory reserves and clearance rich.

Advertising was 10.5% of net revenue in Q1 compared to 11.4% in Q1 of 20 assets, we capitalize on efficiency gains in the quarter.

Other restaurant <unk>, excluding advertising was 38.2% of net revenue in Q1 compared to 33.8% Q on 20, driven by ongoing investments in technology total it and the associated stock based compensation or SBC expense as well as higher mortgage assets is year over year.

Q1, adjusted EBITDA, which excludes SBC was $6.9 million, reflecting solid revenue growth and lower inventory reserves and clearance rates offset by higher shipping American extra cash.

You know Q1 net income was $9.5 million and diluted earnings per share was nine cents or net income. This quarter included a tax benefit from the net operating loss carry back provisions of the carriers.

And finally in Q1, we delivered free cash flow of $51.4 million, reflecting our strong sales and margin performance timing of payments net or capital like model.

We ended the quarter with no debt and $429.9 million from cash cash equivalents and highly rated securities net.

On to our outlook, our robust demand trends along with our improved supply started position give us greater visibility and confidence to reinstate.

To get reinstated or quarterly guidance and share our first quarter outlook.

While we have plans for a wide range of scenarios. One note of caution our guidance today does reflect that our fulfillment centers will continue to remain fully operational stage any significant disruption from potential government related to cooladvantage.

First of all in Q2, we see it improving growth trends across your business. Just the Q3 20 Ecopetrol, we expect for further acceleration in Q2 and throughout the back half from fiscal 2021.

In Q2, we plan to deliver net revenue of $506 million to $551 million, reflecting 12% to 14% growth year over year, which we expect will be fueled by active client growth.

In past Q2 periods, we traditionally pulled back on advertising during the holiday season season, given the clients tend to be focused more on the television purchases a gifting to others. As a result, we saw lower marketing efficiencies. However, with our direct quite offering we can now play a greater role with clients a 10 day shopping during the holiday.

Our season.

That's true blend to lead and anticipate the advertising as a percentage of revenue will be between 11 and 13% in the quarter net.

Continue to take a disciplined approach to our marketing strategy focused on positive lorillard across a diverse mix book channels and believe that this investment will truck work Dr clubs to our offering into true and also be accretive to our additions in the back half of the year.

Factoring in this industry, we expect Q2 adjusted EBITDA loss from the range of 6 million to $3 million.

Now I'll turn to our full year outlook.

With the momentum we've seen in our new quite sign ups and the expected expansion of our direct by experience, we see further opportunity to take share and drive growth from 2021.

Specifically, we expect our year over year active card growth continues to accelerate and allows to deliver net revenue of $2.5 billion to $2.14 billion or 20 to 21st 20% to 25% growth year over year.

This implies growth in.

Employed this implied growth between 29, and 40% year over year in the back half of this year.

Given our opportunity to invest to drive growth over the course of this year, we will hold off on providing a specific adjusted EBITDA range. At this time, we plan to revisit it would feature quarters. In summary were very pleased with the start up 30 years old and confidence in our fixed indirect costs I know that paired with an accelerated active client growth.

Will position us well for the remainder of fiscal 2021 before we turn to questions I'll pass it back to Katrina to share more arc starting CFO.

Thanks, Mike following a very thoughtful and extensive search we're thrilled to be welcoming our new CFO Dan data.

Dan joined the joins us from Amazon, where he spent the last 15 years his.

His background and experience is an ideal fit to help us to continue to scale and drive the next phase if such fix is gross.

Dan officially started today and we are excited for you to have a chance to meet with Dan and teacher Investor meetings, and you'll hear from him on our second quarter earnings call in March.

I'd also like to thank Mike for his nearly nine years of leadership and partnership such that.

Most recently as our interim CFO and COO. He also watch it ran our net business had a critical role in launching the UK taste and so many other milestones along the way not.

Not only has make achieved a lot, but he's done it in a way that has inspired challenged and enable their business and our people to growth.

Thank you Mike for everything you've done for stitch fix we're excited that you have now joined our board and will continue to be part of our journey.

With that we're ready to open up for questions operator over to you.

Thank you at this time, if you do have a question that won't be star one if I could start one for questions well hear first today from Ross Sandler with Barclays.

They are relatively total was in my congrats on the war.

The future plans.

I spoke of course is just on low.

Advertising expense guidance. So you don't really know worthwhile remarketing income the holiday quarter.

For obvious reasons, you just lunch shows, but if we use a doubling its provided.

It looks pretty exhausted our year on year like 70 percentage.

Or thereabouts, so what do you see in terms of dark relative to that expense where else.

And Oh, you're going to see the I know your report clients on a TTM basis what are.

The current quarter acquired growth.

Flow or something closer to that.

It's been growth so any color there would be all four of them.

They squeeze one more in Oh, sorry for the long question beyond that.

The 80 per cent conversion from all first fix it was that looks great.

And can you don't close all from what's your body's coming from all the different though there's no growth personalization overseas.

Somebody your question would probably have more disposable income right now.

Going forward from still very vocal cord E. Commerce, then they are all day.

Discretionary spending category showed that macro or that's just what you're seeing in terms of of course, all day issue. That's all.

Yeah, why don't I. Thank you very much for the questions Ross I don't I actually just take your question on successful first fix on the 80 per cent number and then and on the advertising side, I think Elizabeth and Elizabeth and potentially making lay in as well.

On day on the 80 per cent successful force fix metric I'm you know I think me, it's probably a little bit of both honestly I think there is no question that the macro environment right now is kind of enhancing and increasing our product market fit I think you know as more and more people are looking for ecommerce solution and as more and more people who may never have thought gene.

As an example online are trying to figure out like what are the best tools out there to help me to find gene I think there's no question that that that kind of the macro environment and the kind of drive towards ecommerce is definitely a contributor and I think that like you know we are always AB testing improvements in our algorithm on you know, we we definitely really believe especially.

Womens and kids that that and the speed with which we shifted the assortment to be able to meet our client where we where we've talked about this for the last couple of quarters, but being able to get out of the categories like workwear and the things that are less relevant and be able to be in the categories like athleisure and and even to some extent sport like those those are definitely changes that.

Really helped our business to try to not just survive, but really thrive. During this time and so you know I think it's a combination of both the macro environment as well as as well as kind of things that we've done to be able to improve the fine outcome.

And then I'll pass it over it was that to answer your question on marketing.

Yeah. Thanks for the question Ross you know I think a couple of things to point out one is just the overall scene, that's really significant sign up rate a first six of which we talked about in Q1 and I pay for like the shoulders of Q2, not sort of the peak of what we just were in in terms of Black Friday, and cyber Monday, which really is somewhat counter cyclical to arm.

While the mortgage the ability that we're seeing the consumer shifting so dramatically on low right now we're anticipating to have opportunity there and kind of the later a weeks of December and into January and January tends to be a very good luck for us overall and just to kind of efficiencies that we've seen in P.T.A. have been really simple if they can albeit typically not day.

During the peak holiday weeks and so that's a big part of it that force accomplishing beat the other is just the opportunity to reactivate dormant clients.

Hezbollah beginning to experiment with a prospect of client base with hard rock by offering and so all of those things are providing opportunity and you know it is a range that we're getting on that marketing spend and we of course make dynamic decisions as we go we share about 11% to 13% range and it will depend on what we see in the weeks to come.

Over the course of the quarter, but yeah, we're basing it on the optimism about what we've seen in terms of clients really migrating try model over the course of the last several loans.

What's your next today from Youssef Squali with Trust Securities.

Hello, Hi, a server that are have drawn me per sorry congrats.

From there as well and Mark Best of luck two quick questions first can you maybe speak to the promotional parts environmental activities going on there. How are you guys able to hold the line or which is pretty impressive I saw a 4% decline in ARPU, but it seems like again certainly not.

Anything to do with the promotional environment, but it will be great. If you could like if you guys could comment on it.

And then on the on one particular category, which highlighted last quarter index. The the plus category and just kind of speak to the opportunities. There we've seen some pretty big announcements around store closings for some large players like clean book boring answer and then I'll go offline.

Player. So how big is it for you guys today and how big is moving up a needle mover for you over the next several quarters. Thank you.

Yeah. Thanks for the questions on the first interim promotional environment and I mean, you know look we can certainly see it I think you know we talked about it at one point over the summer you know obviously right now the channel we see a lot of promotional activity, but the reality is you know because fish fix is a place where people really are buying and investing close that day on investing in close up.

<unk> for the long haul and I think that what the the thing that we win on its fit on relevance and those are things that I think a lot of other retailers are not as good at delivering and frankly, probably aren't as relevant for some of the categories that do really well in such acts and you know I think if you're thinking about on a pair of jeans or even appears GAAP handset are going to get.

GAAP hint that you wear every single day and you're not necessarily looking for this what pent up 80 per cent off you're looking for the one day 50 really well that feels really good on your body and so you know I think that you know those that kind of the capability of being able to personalize has actually never been more relevant in the kind of crowded environment that we have today and and so you know I think that.

The other thing that I would mention is yes, we did mention in the call that you know we have you of course during that kind of China's economic challenge and we certainly are seeing and fix that and some of those lower price categories, even though it does low price products and so I think especially in our men's and women's business. As we we have reacted to the macro environment in that way and seen a lot of.

Success there.

And.

On the question around plus price, it's absolutely a significant opportunity and you know I think it's on the store closures that were seeing and plus size I mean, frankly, I think that we're seeing store closures really across the board and apparel retail and and and you know I think plus size is certainly a place where there's been a ton of acute opportunity for a while and that the business that way.

Seen beach enormously successful and leading into co that certainly into co bid right now and and and we've continued to invest and making sure that we have the best product that we kept the rights that we have we have the best fit and if the category that you know I think Ed and it's definitely one that will drive a lot of growth for us in the future and I think it will be.

Well it will be there to be able to capitalize on the trust accounts.

Well go next to Heath, Terry with Goldman Sachs.

Great. Thank you very much Katrina when you look at the combination are well dressed bar and the trends that we're seeing and in great.

I would characterize whats going on in terms of in terms of spend per customer and particularly to the extent that said you know your from your son.

Depletion book and you know within within your your customer base is there is there anything notable that you would say is happening whether it's whether it's regional whether it's a time or your customers with them on the platform new customers versus versus old customers in terms of trends that you're seeing what within that span.

Relative you have multiple options for your customers to be able to spend with us.

Yeah, I can I can kick off and Elizabeth may have something to add and you know at a high level honestly I mean, what we're seeing is that the two experiences are really additive and I think what's really exciting about what Elizabeth share to the category and look in Directbuy is that you know where they are.

Our times when you are generally looking for ways to restructure wardrobe and are also times. When you are looking pretty specifically for things and I'm you still want to personalize view, but that you know you have kind of a category or look or anesthetic that you're specifically looking into and so you know what we're finding is that these are actually you know I think there is a broader high profit.

This that like you know directbuy and fix it will allow us the kind of combination of those two things will allow us to address you know any more types of clients and we're also realizing it's really also its operating it's unlocking I think book quite opportunity, but also pretty significantly on the wallet share opportunity side, where you know if you're looking for you know down Jackie.

To eat outside as an example on you'd actually love to buy doctors that checks in a more frictionless way and I'm directbuy is going to be a great way to do that and and Elizabeth if you have anything to add.

Yeah, I mean, I think what were overall seeing interest for fulfilling more occasions for the consumer and really believe that we are providing the best browse based and discovery day shopping in a world that we're online has been more characterized by search and so what we're seeing right now in the marketplace with so much structurally shifting from offline.

On line you know, we believe something like 10 points of share might ship tenax several months, but usually with around one or two points a year. If those purchase occasions that used to be in a store. When you were looking around we're now making those more easily available through our experience and that notion of the shopping feed and especially what Katrina was alluding to with the categories where people can input.

Their preferences and immediately see recommendations on categories, they're looking for that it's highly out of cash to the surprise and delight fix experience for those occasions that you might have gone into the store to look for something and so there's a real comping inheriting a it does show up very much in the penetration of the categories. We're seeing growth meaningful differences that you know more accessories more.

Footwear, you know more men path, then we would see in our fixed assets as well as some interesting trends that we're seeing and price points that people know me into things that they really want to GAAP, we have seen kind of that kind of deepening of higher price points with consumers, we usually think of being a little bit more price sensitive, which we think is just a great signal that we're we're curious.

Moving and surfacing items are relative to the consumer.

Great. Thank you book.

From RBC next to Mark Mahaney.

Okay. Thanks, Mike Smith, Congrats that's a heck of an exit so congrats on what you folks are able to succeed wishing you all the best going forward a couple of questions I really like this idea of the fix preview I would also think that that would improve from success rates.

So did you also see that in the UK I can't imagine that it would do anything but I will take those when you roll them out in the U.S. So just maybe talk about how long you plan to test before if you get good results you would actually roll it out to all of the U.S. and in all these a record number of customer adds that you had good years Peel that back a little bit how much of.

That was due to gross adds versus reduce churn for increased customer retention all of these new functionality to improve the relevance of personalization I would imagine the bigger impact has been on a customer retention, reducing churn, but anymore color on that would be really helpful. Thank you.

Instead of Great question, Mark on why don't I start with actually that client add side and then on and then we'll have to look at that if we can certainly talk a little bit more about fix preview and so I mean, it's it's probably a little bit of both of the bigger driver is actually first fix and so what we and you know what we've been seeing is that weve seen great efficiency.

We've seen really strong product market fit and so new client adds are really the most significant driver on that 240000 and and of course, we still see really strong retention trends. So that of course to your point that contributes as well and that you know we've seen strong retention trends for a while into the bigger moves on the dial is definitely the new client I'm kind of goodness that we've been seeing.

And of course, we still see opportunity for those to get better and we've taken a little bit about especially when it's on the new client outside Britain are definitely a lot of good trends as seen on that side of the business.

Well they talk about fix preview.

Yeah. Thanks, so much for the question Mark and I think you really are spot on in terms of the intuition adopt being able to drive higher success rate day, Ob and we absolutely have seen not new K were weak fans to beginning to roll it out and you asking really in testing mode right now to make sure. It's a great experience. Then obviously, we have the more established client base.

Sure and some differences that we want to understand better but overall there early signals are positive here as well and so you know we're actively working on how can we scale. This up how can we make it a better and better experience. Then you know its book for the clients that are already out pipeline, but also making people aware that they can free these things before they buy it which we think will have an impact on our.

Our conversion funnel as well so we're really excited about it and just in general I think what gets US excited is just our clients happiness is absolutely going up interest being able to create the right experience. It's great and the other thing is you know the way we've been testing. It is you can opt into it we're making that available and you know with interest.

Thing is not everybody off then a lot of people are but some people do love surprise and delight, we want to make sure we continue with that and for those who want to have a.

More of that peak into what they're getting and from a gain from what the stylist ahead of time. We think this is going to be free offering, particularly for those prospects that are the ones that I think in particular have been looking for that so yeah. Its really a positive signs that we see and excited to more fully roll it out.

Thank you Elizabeth Thank you Katrina.

Moving next to Corey.

JP Morgan.

Great. Thank you I had two maybe starting from Directbuy customers have a number of ways to interact with reported today from shop that category to show from colors just to name a few so I guess my question, just curious which of these jets I understood I wish I had the biggest impact are you seeing clients engage with the most interest.

Sorry.

Looking forward, where do you see the most opportunity from a credit perspective, and then as a follow up maybe maybe from my I understand you're not providing specific guidance, but curious if you still expect to see leverage your leverage year over year, if not moving some of it puts and takes there. Thank you.

Great. Thanks, I'll, probably have Elizabeth I'm talk to your first question here and then I can tell you can talk a little bit more about your leverage question.

Yeah, Hi, Thank you for the question you know that the number of ways that we're beginning to roll out the experience maybe just to to step back for a second we watched first for shopper locks, which for curated outfits. She based on showing out but based on items you purchase in the past, which made it taught us that for our embed.

Good customers, who are already bought items then we watch training for you, which is the out that they need that is generating recommendation just based on anything that we know about you and that's been very successful and that's really been the bread and butter. So far this nascent direct by offering the category offering we just began in eight allocation.

The other day in November so it's a little too early to tell you know which are people using the boat so far, but we really see them as complementary because the outfit feed it very much surprise and delight and just sort of getting a sense of really browsing and seeing what you might be interested in whereas categories as a little bit more like Oh, great per sweaters I'm going to go find it.

Her and I was looking for that west leisure and we'll be expanding categories over time, but I think each one themselves are browsing, but probably the categories are more indicative of things that are closer to search or that you might be looking for a particular item. So we see them as reasonably complementary and also the outfit people finding out really inspiring people because it.

Recognize and understand how to use that item. So I'm sure we'll share more in the quarters to come as we didn't have to scale. The full experience backing off the most interest but the intent is really to be able to address all of the different purchase occasion needs that our customers have.

Hey, Corey this is Mike I could take the low leverage person I mean as I said in Q4 as you know we when we see these opportunities in Boston given the macro environment that you feel like there's plenty of opportunity to take share and we're seeing really healthy returns from marketing, we're going to invest in so.

You know, while we didn't provide any like I said any specific adjusted EBITDA guidance, you know I would expect us to continue to invest kind of in that in the back half of the year, where we see those opportunities to be more share in future quarters to give kind of a better answer on actual leverage versus no leverage up but you know we're pleased with what we're seeing.

You are kind of in the marketplace and returns on investment that we're making.

Great. Thank you.

Well hear now from Erinn Murphy Piper Sandler.

Great. Thanks, Good afternoon, I have two questions from me as well first on the sales guidance. If we were just to take the mid point, implying for the back half that would be the highest dollar growth that we've seen oney you guys are there other new initiatives baked in or is this just the benefit of scaling some of these opportunities like direct five fix price.

If you and then my second question is just in the shareholder letter you talk about chasing inventory I guess I would love to have an update on what you're seeing from the vendor community and it's how you're seeing the balance between vendor brands versus your own private label. Thank you.

Thanks for the question Erin and I will try to take those I mean, I think on the you know on the sales guidance I mean, the way that you should that you can really think about it is like as we acquire new clients those clients generate some revenue in that quarter, but they are also just generate kind of continued compounded revenue in the quarter.

Todd and so when we see a quarter like this last one when we added 240000 clients and we actually just to step back since co that you've kind of been building momentum both on the revenue side, but also in the building of the client base side. So a lot of it so that kinda that momentum that we see in clients and you know benefits us now, but actually it really benefits us as you look out to the.

At year end, so and you know it is that new client growth that we're seeing at sea and at the new client growth and we've already had it also new client growth that we're anticipating as we are I'm looking into the months ahead and it is the good net that we've been seeing in the business around success rate around retention rate. So all of that is flowed in and there is some initiative work in there I mean directbuy certainly.

He has been a significant contributor and we believe that as we continue to innovate and Directbuy that can continue to contribute and you know things like fix preview honestly are a little bit kind of too early to really know exactly what that what that's going to deliver to the business, but you know I think those there's a lot of at any given time you know we share in these earnings calls he is exciting things that we're working on.

We're running AB tests, all the time and you know were always including kind of the balance as and of those those kinda initiatives and hypotheses into into our model that really you know a lot of that a lot of the growth is really around just on our existing client base than what we've seen and also what we're what we're anticipating if we look on out into that.

Quarter second.

And on your second question around chasing inventory you I mean, we [laughter] probably depends a little bit on business line also I mean in a place like kids as an example, and we've really been able to leverage our exclusive brands and to be able to deliver that quick turn product to be able to grow that business and as as weve seen really great demand on that side and.

I think in <unk> and in a place like women you know, we're still very reliant on our on our vendor base and and eat on the on the women side I think what we found is that our vendors are at a point now where they are really having to choose who do I believe it's going to be a partner with me for the long term and on you know we are really happy that we are based.

Typically always at the top of that list and so you know while it's definitely been a challenging time for everybody. As you know demand has been up and down and preferences that then all over the place and at the same time I think it's actually helping our vendor community stronger and to be better partners with US I think you know they've been really excited that we've been able to deliver growth for their businesses. During this time and they see EPS is really.

Value partners and so as we are doing things like exploring new inventory models and trying to figure out ways that we can be more flexible on the inventory side. We are finding that and that you know those relationships are vendors are stronger than ever. So so it's you know it's definitely a balance of business that business that changes, but but you know we feel really really fortunate to be that should be that vendor of choice.

Sorry.

That retailer choice burgers.

Great. Thank you.

And from Keybanc capital markets, we'll hear from Edward Yruma.

Hey, guys venturing into question like best of luck going forward or I guess, just two quick ones from me I guess force. All you know obviously, it's an exciting data points on Directbuy from a logistics perspective, I guess, how much more definitely investment share as you can to scale that business. You know can you deliver or do you need to have a moderate growth there and then.

Second as a bigger picture question, you know hopefully we all share to live life again sometime in college. One was do you anticipate a big fashion shifts and I guess, how do you start to position the inventory or you're buying around it.

A potential these surgeons and apparel the bad thank you.

Thank God flow I answer the bigger picture question, and then I'll have Mike talk a little bit about logistics.

On the Big picture question I mean, it's a great you know I mean, all of these because last nine months has been a real tested everybody, it's millions and flexibility and I mean, you know I think at this quarter. We all acknowledge that we don't have a crystal ball, but we of course, you know I think the thing that has been our biggest assets it didn't flexibility and and that ability.

Good to be able to learn really quickly what change and react and so you know rather than trying to predict the future I would say that our efforts are really channel towards how can we make sure that we are the most flexible that we can be and how can we make sure that add behavior changes or as we see things that are different that we can see it first and we can react quickly and so kind of the reference point that we may.

To the kids inventory and being able to use the rapid sourcing model and that's kind of an example of something that we're doing there and so you know I think you know we we do expect that there will be a shaft I mean, how things will shaft at what rate things they'll shift like when will think share I mean these are still you know question. We don't have the answer Steve, but we want to be really prepared when those things start to change that we can.

Really react threats and Mike why don't you take the question on logistics.

Yeah, I mean, I'll start with more generally and then I'll get it to a specific question Ed I mean generally I'm. So proud of our team kind of on the supply side with warehouses and installing Katrina mentioned kind of being able to hire or into the stylist needs that we had him and you sort of exceeding expectations for how quickly we got back up.

The speed and styling all big warehouses. The same thing I mean, you really really.

Doing it yourself do it also specifically on book value. It helps to have a couple of quarters. Tony you know in the past is having done direct price, but we're super well positioned day angle Directbuy from a logistics this book.

And you know, it's the same inventory that you're getting the same four walls. So huge difference so we're ready.

Thanks, Chris.

Good work like Hell with Needham and company has our next question.

Thank you good afternoon interest, which is the Mike as well I was hoping you could expand upon the operating a more affordable price products across women's and men's and particular category. The brand to call out as you think about your volume assortment and should we expect this will have a negative impact from it will be going forward.

Or would you expect access from such previewed to offset that potential to us.

Yeah, its it and it's a great question and I, probably will only be able to enter directionally for you just because I think some of the things. We are also curious to see how it shakes out. So you know I think what we're seeing is we're seeing more success at kind of the lower end of our price ranges as you would expect I think you know you.

Are there other retailers calls that and that you know I think there there definitely has been some economic pressure on wallets and so on and so what we've really been doing it you know it is kind of the similar inventory to what Weve already high but you know, making sure that we have the right GAAP, making sure that me you know have the appropriate amount to that and that has resulted in higher success.

Rates and so on we share them, you're having the highest attach rates ever in the business and this is you know one contributor to that and so when we see those really high success rates and you know that we see there's you know kind of pro and there's a there's also an up tick in a well it there's a little bit of washing out effect and it'll be because as people are keeping more things in their fix is that of course.

Contribute higher it'll be even though we have you know we also had like I guess, it's both sides of the quite right and then of course as we think about future initiative work and also you know I think there's a little bit of a hypothesis that this is temporarily on and it was just spoke a little bit about like what we're seeing in direct buys. An example is that we're seeing people who might be more price sensitive and fix it actually.

B I'm excited to splurge, and Directbuy and so you know I think we're not quite at a point that we're in I know we're all these numbers land right now, but you know we're seeing great success rates, we're seeing the product resonate really well and you know I think we have some hypothesis that there is a temporal nature I think of just the economic pressure that we're seeing right now it is being able to meet the client where they are and that's of course.

Good thing now that may not be a permanent trend and then things like fix preview to your point on those you know we would we would believe would have the IME send some pretty meaningful impact from things like the cash rate than it will be the teacher and so you know I think there's a lot of kind of puts and takes but like Directionally. I think you you know you're seeing which direction. The arrows going I think the question for assets Jeff.

Like you know where it is everything that out in the next six months or a year.

And I'm, hoping we can get more insight into the plan to introduce direct Florida gross prospective clients. Later this year I'm just curious what that's going to look like from a consumer perspective, we still new data.

From their style profile or the goal here is to use predictive analytics to attract customers. The part in their database right now.

No I think hospitals, but the jump in on this one.

Yeah. Thanks for the question, we're very excited about that and you kind of hit the nail on the head of one of the questions, which is what we call from an algorithmic standpoint like how do you make a great pulled start experience and make it very low friction at the same time and so part of what I described with the category day shopping and that's fine.

Engaging way of leveraging something like style shuffle, we absolutely think could be a part of that new entrant. We also have it's very significant base and perspective clients were actually already have their GAAP profile and they probably will be very interested in this offering into that kind of gets us the benefit of those and then of course, just beginning to experiment with it.

A new you know sort of introduction and onboarding flow on to stitch fix that's probably quite a bit simpler than our typical profile for the stylus that experience. So all of those things are what we're in the flight of a building and testing right now, but with a lot of confidence and optimism that we can create pretty solid recommendations, even without limited with women.

That information because we're not we're not using information about individual we're using information of individuals that have a lot of similar preferences like them of which we have you know that you know 3.8 million active clients.

We have a lot of benefit of being able to understand those style preferences, leveraging our style grass.

And so we are you know kind of in the early days of doing a number of tasks into Katrina point, we're always testing things and so we're confident that this will be parted out by 21 day exact timing it really scaling it up is a yet to be seen just to make sure that it's a terrific experience from your customers.

Very helpful. Thanks, very much.

And from Deutsche Bank will move to can all my whole car.

But if there's good day the question I was just.

Good for the book.

Oh, the big players, who when they go to non subscribers.

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He's built a book to Bill surprising you mentioned, you're doing sort of that's being worked on.

What is the is the key part because if you're looking for or your read before before you actually made good morning, they'll go no go decision and.

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And then I have a follow up.

Sure well why don't I start and I might have missed so your first question. The first part of your question. Just unclear is just what are what are we waiting for before we roll out the direct side and non and on to non clients is that right.

Yeah.

And then the second part of that was.

But in total dark pools, because if you look at work there to hear Mike just talked about how you know you would you would you will invest for growth, but you wouldn't be doing it either in a disciplined manner.

One is called.

You know how how do you intend to grow people spend on brand works is performance I know, that's a big part of who knows.

Got it got it okay, Yeah, let me take a pass at that and it was just can certainly jump in if I Miss anything I mean from personally you know what we're really trying to optimize for its on its converting people into the right experience in such facts and so you know we've been doing some testing around what is the best way to introduce Directbuy and like what is the best way for us to actually.

Okay and figure out like this is somebody who should be on a conversion path to fix is versus this is somebody that we actually should have been share directbuy first and and so that actually so right now we're kind of testing to make sure. We're looking at everything from an LTV perspective, and so just to be like just put out a real a very real example, like if we go and acquire a thousand clients.

You like actually really would benefit from fix it throwing them into a directbuy first experience actually might be degraded to their LPV and so you know there is of course all of the cold start challenges that it wasn't I spoke to you, but there's also the onboarding question around just how do we make sure that we get the right people into the REIT conversion parents and how can we make sure that we're getting that right.

Optimization, and so you know where we want to do some more continued testing to make sure that we are really not from I think for LTV at that very first structure of making sure that we're kind of getting people into the first step in the right experience.

And then on the second question around just how we're thinking about our you know we've always been very disciplined with our marketing friends, we've always and Weve always been optimizing for on for the for really good ROI on that and that won't change it dropped by and I think what's really exciting about having direct by the separate is that it actually opens up all of these additional marketing.

Total to ask that Werent actually available before and so there are things I'm, there's some axio channels in it as an example that weren't available like suddenly you can actually compete in some of the item based marketing that a lot of retailers compete and so you know we view those as likely to be lower C. P. A channel that actually can allow us to you I don't have.

You know kind of incremental cash interest that shakes and and you know to date. We haven't spent we on it we shared I guess now and I guess, maybe a year or two years ago. When we get them brand spend and you know as we look into the future I think there's definitely.

Opportunity for us to be exercising more of that brand muscle and you know we I think today, we have so much opportunity that's in the low hanging fruit of introducing people to stitch fix into introducing people. You know originally the direct by experience that I would not anticipate having a lot of friends fans connected to that but I certainly think that's a big opportunity for the business I think especially once.

Kinda on you know the clouds lift a little bit in that kind of total or that is apparel retail right. Now I think there's really going to be an opportunity for us to establish ourselves assets and I'd be you know pre eminent brand.

Great. Thank you so much.

And our final question today will be from Mark I'll switch or was there.

Hi, good afternoon. Thanks for taking my questions from like a best of luck to you and your next chapter.

So like just starting out to address book gross margin could you maybe speak to some of the puts and takes as we think about the second quarter and then back up and how we should think about potential scale benefits on the gross margin loans as the revenue growth, which celebrates simple obviously you're anticipating.

No Katrina separately really look at the progress with the new stylist hires could you maybe talk about your early learnings you're really a pretty significant shift from the stylus based on a relative in short period, you're looking ahead, how should we be thinking about the opportunities from a productivity standpoint.

These new styles from the coming quarters fix.

Yeah, I think from the question Mark all start out with your question around stylus on hiring and I'll have Mike seek to gross margin and on the south side on that you know, we're just like I think stylist hiring is a place where we've really and we've really gotten better over the years and you know this is a really unique job. This is a job where you can work from home.

And I guess now say that maybe not so unique these days, but this is the job where you can sustainably for you know you have been able to and will in the future to be able to work from home and work from home in a pretty flexible way and so and you know this has always been a really attractive job and you know while we were why we are optimistic that we'd be able to have these kinda.

The profit hiring plans net quickly. We are you know it is just a big a testament to the team that I have that we were able to do that as quickly as we were and you know I think some of it is that we've been able to improve the weighted the market. The role I think there's definitely you know ways that we've been able to.

We've been able to kind of leverage what we know about what makes it fairly successful today and make sure that we're bringing the right people and and so you know this is a muscle that weve been exercising for the last eight years or so and then when that we've just gotten better and better at and in terms of you know leverage on the styling side I mean, the way I think about it is that these stylus like it's such an incredible assets that we had.

Besides thousands of people whore spending high quality time, and thoughtfully on delivering fix is for our clients and so you know overtime I think that the real piece. This is more how can the algorithm do more and more of the things that we know that the stylist doesn't need to do and then at the same time, how can we actually use that stylus capability and.

A more powerful way and so there's a couple of past that I would point to and we had and we have done from lifestyle in test in the UK, where we had stylist, we're doing a more hands on experience with clients and that's certainly that's something that some people are exciting to see in the UK also we've had some stylist, who are actually and helping to create content for us.

So that's another really high value I'd say that the stylists can be adding value and so you know I think we're really excited about on about that trajectory that we've seen for higher Hana stylists and I think we're really excited as we look into the years in the future or just being able to be more creative with the way the stylus that value to our business.

Yeah, Hey, Mark Day me one of the things I'm really proud of all shows just kind of the rebound that we saw in gross margin as you talk though if you guys or from day Q3 can withdraw from wherever yesterday.

Look out in future quarters, while we don't guide to gross margin I feel like we should see consistent performance from us and gross margin to your question about puts and takes obviously there is a little bit headwind and shipping we experiences less than most because they have less of a P.G. kinda quality business all of the things that kind of help us how to be consistent.

One is the scale you mentioned, it's increasing this is a brand and it's actually just a successive businesses like kids in the UK as they grow and they get closer to come onboard men's and women's are so I think we have more tailwinds and headwinds relative sector. We have you'll see more pretty consistent performance from a gross margin infrastructure.

Throughout the throughout this figure.

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

Thank you. Thank you very much. Thank you all for joining US we look forward to seeing you virtually or maybe even in person in the coming quarters. Thank you.

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

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