Q2 2021 Stitch Fix Inc Earnings Call

Good day, everyone and welcome to the Stitch fix second quarter 2021 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Mr. David Pearce, Vice President of Investor Relations. Please go ahead Sir.

Thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2021, joining me on today's call are Katrina Lake founder and CEO stitch fix.

Elizabeth Spaulding, President and Dan <unk> CFO I would also like to mention that we are joining you remotely today from our home offices we.

Have posted complete Q2 financial results in our shareholder letter on the IR section of our website investors Doc fix fix dot com a link to the webcast for today's conference call can also be found on our site.

We would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause our results to differ.

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 statement, 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 on our IR website.

These non-GAAP measures are not intended to be a substitute for GAAP results. Finally this call in its entirety is being webcast on our IR website and a replay of this call will be available on the website shortly.

Now I'd like to turn the call over to Katrina.

Thanks, David and thank you for joining us.

After the market closed today, we issued our quarterly shareholder letter with more details on our results and strategy.

On today's call will focus on three day that demonstrate the momentum we're seeing in our business.

First we are continuing to see clients migrating to our operating at the highest rates weak all year and we're excited about the opportunity to accelerate our share gains over time.

We continue to evolve our fix all French enhanced conversion and retention of new and existing clients.

And third direct buy is resonating with our existing clients.

We're preparing to roll it out in first time clients, a day and a fiscal Q4.

Combined our demand strength product innovation and plan to launch a direct buy new clients give us confidence as we watch for the quarters ahead.

As I'll discuss in a moment, we also see near term factors that we expect will impact the back half of this fiscal year and as a result update are for your outlook.

For a dive into these things let me first review our results from the corner.

In Q2, we generated net revenue of 500 and for a million.

Reflecting 12% growth year over year within our fix offering first fix shipments in the quarter increased their highest growth level in five years. However, due to the pandemic carriers face unprecedented volume during the holidays and we saw increased cycle times.

This resulted in us not being able to recognize all the revenue from fix it we shipped during the quarter.

We defined cycle time is the duration between while we style items for a fix and while we receive and process any item Doc from the client and our warehouse line.

Unlike other e-commerce companies, we recognize revenue for a fix at that client checkout not at the point of shipment.

Adjusting for the impact of these increased cycle times, we believe Q2 revenue would have been within our guidance range.

In response to these delays we've made adjustments in our share planning process to ensure we meet our promise still every day, we are taking steps to diversify our outbound carrier mix and we are partnering with our primary care carrier in the United States Postal service, it's a process that rich friends more efficiently.

In January of Q2 direct buy helped us achieve our strongest month over month, Robyn knee growth of any January on record and demonstrated the power of our new offering to complement our core fix form factor.

That said, we also learn more during the holiday period about seasonality of drive by we saw a softer holiday performance than we anticipated and believe that self purchase behavior subsides and this window similar to what we've historically seen in our fix offering and is replaced with a gifting like that.

Thank you too. We also grew our active client catch nearly $3 9 million representing a year over year increase of 408000 clients are 12% growth.

It also looks like you had a quarter over quarter increase at 110000 clients, which is more than twice, what we delivered last holiday quarter.

This growth was generated more net client addition from the last two quarters than we did in all of fiscal 'twenty 'twenty and we plan to continue expanding our client base and the remainder of the year.

Dan will review our results in more detail later on this call.

Now I'll share more on how we continue to capture share amidst the ongoing shift in the retail landscape and why this gives us confidence in our long term opportunity.

The first COVID-19 stay at home government mandates were enacted nearly a year ago. This resulted in a massive share shift acceleration on line.

The average increase when you moved away from predominantly shopping for apparel in physical stores.

Industry observers estimate that approximately five years' worth of online share shifts occurred in the past year alone.

Forecast now calls for nearly half of U S. Apparel sponsor has moved on line by 2020 five.

As a result, we believe that consumers embrace of our offering is here to stay and the demand for homes and client growth. We're seeing demonstrate that our model of personalized discovery and radical convenience position us well to capture more than our fair share.

As the country begins to reopen and the broader environment normalizes, we believe overall demand for apparel will increase and will be incredibly well positioned to win.

And the second quarter growth in first fix shipments accelerated to nearly 50% year over year.

Our highest growth rate since 2016 was up over from over 25% growth last quarter.

This growth was driven primarily by strength in our women's category, which delivered its highest year over year first fix growth in the past five years.

Given that our women's category comprises a large majority of our business and addressable market. This acceleration is particularly exciting and highlight our strong product market fit and the migration that is underway.

As we looked at the back half of our fiscal year, we continue to see significant opportunity, but there are also factors that have emerged that are important to consider for.

From a demand standpoint, we're seeing first time clients migrating to stitch fix at multiyear highs and to support this demand we are investing across inventory styling and operations to have the product and throughput to serve these clients as well for the quarters ahead.

But we're also seeing longer cycle time, mainly comprising carrier and client delays, which continued in February.

These longer cycle time impact in period revenue recognition and delay subsequent fix orders both of which can dampen our top line.

We saw this in Q2. In addition, we expect some product feature rollout rollouts tied to the direct buy watch the first time clients to move to later in this fiscal year, which would push out some of the anticipated revenue growth.

Before discussing a moment direct by performance remains strong and we are investing the time and effort to enhance the product experience before our planned launch the first time clients at the end of fiscal Q4.

Given these moving parts, we believe it's prudent to adjust our revenue outlook for the fiscal year.

I'll discuss this in more detail later in the call, but our confidence and excitement around the product for a building and the demand we're seeing remains unchanged.

Now I'll hand, it over to Elizabeth will share more on some of the enhancements for delivering across our offerings.

Thanks, Katrina and Hello to all of you on the line today I'd like to share more on the strategic innovation, we're investing in to drive long term growth.

We believe these investments across our fix and direct buy offerings will increase the relevance of our personalized service and allow us to play in a full suite of shopping occasions.

Which we expect for increase the value we get for existing customers.

And expand our addressable market of new customers.

As we shared last quarter, we continue to evolve our fix offering by leveraging our data science capabilities and capitalizing on our large talented filing team to deliver stronger client outcomes and cement long lasting relationships.

Our vision is to elevate our nearly 6000 stylists, who we view as a unique competitive advantage and our personalized offering it for.

While experts.

And as a result, we're investing in product experiences that we believe will drive greater personalization, Inc.

Increase wallet share and enhance the lifetime value.

The first of these experiences is fix preview, which as we discussed last quarter give clients the opportunity to have your proposed items for their next fix before it shifts.

We expect fix preview to increase client conversion rates, because we give clients more agency in the fix experience.

An added benefit of this feature is that we're also able to collect rich and meaningful feedback that improves the efficacy and efficiency of our algorithm.

Initial results from our fixed preview watch, which included nearly half of U K clients demonstrated strong client engagement with nearly three quarters of these clients opting in for the future as of Q2.

When compared to outcomes without fixed preview for you also saw higher keep rate, which drove a 10 per cent increase in average order value and improved client retention.

With these encouraging results, we recently scaled fix preview to 100 per cent of our UK client and we plan to ramp to all of our U S clients by the end of the fiscal year.

We're also investing in additional client facing experiences that further leverage our stylists to deliver personalized collaborative engagement that extends beyond the transaction to for a long lasting relationships.

One of these experiences that we've begun incubating as life styling, where clients join their stylists for a 30 minute session hosted by a video call to talk to your styling advice and to partner with their stylus to co create their fixed.

At this offering evolves, we believe that it will improve client retention and deepen client trust with the help and guidance that our stylists are able to offer.

While still early experiences like fixed preview and lifestyle ing enhance our interactions with clients and thus the quality and dimension of data we gathered from those interactions.

These multi touch points provide an opportunity to learn additional ways for clients would like to engage with our offering.

Creating jumping off points for new experiences that we may pursue in the future.

To accelerate the rollout of these product experiences we're investing for the long term by growing our styling community and product engineering teams.

Overtime, we believe this will allow us to increase conversion improve client outcomes and expand lifetime value.

Now let me discuss some of the exciting progress we've made with direct buy for the offering continues to scale among our existing clients and increased client engagement and purchase behavior.

With nearly one quarter of our women's active clients, having made a direct buy purchased to date, we're pleased to see such strong engagement from our largest client category.

In addition since launch.

Nearly two thirds of these women's clients have returned to make repeat purchases within six months for their initial purchase.

We've also found that clients, we've acquired through paid marketing channels in the past few quarters are actively engaging with direct buy and are delivering higher early lifetime value than previous cohort.

Specifically, we've seen that these clients are generating more cumulative contribution profit in their first three and six months and clients one year ago, who are largely fixed clients only.

It's incremental already gives us more optimism to believe that as our direct by offering expands client lifetime value will continue to grow.

The momentum and client engagement, we've seen increases our confidence as we look to introduce direct by two new clients at the end of the fiscal year.

We have a solid foundation in place and our development efforts are largely focused now on expanding the experience for first time clients.

This includes evolving our client onboarding process and user interface.

Tightening logistics and operations and streamlining client style collection information.

Specifically within the client experience, we're focused on expanding the breadth of our assortment to accommodate clients individual preferences, while balancing the browse and discovery experience to ensure direct buy remains highly personalized and engaging.

We believe that taking the time to optimize the experience in this way will allow us to more effectively scale direct line and bring that offering to life for first time clients later this fiscal year.

Our goal is to help clients begin their journey with stitch fix and the best possible way, starting with either fix or direct buy as soon as they enter our ecosystem and we expect that direct buy will help drive greater engagement and fewer client acquisition in the years ahead by unlocking the full addressable apparel market.

Before I hand, it over to Dan I'd like to quickly touch on our efforts to vastly expand the selection that we can offer to clients as we position the company for accelerated long term growth.

Historically, we've used our wholesale inventory model, which has been very effective but places inherent limitations on the breadth and depth of our assortment.

Earlier this fiscal year, we began exploring new inventory models, including vendor managed inventory and drop ship.

We believe moving to a multi inventory model will enable us overtime to meaningfully expand selection, allowing us to attract more clients.

Higher demand and create a flywheel of accelerated growth.

We look forward to sharing more details on this topic in the quarters ahead.

As you can see our focus on innovating, our fix experience scaling and gating direct buy.

And evolving our inventory models demonstrate our commitment to creating more ways to win in this new apparel retail landscape.

This gives us confidence in our ability to continue taking share in driving long term growth with that I'll turn it over to Dan.

Thanks, Elizabeth and Hello to everyone joining us on today's call.

I'm just over three months into the role and I've had the opportunity to dive into the business.

A few things stand out that I wanted to share for.

First the passion and dedication of the team to innovate in this space and provide a unique personalized client experience is unmatched.

Second I'm incredibly impressed with the data science note and creative styling capabilities for the team has built.

And finally, the investments, we're making to evolve our fix offering and scaled direct by giving me excitement in our long term growth trajectory and I look forward to helping meaningfully scale our business overtime.

I couldn't be more excited to be part of the stitch fix team.

With that I'll discuss our Q2 results.

In the quarter, we generated net revenue of 504 million, representing 12% growth year over year, which is an increase in growth over Q1.

As Katrina mentioned revenue for the quarter was impacted both by increased cycle times for fixes, which are largely related to carrier and client delays as well as direct by softer than anticipated performance during the holiday period.

Adjusted for adjusted for the impact of these increased cycle times, we believe Q2 revenue would have been within our guidance range.

In the quarter, we grew active clients nearly $3 9 million, an increase of 408000 clients and 12% year over year.

This also resulted in an increase of 110000 active clients corporate quarter over quarter, which is more than twice what we delivered in our last holiday quarter.

Net revenue per active client of $467 declined six 8% year over year consistent with our expectations.

As we shared last quarter. This decline is driven primarily by our increasing new client growth.

With an influx of new clients that are early in their spending journey with us revenue per client may be lower until these new cohorts of clients have more time on our platform.

In addition, our trailing four quarter calculation continues to include the impact of our Q3 2020, Covid trial, which we will have next quarter.

Q2 gross margin was 42, 9%, representing a 190 basis point decline from the same quarter last year, primarily driven by increased shipping expense largely due to higher rates for their carriers.

In addition, the decline was impacted by increased inventory reserves due to higher inventory level as well as from select men's inventory targeted for near term clearance.

This is a function of our men's category rebounding more slowly from the impact of the pandemic than women's and kids.

We believe men are shopping less frequently during these COVID-19 times, we expect these trends to improve as we emerged from the spectra.

Yeah.

Advertising is eight 3% of net revenue in Q2 compared to seven 9% in Q2 2020.

During the holiday period, we saw higher cpas in certain channels. So we pulled back on advertising in December.

Entering January we saw significant improvement in CPA and increased our advertising spend accordingly, which contributed to our strongest month over month growth in revenue and active client additions of any January on record.

Other SG&A, excluding advertising was 42 six per cent of net revenue in Q2.

Compared to 35 zero percent in the same period last year.

The increase year over year was driven by higher compensation and benefits expense, including increase wages utter fulfillment center tied to an hourly wage increase to at least $15 per hour for all full time U S warehouse associates.

In addition, it reflected higher marketing expenses and increased COVID-19 related costs.

Q2, adjusted EBITDA losses, $8 9 million, reflecting the impact of lower revenue in the quarter higher shipping costs and investments in our people and operations.

Yeah.

Q2, net loss was 21 million and diluted loss per share was <unk> 20 cents.

And finally, we ended the quarter with no debt and $369 4 million in cash cash equivalents and highly rated securities.

Now I will turn to our outlook.

We're seeing strong new client acquisition trends healthy authorship retention levels and increased client engagement with direct buy.

That said there are also near term factors that may impact the back half for fiscal 2021 and are reflected in our updated full year guidance.

First we saw longer cycle times in Q2 that persisted in February debt, we believe could impact revenue from the second half of the year.

These longer cycle times, mainly comprising carrier and client delays impact in period revenue recognition and can delay subsequent fix orders given that a large majority of our clients receive recurring fix shipments.

In addition, there's still a lot of uncertainty given COVID-19 and as a result, we're taking a more measured approach to auto book.

And second our direct by offering we're very excited about the momentum we've seen with our existing clients and we look forward to rolling it out the first time clients.

As Elizabeth mentioned, our product teams are focused on expanding features of the user experience to ensure that direct buy is a great experience from the onset to onboard new to stitch fix clients.

As such we plan to continue testing the products from fiscal Q3 and into Q4 before a full scale product launch in late fiscal Q4.

This rollout timing also plays a role in our revised guidance.

Given these factors, let me now share our Q3 and full year 2021 guidance.

For Q3, we expect net revenue in the range of $505 million to $515 million, representing growth of 36% to 39% year over year.

We expect adjusted EBITDA in the range of negative nine to negative $5 million or a negative 1.8 to negative 1.0%.

This reflects our ongoing investment in advertising operations and styling that we discussed earlier.

Well, we expect these investments to benefit client growth from the quarters to come they will also weigh on adjusted EBITDA in the near term.

For full year 2021, we now expect net revenue in the range of 2.02 to 2.05 billion representing growth of 18 to 20 per cent year over year, driven primarily by accelerating year over year active client growth and increasing spend from our newest quaint cohorts as they mature on our platform.

Yeah.

From an investment standpoint, given that there are several moving pieces, including the precise timing of product launches will hold off on providing full year adjusted EBITDA guidance at this time.

In summary, we remain excited by the demand trends, we've seen over the last few quarters, giving us giving us confidence that this combined with our investments in new product and innovation position us for long term growth.

With that we're now ready for your questions.

Operator, I'll turn it over to you.

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

Hey, good afternoon, guys. Thanks for taking the questions I guess two first for.

Are you starting to see any kind of early cycle signs that we're seeing a rotation in apparel for that are you seeing an uptick in going out clothing workwear and then as a follow up for your commentary on launching direct buy.

<unk> started people and direct book, where there other initial signs that indicated that the product line.

<unk> kind of more work before launching it and kind of help us understand a little bit more clear up clearly kind of why.

You know why that was the right. Thank you.

Yeah, Hi, Ed This is Elizabeth I'm happy to take both of those those are great questions. First on I think your first question was about are we seeing differences in kind of consumer demand patterns and you know we can continue to just see very strong growth in casual and activewear both of those to have that out.

<unk> growth and then not surprisingly slower growth rates and kind of career and workload type items and there are specific categories. We've seen particular strength in sneakers being one net you know not surprising.

Items that people are wearing in this work from home and environment.

We have tried to keep a pulse on markets that are opening up a little bit more quickly at markets that have moved out of lockdown phase and the trends are largely similar a little bit stronger in some of those work wear categories, but they're still down on a year on year basis.

Which is interesting because I think some of these work from home trends, we're anticipating kind of this casuals nation to continue to persist post COVID-19, but more to come there and then on a dress buy you know we continue to be really excited about what we're seeing in terms of our active client demand as we mentioned on the call you know a quarter of our women's clients are.

Now in that offering and the contribution margin and lifetime values have been very strong incremental relative to last year. When we were really more of a fix only offering.

And then in terms with our timing you know we're building a zero to one product and we just want to make sure we really get it right as we roll it out and so.

Some of the things that we mentioned on the call that we're working on is really expanding the access to our assortment and selection in a personalized way.

For the cold start that you mentioned of Onboarding, new customers is for sure one of those areas, but also exposing our assortment in the right way, we talked about our categories data.

For the last call that we have and we continue to work on on.

Generating those categories in a very unique way, we thought about it internally a little bit akin to kind of the genres you might see.

And that fix that are being dynamically generated based on your preferences. So with areas like that that we're continuing to work on and to make sure there's adequate.

Selection and breath for those new customers when they join.

Thank you.

Well hear next from Dana Telsey with Telsey Advisory group.

Good afternoon, everyone. As you think about the supply chain and the capacity issues with delivery.

What's your sense in terms of timing is how we move through this how do you see inventory progressing as we go through the balance of the fiscal year and the <unk>.

Pat on the expense side. Thank you.

I can take the second part of that question on inventory, we have seen inventory increase in our second quarter as.

As we get ready for our direct by expansion in our roll up and also as we are expanding selection. So we are continuing to invest in selection of both breadth and depth.

And we will continue to grow our inventory as we get ready to launch direct by two non stitch fix customers and continue to expand our fix offering.

And Ah can you repeat the first part of that question. Please.

As you think about the timeline of the delays in receiving of goods and diversifying capacity. How do you think of when when does it normalize when will when do you think deliveries start to normalize.

Yes, we are.

About 90% of our product coming into a yeah.

The West Coast ports, specifically L. A we haven't been too impacted.

On our inbound on that yet, but we're watching it very closely at it hasnt impacted our there are selection or inventory at this at this point again, something we're monitoring very closely and we can update you. If we do it if it does impact us on future calls, but to date it hasn't materially impacted us.

Thank you.

From Barclays, we'll move to Ross Sandler.

Hey, guys.

Just a couple of questions on the gross margin kind of fall off from that last one.

All understand a little debt.

In any given quarter, you have more or less pretty pretty good for harmony fix.

You know youre going to process.

Demand in inventory and that most likely you would contract for that much outbound shipping volume ahead of time so.

Guess, what happened here in the fourth quarter, we know that there's a pretty tight across the industry, but was there do you have over the dental postal service or was there something below for more one of their shipping partners and their line.

What are you doing to sort that out on a go forward basis and then.

It looks like the menus.

Side of the business current tissue, so any more color on that.

Given where we are.

Amp up of inventory.

You still have the same level of confidence on a go forward basis around gross margin given that.

Current tissue.

In the January quarter, Thanks, a lot.

I'll take the first part of that Ross in Alaska was supposed to take the second part on the men's category.

With respect to shipping obviously during the holiday period, there was unprecedented volume across the network across all the networks in shipping and we were impacted by that.

We have standard contracts, but we do use as Katrina mentioned, we do use U S. P. S. A although we also use other carriers, including Fedex as well and so not only did we see a higher shipping rates, but we also saw holiday surcharges.

Not unexpected to us and so it did impact our year over year margins. We are very active in focusing on diversifying our carrier network. Both on the outbound to the clients and on the returns they reverse logistics and something we're going to monitor closely we do monitor it closely we strike the right balance between car.

And making sure our clients get their fixes them on in a timely matter, but carrier diversification, that's something that's very important to us and we're also.

Working at getting our fixes are out the door from the time it styles for the time that exits or warehouse very quickly. So we can alleviate some of that extra time, holding we talked about earlier, but with respect to your question.

Carrier diversification is something that we're focused on again balancing that tradeoff between getting the fixes and the direct buy orders to the client along with trying.

Trying to keep their carrier cost in check and in line.

Elizabeth I'm going to let you take the men's category.

Yeah, Hi, Ross, Yes, I can touch on men's I mean, I think whats been exciting purpose that says we're just seeing continued incredibly strong growth across women's kids for the U K No men's is one area that we just think that consumer has come back a little bit more slowly and just believe it's a function of that client set and you know frankly was a little bit softer than we expected.

In Q2, and some of that you know resulted in us incurring some higher inventory reserves I think in addition to that you know, we probably were a little bit slower to shift as dramatically into some of the lounge in athleisure wear that we're seeing in the highest demand for that client segment. So we're you know we've been very focused on right sizing.

Our assortment better balancing that with both demand.

And also you know now in a position to be better positioned to capitalize on one that market. The market overall the opening from when we expect to see a month demand start to come back in a Marshall from life.

Well move on to use of Squali with true Securities.

Great. Thank you a couple of questions for me and maybe starting with you Dan on the on the full year guidance on the revenue I was wondering if you could maybe unpack that a little bit for us.

Tween the longer cycle time, which you've seen assistant to February and then just as a slower direct buy rollout when in your initial guidance that you shared with US three months ago. When did you guys have seen the direct probably was gonna roll out versus now you're saying at the end of the year.

And second maybe can you discuss the state of the UK business and just your appetite for.

Additional channels over the next year or so.

Hi, you said thanks for the question with respect to the guidance first of all let me talk briefly about what we're seeing on cycle times.

When we entered February we did see modest improvement in cycle times coming off of January and we.

We saw we like the trend that we saw we saw the trend back certainly wasn't back too.

Pre COVID-19.

Covid levels, but it improved from January and then we all then.

Weather hit us.

It did many in the south and in the Midwest and that has impacted us over the last two weeks. So it's been a little it's been a mixed bag of cycle times in February we do expect cycle times to stay elevated throughout the quarter, Although we expect it to improve from where they are now and to your second point with respect to.

The delay of of our direct buy for non stitch fix claims we didn't we didn't say when we were going to roll that out in previous guidance. Although it is a cause for our revised guidance, we plan to roll that out late in Q4 now as we get as we get the product right as Elizabeth mentioned earlier.

But we're not breaking out what the impact was except to say that it is still planned for launch. This year. It's just going to be later in the back half of the year than we originally anticipated.

I'm going to let Elizabeth take the U K question.

Yeah, Hi, Youssef for thanks for the great questions on the U K you know, we continue to see really great momentum there.

We saw particularly strong first fix demand over the quarter driven primarily by women.

And we've also just seen continued very strong momentum in contribution a perfect and just continuing to elevate our product market fit within that market. We saw about a 30 per cent a year on year growth in both keep rate and a O V.

And then as I mentioned on the call. We also have a use that market to incubate fix preview, which have been attitude in that market as well and so we're feeling really good about just our ability for our model to travel internationally.

You know in terms of other geographies, we don't have any specific timing yet to share, but we will say that you know debt, but promised that we'd seen in that market gives us confidence that we can take our model globally for them.

More to share on that overtime.

Thank you.

Well hear next from Cory Carpenter with Jpmorgan.

Great. Thanks for the question I.

Got you and just maybe kind of want to go back to your comments around January mentioned, a few times one of your strongest januaries on record. So I'm, just hoping you could maybe expand a bit more on what has worked so well that months, perhaps where you're starting to see a pickup in demand as the economy started to reopen.

Secondly, just on advertising curious, how you're thinking about the right level of AD spend in the second half of your fiscal year, just especially in the context of the extended cycle times and indirect by pushing back. Thank you.

Yeah, I can start with January and touch on advertising and Dan can kind of add on yeah. I mean, we saw an incredibly strong January and part of that was just a very very strong first fix demand I think we had mentioned we had pulled back on some of our AD spend in the summer just given the elevated ppas were saying and then we really saw demand coming.

Really rushing back and C. P M coming down in January and we took advantage of that and had incredibly strong for fixed line ups and then on top of that we just saw a tremendous momentum with draft by both our daily active user is conversion rates and just the same kind of go back to them. We have been seeing it really pre holiday and so those two things together just gave us a very very.

Strong January and Ah as we think about advertising for that the balance of the year, you know well continue to be dynamic and how how we're spending for that and I think Dan can touch maybe a little bit on that further.

Yeah, just to reiterate what Elizabeth said I'm not surprising CPA has increased dramatically in December and.

And we didn't like the rates that we were.

Seeing on customer acquisition. So we did pull back we we knew they would get better in January than they did and we ramped up our our advertising and so going into Q3, we like what we're seeing we're going to continue to spend Q3 will likely be higher than Q2, a customer acquisition is strong our new client.

Strength is strong and advertising is a big reason why so we will continue to spend.

As long as it stays within our analytics and how we look at our lifetime value of our customer and so with that you can expense.

Spend.

Spend back to more normalized rates in Q3, and most likely into Q4.

Thank you.

From Piper Sandler, we'll hear from Erinn Murphy.

Great. Thanks, Good afternoon, a couple for me I guess first if you kind of opened up the platform to direct by new customers in the fourth quarter can you just talk about how you expect that are potentially cannibalizing existing fix visits or at least what you're seeing today with the added offering to vote that already used for fix business.

Yeah, Hi, Erinn. This is supposed to be if I can touch on that I mean, I think overall, we think there's just a bigger addressable market out there by having a wire platform for our customers, whether they want to shop, whether they wanna be styles or participate in both of those models and so both similar to the incremental holiday debt.

We've observed with active fix clients as they participate in both in saying that is actually.

A additive experience I think we're thinking about it similarly, as we bring new consumers onto the platform.

Over time as well there are parts of driving traffic to our site that will be able to participate in in the quarters to come probably not immediately just given the build out of infrastructure and the way our site index thing works, but to be able to eventually participate and search engine optimization and so between consumers having.

More ways to win with us as well as driving more traffic to stitch fix by opening up our product catalog and having more ways to interact.

We feel like it's just the right thing to do to be able to offer a more diverse experience.

Okay. Thank you and then just my second question is on I guess, Dan for you can you share what's contemplated in your third quarter guidance between active customers and revenue per customer. Thank you.

Well our revenue per customer as we mentioned is that for six seven which was flat to Q1 and that is a function of just the newer clients of cohort of customers spending very early on in their cycle times as those clients spend more we do expect that to <unk>.

Kris and get to more normalized levels going forward I think that was the answer to your question.

On a revenue per active clients.

And then we're not going to say anything on our Q3 guidance with respect to active clients, we're not we're not giving that as part of guidance.

Okay. Thank you.

Well hear next from Paul Trussell with Deutsche Bank.

Good afternoon.

With the fix preview.

How much higher where the cap rates for free.

For those that utilize that feature and any other color you could provide on like client retention and average order value also on the lifestyle and certainly that's quite interesting concept, maybe just speak a little bit more about what you expect from that and the level of investment you have.

Gonna make into that capability.

Yeah. Thank you Paul Great question, so on fixed preview I shared a little bit on the call and overall you know we've just seen expansion really in the majority of the metrics that we look at for our customers on a or B and keep rate in particular, we saw about a 10% all day.

Lift across both of those and we've seen that continue we started that pilot in the U K back in August scaled it to 50 per cent. Soon thereafter, and then recently scaled up to 100%. We're feeling good about the continued strength of that experience and we're still at a pretty modest level in the U S. But we are scaling it to 100 per se.

We foresee by the end of the fiscal year and so we feel really great about it being a service that makes clients, even happier driving retention and driving those higher average order values and a place that we could imagine experimenting with even further over time you know one interesting anecdote is that.

If if previewed in accessory and somebody keeps it in our current they almost always keep it. So also just certain item types, we think will be an exciting add onto that feature.

And then with lifestyle, we're a little bit earlier on that than we are with fix preview, we're still incubating it but we're seeing a lot of the same pattern from trends around you know just that the response for things like order value and so forth and really just a lot of richness and other things clients for wanting to share with us like Hey, Let me show you the thing I Love in my closet.

Find me something to go with it and just different element that we are envisioning how that might create almost experienced offshoots from it.

But I would say, we don't plan to scale that immediately we're still in sort of the incubation in testing mode to figure out what is the best way to scale that and what other kind.

Kind of services might it imply that our clients are looking for so we're really excited by the feedback we've gotten so far both from our clients and frankly from our stylist as well who are loving participating in the program.

So we'll share more in the quarters to come I think we've got our plate for between direct buying fix preview right now, but we'll keep incubating that for something that'll follow on probably in FY 'twenty two.

That's helpful and just a quick follow up.

Think about.

The cycle time delays I mean, you spoke to the revenue impact just can you talk a little bit more around what impact that's having to the overall P&L. Both what you saw in Q2, and how you think about it.

In Q3, and also with your Q3 guidance.

You outlined about these ongoing investments in advertising operations in style and true to what extent is that weighing on the quarter.

I can take that one to your question on cycle time, we did talk about the revenue impact.

What happens a lot of times as the route.

The processing time becomes lumpy as we get our returns in large batches and so theres. Some operational burden that cycle time does have on our fulfillment centers and so we're managing that closely it hasn't been material, we've been able to to work around that and implement new processes to better align.

On any sort of lumpiness that we get and so it's from a cost structure standpoint.

I would not assume that it's material to us just because we've been so proactive in how we manage that cycle time, especially on the returns processing and so it is more of a revenue recognition, including the potential to impact subsequent sixes.

And so from that standpoint, it's primarily more on the revenue side than it is on the cost side.

Yeah.

Well hear next from Ike <unk> with Wells Fargo.

Hey, Thanks, everyone just two questions on direct buy.

Is it possible to kind of break apart the P&L with both direct five versus the subscription business and talk.

Talk about the gross margins between the two but I'm just kind of curious as direct buy continues to ramp will that be a drag on gross margin, but it would be neutral or just how should we think about that and then I believe there from the last quarter before we start lapping for direct buy rollout can you comment on the other part of the business separately, what kind of growth rates, you're seeing in the box business.

The direct buy components out of it.

Okay.

I can take that we don't break breakout the direct buy versus the fix our financials.

There there are a couple of areas I can point to are obviously, the fix has a style and components.

But direct and indirect value does not that being said.

The margin structure is very positive for both.

And but again, we're not breaking out the different growth factors and direct buy right now or and we don't really talk about the different economics.

Economics of direct buy I will I will reiterate what Elizabeth said that direct buy is additive.

To the fix business for our fixed customers. So we like what we're seeing there from an incrementally standpoint.

Yeah, maybe the one quick thing I would add just on the fix side of things just what we've seen on our first fixed growth. In particular is just incredibly strong trends with women's as well as kids kind of outperforming them, but to Dan's point, we don't really.

Break out the growth rates of the two I think over time, we'll figure out if it makes sense to do so I think we're saying you know as we mentioned on the call as well just the positive momentum of a greater portion of our client base participating and as we expand the feature set and start to make it available right out of the gates to new clients, we would anticipate that growth to.

Salaries, but we'll be able to share more in the quarters ahead.

And from JK Research Associates will move to Janet Kloppenburg.

Good evening everyone.

Just a couple of questions from me first on the expansion of the direct buy Assortments I was just wondering.

What you thought that might lead to in terms of residual product you know markdown pressure et cetera, generally something associated with expanding assortments and and you.

You know how we should think about that in terms of merchandise margin and then you have a lot of.

New pilots going on right now.

Moving life styling, and then dropped by coming to the new.

New customers et cetera, and I think you'll learning a lot along the way you know you see the seasonality can come in and maybe the men's business not being.

Quite as strong as you thought which I assume will pick up at some point soon I'm just wondering how we should think about your view in terms of continuing to invest in these new projects, which are clearly driving new customers to stitch fix them, but they're also putting pressure on your profit.

Because.

You know the learnings and the investments that follow so I was just wondering what what are your priorities there and how we should think about future projects. Thank you.

Yeah, Hey, Jonathan maybe.

I'll take the first one yes, I'm going to take the person for that thanks for the question Janet with respect to direct buy and increasing selection on inventory.

As you bring in more more inventory reserve rates and potentially be the resulting markdown clearance as possible but.

You have to counter that with the increase in clients.

Our ability to attract non fix based clients, which is one of the reasons why we're going to launch this direct by Genoptix customers and in the back half of the year and so we're watching inventory closely.

We are expanding selection that's very intentional.

Especially as we launch new features like categories, which Elizabeth.

Discussed earlier, having the right product mix to show that the customer is very important in those areas. So we will continue investing in inventory and we'll get to watch it closely.

And we do expect you know.

The true as it relates to move along with inventory, but it's something that we're keeping a very close eye on.

Great. Thank you, yeah, and Janet I can touch on your question on just sort of innovation expansion that we've been focused on in some of the pilots that we mentioned on the call interest from general we see this as really a moment as consumers are shifting at unprecedented rates online you know Katrina mentioned just this notion of.

The belief that you know 50% of apparel by 2025 will be on line and the market is going to start opening up here and we're really gearing up for that and so we view our platform today a lot of times on these calls we've been talking about it fixes and direct buy but really the long term vision is just the most personalized shopping experience in the world and.

E Commerce has really been characterized for apparel by search and we're entering into a new phase of it'll be characterized by browse from discovery and so our styling model and experiences that are hinge off of that just a curated shopping feed all of those are areas that we think we can be cut really the destination of choice and the primary shopping destination for our clients.

And so what we're excited about is that the things that we've been testing, we're proving that we can pretty quickly scale like fix preview and even dropped by you know, we really only launched that to our active client base a year ago. It was February 2020, So I think what we're excited about is just the adoption that we're seeing of these new services together with just the overall market tailwind.

So we will continue to be testing things for sure not everything will work.

We're very optimistic of seeing the adoption we've seen to date that we can continue the expansion of our model.

Okay. So the focus will be on expanding the services that you provide for the customer to continue.

Continue to grow your Yo Yo group of active customers.

Yeah, that's right and I think what we're seeing is we're participating in more and more of the share of wallet and purchase occasions, whether it's more inspiration based or more purchase intent based purchases, hence the scaling of our categories experience.

Right. Thanks, a lot and best of luck.

Thank you.

And again for questions Thats Star one at this time well hear next from Orange, Inc. With Morgan Stanley.

Great. Thanks for taking my question I, just wanted to follow up on the on the longer cycle time, just wondering if you can quantify sort of on a number of days perspective, how much those have been extended and then curious if you are seeing that and in early to mid December when you initially guided the quarter I would've thought maybe.

Over cyber Monday, Black Friday that those delays would've been evidence already.

No.

On.

You know when you started to see that that real impact and then you know presumably this is just sort of a revenue recognition timing issue. So on a full year basis, ignoring for the quarterly variances is below our 'twenty one outlook really direct buy driven and did that does that play out more in fewer number of active customers are lower spend.

For our customer.

Yeah I'll take the question I can take that one thank you for the question.

We did see cycle times start to creep up.

In December in November and December what surprised us a little bit is that they continue to stay high for January and into February.

And so that is impacting us as we mentioned for Q2, and we have not seen them come down to.

To pre holiday levels, and we expect and what we do expect them to come down throughout Q3.

We do believe that in the back half it will still impact us.

To your point on the timing of it.

Does impact subsequent fixes potentially.

Because most of our clients are on a a scheduled subsequent fix.

So if they if it takes longer for a carrier to deliver or the client holds the.

Fix longer you.

It will impact subsequent fixes and so we're managing that and watching that very closely as well that all said.

You know to your point on <unk> on the back half of the timing of our direct buy is a reason for the lower guidance from the back half.

As we get that product to the right and launch it very you know lunch at late in Q4 relative to what we were expecting earlier when we provided the guidance from box quarter.

And from Baird, We'll hear next from Mark Ultra nature.

Hi, good afternoon. Thanks for taking my question I guess two.

Two questions related to inventory for.

First I was hoping you could just talk a little bit more about how you're planning inventory receipts would you begin to cycle. The COVID-19 disruptions and we look for additional stimulus I guess it sounds like direct buy picked up in January not sure how much of that might have been impacted by stimulus, but I guess I'm curious how responsive do you could be should demand accelerates.

And your plans in the coming months, especially in the direct buy piece and then bigger picture just the new inventory models.

We are excited with the drop ship vendor advantage just can you give us a better sense of what inning you're in there.

Net investment standpoint, and what level of additional capacity or technology infrastructure might.

Might be needed to scale this longer term. Thank you.

Hi, I can I can take the first part of that question and then I'll, let I'll, let Elizabeth answer the second on the inventory models to.

To your point on our on our ability to bring on receipts are first of all it's unclear in January what drove it was stimulus checks or stimulus checks coming up would drive demand.

We did see very healthy January growth rates.

And we were ready for that with inventory.

And we do have of course lead times for the receipt of our inventory that said we were very for we're very familiar with our lead times and we do feel very well positioned to take advantage of of any change in buying patterns, whether it's as economies open up and decide debt.

That we're going to go out more and go back to work or we continue on with the athleisure wear positive growth rates that we've seen to date, we feel we're in a good position for inventory. We do we're very good at chasing inventory, where we need to but going forward just given our inventory position we feel like we.

We're well positioned for the back half for the year.

It should it should the open economies change the buying patterns.

Do you want to take the second part of that.

Yeah, Hi, Mark Great question on that we're also very excited about kind of becoming a multi inventory model business and so as.

As I mentioned, you know gearing up for being able to participate and drop ship as well as vendor managed inventory you know we've been working on that for the last few quarters and we'll continue to do so in line. The next few quarters to come with the intent of being able to use that as an opportunity to both widen our selection, but also create more flexibility in being able to scale up and scale down.

To meet demand patterns.

A lot of the work that's been involved have been putting the technology infrastructure in place for things like financial automation as well as you know even enhanced forecasting tools to participate with our vendor community that we're very excited about for that are data driven.

Algorithmic capabilities and so we're essentially in beta mode right now on those offerings and over the course next few quarters, we'll be able to share more of that over time, you really scale those as part of our inventory model, which together with the.

For the consumer facing part of our experience we can create just a really phenomenal flywheel. So we're excited to share more over the coming couple of quarters.

Thank you.

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

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

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

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