Q3 2021 Stitch Fix Inc Earnings Call

Please standby.

Good day, everyone and welcome to the Stitch fix third quarter 2021 earnings call. Today's conference is being recorded at this time I'd like to turn the comments 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 third quarter of fiscal 2021, joining me on today's call are Katrina Lake founder and CEO of 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.

<unk> Q3 financial results and our press release posted on the IR section of our web site investors that stitch fix dot com and starting this quarter, we will not be issuing a shareholder letter a link to the webcast of today's conference call can also be found on our site.

We'd 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.

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

Call, we will discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call and its entirety is being webcast on our IR website and a replay of this call will be available on the web.

Site shortly.

And now like to turn the call over to Katrina.

Thanks, David and thank you for joining us.

After the market closed today, we issued a press release with details on our quarterly performance and outlook.

You'll hear on today's call, we delivered strong third quarter results with active client growth accelerating to 20 per cent year over year and outperformance across net revenue and adjusted EBITDA. This was a function of strong demand and improve client outcomes.

Cross both our fix indirect by offering and was reinforced by and improving apparel retail market backdrop.

And Elizabeth will discuss later.

We continue to rollout new product features and Q3 to enhance both offerings and drive greater client adoption and.

We believe these new client these new experiences drove momentum and the quarter, which will continue in Q4 as we capitalize on the demand strength and relevance of our fix offering and introduce dropped by 2 new clients by the end of the quarter.

Now, let me discuss our Q3 results in more detail and the third quarter, we generated net revenue of $536 million.

Selecting 44% growth year over year during the quarter, we grew our active client count to over $4.1 billion.

Representing a year over year increase of 689000 clients are 20 per cent growth.

And on a quarter over quarter basis, we added 234000 active clients. Our second highest client addition, EVAR and <unk>.

And 3 we delivered a net loss and $18.8 million and adjusted EBITDA of $11.6 million.

Dan will review our results in more detail later on this call as well as share our updated outlook for fiscal 'twenty 'twenty 1.

Over the last decade, we delighted and millions of clients and formed lasting relationships and feedback loops that underpin our unrivaled personalization capabilities.

Are radically different client experience and built on getting to know every client and gathering feedback around their detailed preferences, resulting in a rich and highly differentiated data moat.

Through our powerful combination of data science and creative human judgment, we've shipped over 50 million fixes to date and while fixes have been incredibly successful. We know that this form factor alone doesn't address all consumer use cases.

As such we're now embarking on our next growth horizon through our introduction of dropped by which expands our ecosystem of experiences and opens up a total addressable market that we estimate to be multiple times larger than fixes alone.

We believe that this more personalised way to shop is universally appealing and 1 we are uniquely positioned to address.

How we shop and live work and interact with each other has changed dramatically in the past year, and we believe that consumer shifts to shopping online will be a last name on a per.

Apparel retail is that a pivotal point with market share and moving on line at record pace and consumers seeking more highly personalized and authentic experiences.

Stitch fix is purpose built to address this evolution with our unique multi touch point model and as we share. It in April this moment of transformation and our industry and our business and they get the right time for the next generation of leadership at stitch fix to lead us into the future.

With that I'm very excited for Elizabeth to assume the CEO role starting in August working alongside her we have we have an experienced and talented leadership team that shares relentless energy and passion and optimism for the potential possibilities ahead and our business.

Since joining us as president and Elizabeth has made significant broad based contributions across our business and demonstrated outstanding leadership.

She has challenged us to think differently accelerated our pace of innovation and outlined an ambitious and didn't and ambitious vision for our future.

To be clear I won't be going anywhere and and as committed as ever to stitch fix and I'll be transitioning to the role of executive chairperson and will remain a stitch fix employee well I'll be focusing my impact on our sustainability and social impact efforts that will drive long term value for all of our stakeholders I'm deeply confident and Elizabeth and our entire team and cash.

And imagine anyone else, assuming the CEO role I.

I look forward to her continuing to innovate on behalf of our clients and taking us from over 4 million clients today that we serve today for the tens of millions more that we plan to start up and the future.

And with that let me turn it over to Elisa.

Thanks Katrina.

For it to our continued partnership as you transition to the role of executive Chair person.

I feel book, a great sense of responsibility as well as optimism for all of the possibilities that lie ahead for stitch fix.

Our mission remains the same and since our inception.

And to transform the way people find what they love we are a relationship based brand and creating a more curated and discovery line ecosystem, a personalized shopping experiences that is truly transformational.

Whether a client prefers to have items handpicked by our talented stylists.

Select their own pieces or book clients can trust that stitch fix has a shopping experience that uniquely caters to that.

With vaccination rates, increasing and Covid restrictions easing we are seeing the overall market for apparel beginning to rebound as more consumers can leave their homes to eat out of 10, social gatherings and return to the office.

These consumers are turning to us for fresh inspiration and our radically convenient personalized shopping experience.

And in Q3, we saw robust first fixed demand and reactivation rate.

Our fix and direct buy offerings have allowed us to meet consumers and this moment and position us to further capitalize on this improving apparel demand backdrop and the quarters ahead.

With our fix offering and Q3, we drove strong client acquisition and trends and improved client outcome.

And the first 3 quarters of fiscal 2021, we've already added more net active clients than any full year since 2016.

And then Q3, we saw strong we saw strong client demand from first time and reactivated clients that resulted in our second highest quarter over quarter client additions on record.

In line with recent quarters, nearly 80 per cent of our first time fix clients and the quarter purchased at least 1 item and share that they look forward to their second fix which is a strong indicator of future client engagement and retention.

Our ability to delight clients was evident across all categories, including women's and men's and kids with success rates and each growing both year over year as well as quarter over quarter.

As client preferences began to shift and Q3, the rich insights, we've collected around product and client preferences and allowed us to match clients with the most relevant and personalized items for that.

For example, within our womens category, She's excited about newness and dressing up again for <unk>.

Work or going out and we saw a shift out of white loungewear and back into Dressier more tailored luck.

And <unk> and junk suite sales increased 60% year over year, and miniskirts sales increased over 80% year over year.

She's also traveling again, and we've seen an increase and request for vacation related items and fix it and bright seasonal colors in particular are doing exceptionally well.

And men's and he is beginning to venture out of leisure wear and speaking more structure with buttoned up shirt trending recently and our fix requests note.

These positive underlying demand and client satisfaction results reflect our differentiation and being able to collect early signals.

Identify trends and react to deliver great client outcomes.

And Q3, we also continue to expand the availability of fixed preview, which has allowed us to begin to re imagine our fix experience deliver stronger client outcomes and build deeper trust with clients.

As we previously discussed fix preview allows clients to engage more directly with their fix before its shipped and have more agency and selecting the items they received.

Based on the positive impact fix preview has had on client outcomes and the U K, where it has been rolled out to all clients. We began to scale the experience to U S clients and Q3.

And as of the end of May we've offered it to over half of our U S client base and we will continue to roll it out.

Across the U S and the U K to date, we've seen roughly 3 quarters of clients opt in to fix preview with strong repeat engagement, which has driven higher success rates and higher average order values.

With these games and the broader expansion of fixed preview, we believe it will improve client retention as well as conversion rates over time.

With fix preview clients feel increasingly confident that theyre going to love their fix before it even ships and they appreciate the tighter communication with their stylists.

And the additional feedback dimension also helps us catching our clients sooner and better as they share more nuanced personal preferences.

Cyclic requests and information regarding the contents of her closet.

To give you a couple of examples after PD and her items 1 client share that her closet already contained took suede shoes and that she preferred another piece. So we've refreshed her basket, resulting in a higher keep rate.

Another client who use fixed preview to discover new styles with excited to purchase a jumpsuit and a floral dress pushing her style and a new way that the traditional fix experience might not have.

Now turning to direct buy.

And Q3, we evolved our direct buy fee based experience and considerably expanded the feature set to deliver a more holistic shopping solution.

Most notably our new shop by category offering with watch to all existing clients and March giving them the ability to browse and discover a range of categories with item recommendations and personalized to their preferences.

Clients can now engage with direct buy for intent based shopping meeting more of their everyday needs and supplementing our more serendipitous trending for you and complete your looks offering.

Following the shop by category launch, we saw a meaningful increase and client engagement that led to the average weekly units ordered per client, reaching a record high and the third quarter.

In addition, we've noted that our newest fix clients are purchasing through direct buy and increasing rate, thereby meeting more of their needs and increasing their average spend with us.

In fact, we've seen that each quarterly cohort of new fix clients, who have been with us for 30 days or less has purchased through direct buy at a higher rate and those cohorts that preceded it.

<unk> clients engage earlier with direct buy highlights how the experience is becoming an immersive part of our ecosystem and allows us to grow client value sooner and expand our share of wallet.

The successful instrumentalities that direct buy has demonstrated to date gives us high conviction that our personalized shopping experience will significantly broaden the appeal and reach a stitch fix.

We look forward to more fully unlocking our nearly half a trillion dollar total addressable market opportunity overtime.

By the end of fiscal Q4, we plan to open up direct buy to newest stitch fix clients and we will begin scaling our advertising efforts and fiscal 2020.2 to build greater awareness and mind share.

With that I'll turn it over to Dan.

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

While I've only work with cash for the last 6 months I want to Echo what Elizabeth remarks.

And that has built an amazing and highly differentiated client centric business over the past decade with so much potential still ahead.

I look forward to continuing to partner with her and her new role as chairperson and with Elizabeth as CEO.

And the third quarter, we generated net revenue of $536 million, representing 44% year over year growth compared to the same period last year, which was the COVID-19 trial.

We grew active clients to over $4.1 million and increase of 689000 clients and 20% year over year.

This also reflected an increase of 234000 active clients quarter over quarter, and our second highest quarterly quite client addition ever.

The momentum and active client growth was driven by strength and fixed demand.

Lower dormancy rates as we lap year ago, Covid softness and re engaging past clients.

Net revenue per active client for $481 increased 3% quarter over quarter compared to $467 and Q2, 2021 and declined 3.4% year over year.

As we shared on past quarters. This year over year decline is driven primarily by our increasing new client growth.

And with an influx of new clients that are early and are spending journey with us revenue per client and maybe lower until these new cohorts of clients have more time on our platform.

Q3 group gross margin grew to 46%, which marked our highest quarterly gross margin since fiscal 2017.

It represented a sequential increase of over 310 basis points from Q2, and a 520 basis point increase from the same period last year.

Year over year. These gains are primarily driven by improvements in inventories and lower merchandise cost.

Quarter over quarter. These gains were largely driven by lower merchandise costs and improve transportation costs.

Q3 advertising was 9.1% of net revenue a sequential increase of 80 basis points from Q2, and a 110 basis point decrease from the same quarter last year.

Other SG&A, excluding advertising was 41.4 per cent of net revenue in Q3, and a sequential decrease of 120 basis points from Q2, and a 160 basis point decrease from the same period last year.

Despite our progress and the quarter like many others. We are seeing continued labor market competition, and we'll continue to invest to attract and retain the best talent to support long term growth and enhance the client experience.

Q3, adjusted EBITDA was $11.6 million and reflected the flow through of higher revenue improved gross margins and efficient advertising spend in the quarter.

Q3, net losses, $18.8 million and diluted loss per share was <unk> 18 cents.

We ended the quarter with no debt and $303 million and cash cash equivalents and highly rated securities and earlier. This month, we renewed a 3 year $100 million revolving credit facility to provide us with greater flexibility to invest and accelerate growth.

We were pleased with our outperformance in Q3 and are excited for the improvement and the apparel market backdrop to continue.

With that let me now share updated outlook for the remainder of the fiscal year.

In Q4, we expect net revenue and the range of $540 million to $550 million, representing growth of 22% to 24% year over year.

We accept and we expect to generate positive adjusted EBITDA and the range of 15 to 20 million for 2.8 to 3.6%.

To wrap up our third quarter results and outlook underscores our strong business momentum and enduring secular trends.

We're continuing to innovate on behalf of our clients and our focus on driving long term growth by bringing more consumers into our ecosystem personalized shopping experiences.

We remain very excited for both our fix and shop offerings going forward.

With that we're now ready for your questions operator, I'll turn it over to you.

Thank you if you'd like to ask a question. Please signal by pressing star 1 on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to Louis and will treat dry equipment again press star 1 to ask a question.

And we'll take our first question day from Edward you rumour with Keybanc capital markets.

Hi, good afternoon, and thanks for taking the question and congrats on the momentum I guess first you guys called a couple of categories that we're working from and apparel perspective. It sounds like a lot are tied to kind of travel and reopening I guess, how would you characterize performance and wear to work I assume that's going to become a tailwind at some point and have you started to see it.

And then as a follow up as it relates to direct buy and thank you. Once commented that the gross margin was comparable and you expect that to go higher overtime, then fix just kind of curious where you stand on that today. Thank you.

Hey, Scott Great questions I can start with the first 1 and then I'll hand, it to Dan on the dropped by gross margin question. Yeah. I think we're really pleased what we're seeing in terms of consumer preferences, and it's interesting because active and athleisure continue to be our highest growth category for I think those are here to stay and I do think we'll probably see those decelerate overtime.

<unk> and <unk>.

We are seeing a growth in client fix request as well as I'm, just overall trends back and to work wear and what categories, but we do think theres kind of a trend towards more comfortable at higher given the hybrid work environment. So we do believe this is a tailwind and we're particularly excited about our men's business.

Because we think that there's a set of categories, that's going to bring him back shopping again, more often you know and as well as within our women's segment and so what we're starting to see that within direct line. The gross margin, let me hand, it to them for that.

Hi, Edwin Thanks for the question Yeah, what we said in the past is that we thought they were very comparable and we looked at it is pretty close and on a gross margin basis, that's accurate they're very comparable.

And do like what we see on a contribution margin basis as we look at the units the contribution profit per unit and shop, just because there's less costs associated with styling and the pik.

And we picked 5 items for fix a 10 for kids.

Both are we would like to profitability and vote and shop is going to continue to expand in that area and so we're excited about that but what we see on a contribution profit per unit and the shop experience.

Thank you.

Yeah.

Next we'll hear from Mark Mahaney with Evercore ISI.

Okay.

Okay, Let me try 2 questions 1 cash.

And I think you talked about the ability to get tens of millions more customers and the future.

Just a high level and you built this business from scratch and when you think about getting to those kind of numbers would be which would be materially higher than where you are today, what you know what.

What is the bogie for the or the proxies that make you think you can get there how can you go from for Tim.

And to millions of customers and then Elizabeth on the reactivation and what do you think if you could peel back what drove that was that just people finally coming back out and wanting to shop again or was.

The extent that was some of the personalization things you've done or the way you reengage with with clients. So how much of those re activations were kind of market driven versus company specific driven thank you.

Yeah.

Yeah.

Thanks for the question Mark and I'll start out I mean honestly. It wasn't this will be I think you know just is locked up for eclipse I think to answer that first question and but you know I think that you know thinking about direct buy and thinking about what a different use case. It is and I think some day examples that Elizabeth shared on the earnings call kind of show the show light on those where you know fix is really on.

We are on and it's an amazing vehicle to be able to have more of like a lean back and have the shopping done for me experience and but you know there's a lot of Margaret market opportunity, both and and then being able to to help people to discover and a more active shopper and somebody who's looking more for something specific and somebody who wants more of a say on and what theyre receiving.

And you know this is a really amazing kind of point and time when a lot of people are really shifting market share on to online channels and that and where people really are looking for really differentiated experiences and 1 that really speak to them and I think such fix is really well suited for that and well just why don't you take the rest of that.

Yeah, I think I captured it well I mean, if you think about just the 100% share of wallet of consumers and their purchase occasions, we can just address.

And even more by opening up shop, and so I think it's a lighter weight entry point, but also just a greater share repurchase occasions. So I think cat's answered that well and we're already seeing that in terms of incremental Eddie with our current clients, but also just as we have with ask clients on their interest level, we know that it appeals very very widely.

And then on reactivation and you know, we're really excited about what we've been seeing there and.

I think there's lots of reasons to be starting to chip get dressed again, so I'm sure. That's part of the tailwind, but we're also just seeing really strong strength and our organic channels, whether people are coming directly to stitch fix dot com organic search and we've also seen strength within some of our media channels that are building awareness, but I think when we see things like reactivation and what gets us excited.

Is that typically means like theres, a lot of promoters out there and what we're doing and people on and frankly, just wanted to shop again and coming back that baby on.

You know workshops as much during COVID-19 and are coming back to us.

And then you know I think we've just seen them all the channels that work well for us on marketing just continue to work hard so overall.

Just real strength that our customer demand and people kind of vote and for their feet for them to be there for them are shopping.

Okay. Thank you Elizabeth Thank you Katrina.

Next we'll hear from Mark <unk> with Baird.

Good afternoon, and thanks for taking my question.

And so on the quarterly net net.

And second time this year, we've seen the over 200 K, Yes, obviously, we're cycling a period of some easier compares with.

And some clients not engaging in the category as much and perhaps some pent up demand here, but maybe just help us understand that 1 and what role do you think stimulus played in this.

And if any and to what extent do you think theres been a bigger unlock here in terms of how you are approaching.

Both acquisition and reactivation that could potentially drive a faster pace and that kind of quarterly net add figure.

As we move forward for the next several quarters here.

Yeah. Thanks, Mark for the question why don't I, let Dan take.

Take that 1 and I'm happy to chime in after.

Yeah. Thanks for the question Mark you know, we looked at the stimulus and to see if we could see anything and there and there was nothing that we can't do any conclusive.

The analysis.

And we're stimulus later and impact on us.

As we mentioned previously the sequential adds for this quarter was a combination of new to stitch fix a line customers that have lapsed that have re engaged which makes a lot of sense. Since we know those customers and they're ready to buy again and as you mentioned as well as the lower gross ads a year ago during the Covid.

<unk>.

Going forward.

As we go into Q4, there is the summer season that we see ahead of us and so we will we'll continue to watch.

Closely but the tailwind we see but we're happy with.

That's great and maybe Dan if I could follow up just kind of more broadly I think and the right and.

Investor deck, most recent Investor day that was posted we're still talking about the kind of 11% to 13% longer term margins.

And any high level guide post you can provide on and how we should be thinking about just the level of profitability and.

In fiscal 2022.

Yeah. So again, we're in a we're in a unique position to expand our addressable market as we talked about so we are in growth mode, and we see an incredible opportunity with us and expanding our addressable market with the launch.

And with direct buy.

And and we're excited about that and at the same time, we're focused on operational efficiencies and all the areas you would expect including our on our upside.

Making sure our marketing and it's very efficient, but we're going to continue to invest as we grow depth and selection on inventory as we hire new tech and product people for the client experience as we build out and new warehouses. So we're not providing guidance going forward, but we're focused on operational efficiency, where we have it and we're going to continue to invest as we focus on growth and have a real.

I'll focus on long term free cash flow given this and this addressable market that we think is quite expensive and enormous and front of us.

That's really helpful. Thanks for all the color and best of luck.

We'll now hear from Ross Sandler with Barclays.

Hey.

Nice job on the quarter just 2 questions here.

The keep rate historically has been around like 2 items per fix I believe.

And question is with the new fixed preview products are you seeing a noticeable increase for people that use that for.

Versus not use it in terms of the keep rate and then the second question.

And any color on the gross margin.

And Dan you listed a couple of things good and.

And as your own exclusive brands, having an impact there and how do you feel about the sustainability of the debt.

And 46% book and looking forward. Thanks, a lot.

Thanks, Ross Great question and I can start on the first 1 with fixed preview and then I can hand, it to Dan to to add on and take the other on gross margin.

Yeah, I think what are the things we're very excited about with fixed preview is that we have seen positive momentum on <unk> as a result of actually kind of a combination of.

Keep rate as well as on AUR and something that we've seen on the U K as well as and the U S and overall.

Overall, though I would say keep rates are improving as well on our traditional fix it and that's something that we saw from quarter over quarter and year on year across all of our categories of women's and men's kids and the U K. So I think in general we just continue to improve across the board, but fixed preview on does have an extra boost we think in part because clients get.

2 bites at the Apple so to speak of giving us the input on their fix let me hand, it back over to Dan.

Okay.

Yeah on the gross margin question, we did see strong gross margins in Q3 at 46%.

We do have some seasonality going into the summer season, where our Asps will come down as people are buying more summer versus fall versus spring merchandise and.

So that may have a small impact on gross margins, we are seeing tremendous momentum with our private label. We're happy with it. It is strong gross margins and we're going to continue to add as I mentioned earlier depth and selection. So we will continue to add inventory for our direct buy experience, we think selection matters tremendously.

That plays out on gross margin again, we don't guide to that.

But we don't see anything that is negatively impacting gross margin except for seasonality and of course as we grow our selection for inventory for a direct fixed customers.

Mr. Sam or do you have anything further.

And then there was great. Thank you.

Thank you well now hear from Cory Carpenter with Jpmorgan.

Great. Thanks for the questions.

And 2 maybe first could you talk a bit about where you are with with fix cycle times and are those kind of back to the pre COVID-19 levels and then.

Wanted to talk a bit about the U K, where you recently had your second anniversary and maybe if you could just talk about the progress you've made there and the state of the UK business today. Thanks.

Great. Thanks, Cory I can start I'll I'll actually start with your second question on the U K and then I'll hand, it over to Dan on the fix cycle time.

We're really pleased with what we're seeing and the U K you're right. We just had our second anniversary, which is very exciting and we've seen triple digit growth year on year, and just continued momentum and that business of acquiring new women's and men's clients and.

As you know we incubated the fix preview experienced there which has had a very positive impact on average order value. So everything we're seeing just gives us a lot of optimism on both for continuing to expand and grow and the U K, but really a lot of conviction on what this means for us to be able to take our business global and.

And continue to bring stitch next to your more geography. So overall I'm really pleased with the momentum there with that let me hand, it to Dan on the cycle time.

Yeah, Hi, Cory on the cycle times, and we mentioned in March during our Q2 call that we had seen a tick and.

On an increase and cycle times during the holiday and then again February which we attributed to the weather and we expected those cycle times to come down in March and April and we did in fact see cycle times come down mainly on both our client holding time and our carrier delivery times. They have come down to pre holiday levels again, we were excited to see that.

And they're still up year on year, but again, they are back to pre holiday levels.

Great. Thank you.

Well now hear from Erinn Murphy with Piper Sandler.

Great. Thanks, Good afternoon, and 2 questions for me as well first for Elizabeth could you talk about how growth broke down during the quarter across men's women's and kids and kids as you lean into the back half of the year is that a bigger opportunity with back to school being and person. This year and then a question for Katrina on just as you shift your.

Focus deeper into sustainability can you talk about the role that you see if at all for resale of rental and how do you innovate around the shipping of the fix it. Thank you so much.

Thanks, Darren great questions.

Yeah, I mean, we're really pleased with the momentum we've seen on a broad basis across the business I think and particular women's and kids. The U K have really had extraordinary growth I think our men's business is not quite yet where we want it to be I think and part we believe those consumers just had lock and shopping as much we started to see really good thing from success rate and our assortment and we have a lot of <unk>.

And it's just the right assortment and we're just seeing the kinds of requests for men and clients are having on.

Of course grew year on Europe, and we expect to start to see more acceleration as we move and share.

Really people getting back into apparel and back to work on.

On the kids business, Yeah, I think you know that.

And that business overall has been up triple digits year on year, we passed a number of great milestones that we don't disclose externally, but we feel really confident we actually had a very strong back to school season last year was actually about 60% growth year on year, even though kids were largely and remote mode. You know kids still grow so we would hope that it will be even strong.

Longer this year as kids are going back to school. So we of course are gearing up for that.

And I'll hand, it over to cat and on the sustainability question.

Yeah great.

Great questions and I mean, you know the I think the high level answer is a little bit on you know kind of to be determined I don't I'm not going to have a lot of specifics to share yet and that's just actually just recently joined the sustainable apparel coalition and it didn't really kind of productive and helpful to be able to work with many other industry leaders around what are the elements and which we can be more sustainable and you know you mentioned ship.

I mean shipping certainly is a place where and I think there's some room for improvement I would also say that the studies that we've done have actually shown debt and shipping product is actually a much more kind of efficient way than kind of heating and cooling really large footprint and retail stores that is actually quite an inefficient way as we think about the expense.

So our environment and those those stores are actually much much worse for the environment than shipping back and forth and so it's not to say, there's not more room, there, but it's definitely I'm just kind of and interesting finding that we found and and then to answer your question around rental and on second hand, and we're very interested and kind of how can we extend the life of the GOG.

We have many closed that we've sold into People's homes, we know a lot about that and the data advantage that we have can be just as powerful if not more powerful and the secondhand world and the firsthand world.

Actually I think we're probably more interested and second hand versus rental to be honest and but theres definitely on a lot of excitement and internal momentum we have nothing to share specifically on it but it's definitely something that's and that's on our minds and the business.

Thank you so much.

Youssef Squali with Truest has our next question.

Hi, This is Dan and I'll speed on for Youssef, Thanks for taking the questions.

On inventory it looks like another big build this quarter and it.

Changes there in terms of mix either among categories or.

Our exclusive brands versus vendor brands and then if you could provide any update on the progress around the new inventory models, you've been experimenting with whether it's a flex or the consignment model.

Thanks.

Thanks Danielle.

Well, let me start with the second question on the new inventory models, and then I'll hand, it today and on the first question on the build of inventory. Yeah. We definitely are excited about the investments, we're making behind a confinement like model as well as drop ship, we see just overall that the growth and our selection to be a big strategic priority as we.

And our offering we really consider our secret sauce to be around matching clients with the best product for them and helping transform the way they find what they love and part of that means we want to be able to on gate selection for our clients and so we've made progress every quarter for the last year or so on and.

And the thing that technology.

And with many of our great vendors and beta mode of these new offerings and so we have nothing specific to share, but that we will be making multi quarter investment to scale up these new models.

And so hopefully we can share more on the next couple of quarters, that's more specific on that but we definitely view it as a priority for the business.

Dan do you want to take the first question.

Sure, Yes on inventory.

As he mentioned Daniel we are up 60% quarter on quarter to $250 million debt inventory and again weird.

And as mentioned and I mentioned earlier as we scale direct by breadth and depth of selection and become important as we want toxic or direct by customers to come back weekly and daily and and we're going to continue to invest and selection.

We are focused on on inventory.

And making our inventory buying on inventory and the most efficient way possible.

We don't break out mix of inventory, but we're going to continue to focus both on private label and third party and.

And Elizabeth just gave the update on the different inventory models. So its something we are aware of and focused on the client experience is what we're really focused on as we scale up shop.

And likely we will continue to invest and the breath and selection for inventory.

Great. Thanks.

Yeah.

Our next question comes from Simeon Siegel with BMO capital markets.

Thanks, everyone and good afternoon, great results and and catalyst lift congrats to both of you on on the next chapters.

How are you guys thinking about expectations for revenue per client as you continue the rollout of new initiatives, just any way to and then maybe for this quarter just thinking about where you rounded out any way to parse out revenue per client from I guess, the new cohort of active clients first and maybe the existing clients. Thanks.

Thanks Simeon.

Great question, let me hand that 1 to Dan.

Okay.

Yes, the Archrock, we talked about the change year on year and we've we addressed this last quarter and again this quarter, we have such a strong influx of new clients and it does take time with them to spend on our platform and as you know we define revenue per active based on a 12 month trail.

And what I can share is that when we look at it on a cohort basis, we like what we see because we see the newest cohorts and spending more than previous cohorts.

And so that's a big positive for US again, the way that our path is calculated on that 12 month trend just means that we need more time for the influx of new clients to spend with us and so again, we're happy with what we see on share of wallet from.

And every cohort that we look at.

Awesome. Thank you and then maybe for cat or Elizabeth So as you think about the broader promotional environment and it just seems everyone is seeing better full price sell through how do you think about does that give you an umbrella and I know youre not normally indirect competition with lavazza somebody walks into a store, but just how do you think about that let's just call. It positive inflation, we're seeing across apparel and what that does to.

The way you price.

Yeah, I can take that wants to me and it's a great question. I mean, we've continued to see great demand, albeit not being a promotional player and I think that just speaks to the strength and sort of debt. The core model for US is meeting the need of getting the client the right product versus a highly discounted product that might not actually ship them and so I think that's always been a big strategic advantage for Citrix.

And I think Theres a lot of pent up demand right now to get the product you really want which plays really well to our model overall as consumers are looking for things that they maybe haven't shopped for and a long time, which I think is also demonstrated by some of these.

Big growth rates and and categories for the assortment that probably were less addressed over the last year or so so it probably does play well to our model.

You know we also do a really good job I think of offering a combination of lower price point mid price points and high price points, and we have seen real strength and those lower price points over the course of the last year as consumers and in many situations have been economically constrained and so I think what we pride ourselves on just really match and a client with the right product.

Okay. Thanks, a lot guys, great job and best of luck for the year.

Thank you.

Lauren Schenk with Morgan Stanley has our next question.

Great. Thanks for taking my question I, just wanted to ask about the inventory reserve benefit and the third quarter I think it was a fairly sizable tailwind just sort of help us quantify that and then how much it hurts them or help and the fourth quarter. Since I think we're lapping a significant reserve benefit last year and the fourth quarter as well. Thanks.

Thanks, Lauren Dan do you want to take this 1.

Yeah I'll take this 1 yes, we did mention that the increase year on year and.

Gross margin was primarily due to inventory health and lower merchandise costs and and you're right. There was some reserves that we took and a year ago. As we were in the Covid trial and our fulfillment centers were shut down.

Economies were closed down and we don't we don't give guidance on inventory going forward, we do feel good about the health of our inventory.

A lot of what we're receiving we're buying because of the demand that we see and.

And so.

And without providing forward looking guidance, what we saw in Q3 from an inventory perspective is the best guidance I can give at this point because we feel pretty good about the health of our inventory and what we're buying.

Okay. Thanks, and then just a quick follow up on the on the net adds any any way to quantify percentage of new versus existing or sort of reactivated customers during the quarter.

And do you want to take that 1 as well.

Yeah, we don't break out for ads.

And I will I guess, we will see that there were very strong across the different spectrum, including new and reactivation and we're very happy with what we saw and our customers coming back to us and again that makes them a tremendous amount of sense because they want to buy we know them. They love of course.

Styling services, we offer and so we did see strength in both channels.

Okay. Thank you.

Maria Rips with Canaccord has our next question.

Oh, great. Thanks for taking the questions. So now the direct possible broader launch a few months away can you maybe talk about your marketing strategy around it and how do you need to adjust your messaging maybe to educate consumers about this sort of emergent and you're offering and then secondly, just to follow up on the U K. It sounds like you have some.

A lot of brokers. There can you maybe just talk about what are some of this additional investments that are still needed to further sort of improve your scale in that market.

Yeah. Thank you Mario Great question so.

Yeah on direct value, we're very eager and excited to start opening that experience up at the end of this fiscal year to new customers and then over the course of fiscal 2022 will definitely be evolving and growing our approach to marketing and yeah. It's a very good point you know I think we have reasonably good brand awareness and a good understanding of what stitch fix has not historically insurance of our style.

On surfaces and fix offer and so no. We've done some early testing on new messaging and will be continuing to do that over the months to come and you know really being very cognizant of how do we open up the aperture of how people think about stitch fix and that's broader notion of personalized shopping and sort of you know sort of shopping and styling on <unk>.

And so to speak with our shopping fee based experience.

And I would anticipate seeing some new marketing for us in fiscal 2020.2 as we begin to tell that story and.

And then on the U K, Yeah, we're very pleased with the progress we have yet to open up direct buy within that market. So that's of course for similar idea of what we've been doing and the U S that we need to bring to that market. You know we continue to grow the strength of our exclusive brands and our assortment. There. So it's really just a continuation of what we've been doing as well as bringing the innovation that we're building and.

And both markets to that geography, but it's scaling nicely I mean, I think we feel great about the offer and we have that absolutely see opportunity to innovate and expand at the same way, we're doing and the U S.

Great. Thanks for the call it that's very helpful.

Our next question will come from Ike <unk> with Wells Fargo.

Hey, excuse me congrats everyone on.

And just another question on inventories.

As you're building it up.

On the deal would be increased breadth and depth and you need, especially for things like shop. Your categories is there a way to think about inventory.

Going forward for the company what is needed on.

On the balance sheet versus in years past when direct buy wasn't as meaningful just trying to understand how much inventory the model should be carrying going forward given some of it shifts and strategy.

And any color there would be great. Thank you.

Yes, again outside of saying the focus on breadth and depth, we're not providing any guidance and we are going to ensure that our customers have great selection and the direct buy experience. We don't again going forward, we're still building.

The way our assortment will show and we're not giving guidance to inventory at this time.

Okay. Thanks.

Our next question comes from Janet Kloppenburg with JK research.

Hi, everybody and congratulations on a nice quarter.

Not to beat a dead horse on inventory.

I was wondering if you could talk a little bit about your confidence and your assortment planning and by category and seasonality as you pause and lived through a program.

And I was wondering if you thought and you have the right tools.

To buy up and what level by category and and.

And you know the think about transitioning from summer and into early fall and holiday and also as the.

Uh-huh collection and I was wondering whether we should think about any residual issues that may.

We've become more prominent because you.

You know offering more products for a wider.

And to a wider audience.

I'd love to learn more about that thanks, so much.

Thanks, Janet Great question I can I can take that and Dan if you have any other color to add feel free to chime in.

Yeah, I think we've been having kind of a this dual channel approach for a while now of course, we're planning to expand direct buy and a very meaningful way, but I think we have a good understanding of what we're saying is we've kind of share. It you know even circa a year ago. Some of the differences that we see and direct buy of different categories that tend to have deeper.

<unk> and what we've seen and our fixes for whether that's you know footwear or outerwear or accessories, and we know the kinds of categories that we're able to actually start to penetrate and a more meaningful way with dropped by which is exciting and we.

We also have I think 1 of the big benefits and the way you know Katrina and the team and vision. This model has all the different places that we get feedback and early signals from our clients you know the combination of style shuffle and our client feedback note to our stylists, which of course eat and can help us understand trends before they come for for direct buy as well a feedback that we.

Get on 85 per cent of items, we ship. So all of that has helped really inform the cash.

And a continued buying of our assortment. So I think we're feeling overall I'm very optimistic and that we're in good shape on it I do think that point for Dan and I are both raised around.

Going deeper with the great brands, we have and you know starting to broaden that selection that is you know.

A big push for us over the coming year or so I'm sure. We'll learn as we go but given how data driven and we are we're feeling like we're in good shape in terms of being able to predict that assortment.

Dan I don't know if you have anything you want to add on there.

No I think you covered it I think our customers continue to tell us that they want more selection as they come back for direct buy.

And that's very telling for us and so we want to make sure that from a client satisfaction perspective.

We have for selection and assortment to bring our clients back multiple times throughout a month or even a week for that matter. So yes, we're going to continue to invest in this area going forward, but as Elizabeth mentioned, we're still building this and and we'll.

We will provide more on selection and future quarters.

And if I could ask 1 more on private label.

I think.

When it began and it was focused on drilling and in boys and and focus on core and a central and I'm wondering national gaining confidence.

And Uh huh.

And obviously the margin and have a nature of it.

And our broadening it and close more innovation and newness and fashion.

Yeah. That's a great question Janet Yeah, we definitely are expanding our offering there I think 1 thing we're really proud of is the kind of client happiness and success rates, we do see with our exclusive brands for example, and our kids business, we actually see higher happiness and like scores with most of our exclusive brands over what our wonderful national brands. So we think it's.

Incredibly important to have that breadth of assortment for our clients both on <unk>.

<unk> brands as well as our and exclusive brands, but we are seeing continued strength of our ability to innovate and outperform there and use our data to build great product, including categories, where we also carry on market brands. So we definitely have more to come and the quarters will be what we will be launching some additional new brands and categories that we think are.

Of particular strength right now so we will be continuing to invest there.

Thanks, so much.

And our final question will come from Dana Telsey with Telsey Advisory group.

Good afternoon, everyone and nice to see the progress as you think about the number of stylists and engagement given the growing customer base. How are you thinking about stylus and and scaling them, especially given new features like what you're doing with live styling is there what is the retention of stylists, adding of new style.

Atlas how is that adding to average average increase in revenues. Thank you.

Yeah, I can start on that day in and Dan and feel free to chime in if you have anything to add there yeah.

Yeah, you know we have added a large number of pilots over the last year and will continue to invest and that differentiation for stitch fix you know they to your point on lifestyle and they play a role in a number of places for our clients. Both our fix says fix preview lives styling. They also on play a very active role and training our machine learning models with our day to <unk>.

<unk> team for outfits, which our ability to generate algar algorithmic outfits and our feed is we think a real source of differentiation that requires that human touch to help build build and train those models as well as quality control. So you know we feel like we have pretty good understanding of for forecasting how to grow that population and we'll figure out you know.

And things like lifestyle, and you know that's not probably something a client does every week, it's probably a more episodic type of experience and as we go from incubating that to figuring out the right way to scale. It will definitely take a kind of a.

Learn and test and learn approach of how best to scale that but I think it's a population and we understand well, we love that we're able to brought and the kinds of experiences and the way they add value to the customer experience.

Thank you.

That will conclude today's question and answer session I will now turn the conference over to Mr. <unk> for any additional closing remarks.

Thank you so much for joining us today, we look forward to seeing you virtually or hopefully in person in the coming months.

This concludes today's call. Thank you for your participation you may now disconnect.

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