Q1 2022 Stitch Fix Inc Earnings Call

December 7, 2021

Good afternoon and thank you for joining us on the call today to discuss the results for our first quarter 2022. Joining me on today's call are Elizabeth Spaulding, CEO of Stitch Fix and Dan Jedda, CFO.

Joining me on today's call are Elizabeth Spaulding, CEO of stitch fix and damage at our CFO.

We have posted complete first quarter 2022 financial results in a press release on the IR section of our website investors.stitchfix.com. A link to the webcast of today's conference call can also be found on the 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 factors that could cause the results to differ.

A link to the webcast of today's conference call can also be found on the 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 factors that could cause the results to differ.

Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliation 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.

During this call we will discuss certain non-GAAP financial measures.

Conciliation 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 in its entirety is being webcast on our IR website. A replay of this call will be available on the website shortly. Now, I'd like to turn the call over to Elizabeth.

Now like to turn the call over to Elizabeth.

Thanks, Kenny. After the market closed today, we issued a press release with details on our quarterly performance and outlook. In Q1, we delivered top-line revenue at 581 million, representing 19% year on year growth. We also achieved our highest gross margin ever at 47%, along with 38 million and adjusted EBITDA.

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

Q1, we delivered top line revenue at 581 million, representing 19% year on year growth.

We also achieved our highest gross margin ever at 47%, along with 38 million and adjusted EBITDA.

We ended the quarter with $4.2 million active clients, an increase of 11% from a year ago. At the same time, our sequential net client additions were lower than prior quarters, and we are currently making changes to get moving in the right direction.

At the same time, our sequential net client additions were lower than prior quarters, and we are currently making changes to get moving in the right direction.

We are in a major learning phase right now as we build out our new freestyle experience in fall. And we opted in Q1 to be conservative with marketing spend as we optimize our new onboarding experience and conversion. I will discuss this more ahead. Today, I will first share highlights on the quarter and our recent launch of freestyle. Dan will discuss why our approach is highly differentiated in apparel retail.

I will discuss this more ahead.

Today, I will first share highlights on the quarter and our recent launch of freestyle Dan will discuss why our approach is highly differentiated in apparel retail and.

And finally, I will share our focus areas as we scale our ecosystem of personalized shopping, styling and inspiration. First on Q1. We've grown top-line net revenue per piece down 40% year over year. <unk> penetration increased quarter over quarter as we continue to see our clients leveraging growth fixes and freestyle demonstrating the complementarity of our growing offering.

Personalized shopping styling and inspiration.

First on Q1.

We've grown top line net revenue per piece down 40% year over year.

<unk> penetration increased quarter over quarter as we continue to see our clients leveraging growth fixes and freestyle demonstrating the complementarity of our growing offering.

We are also capturing more purchase occasions through Freestyle in product categories that have been underrepresented and fix it. Such as footwear, dresses, outerwear accessories, and sleep and loungewear. Today these categories represent $90 billion in the US women's market alone demonstrating the opportunity ahead of us.

Footwear dresses outerwear accessories, and sleep and loungewear.

Today these categories represent $90 billion in the U S women's market alone demonstrating the opportunity ahead of us.

In fact, footwear accessories, and dresses together foreign over 50% increase year over year in Freestyle, which is five times related growth, we see in [inaudible] for the same categories in the same period. We also enjoyed growth in our fixed offering which benefited from the first full quarter impact of fixed preview, now rolled out to the US and UK and implement client populations as of the end of Q4 FY '21.

We also enjoyed growth in our fixed offering which benefited from the first full quarter impact of fixed preview now rolled out to the U S and UK and implement client populations as of the end of Q4 FY 'twenty one.

As a result of our innovations with Fix Preview, we continue to see average order value increased driven by strength in keep rate and continued satisfaction with over 80% of our first Fixed clients in the quarter purchasing at least one item and sharing that they look forward to their [inaudible]. When looking across the Freestyle and Fix, our revenue per active client topped $500 for the second quarter in a row and reaching a record high of $524.

Continue to see average order value increased driven by strength in keep rate and continued satisfaction with over 80% of our first fixed clients in the quarter purchasing at least one item and sharing that they look forward to their scientific.

When looking across the street style and fit our revenue per active client topped $500 for the second quarter in a row and reaching a record high of $524.

Stepping back, this expansion into Freestyle represents an evolution of our business, which you can think of as Stitch Fix 2.0. There will be significant learning and experimenting to build the future of retail experience. We may experience short term impacts of cannibalization, we will be implementing new described and we are building new workflows. All of this learning of new motion is in service of building a great customer experience and we all need to optimize this. We do not anticipate a linear journey.

There will be significant learning and experimenting to build the future of retail experience.

They experienced short term impacts of cannibalization, we will be implementing new described and we are building new workflows.

All of this learning of new motion is in service of building a great customer experience and we all need to optimize data.

We do not anticipate a linear journey.

Specifically on new client additions with Freestyle now available in addition to our fixed offering. We are learning how best to wrap clients into the right experience for them. We've been testing client ongoing close whether client comes directly to our main site or lands on our product detail page through paid search or other pay channels. We see significant new client potential ahead at retail enabled us to access a greater share of shopping occasion and has opened up new marketing channels for Stitch Fix to drive user acquisition.

We are learning how Baxter our clients into the right experience for them.

We've been testing client ongoing close whether client comes directly to our main site or lands on our product detail page through paid search or other pay channels.

Significant new client potential ahead at retail enabled us to access a greater share of shopping occasion and has opened up new marketing channels for Citrix to drive user acquisition.

That said and as I noted at the beginning of the call, our sequential net client additions were low for the quarter. At the early stages of this learning journey and as a result of our testing in Q1, we experienced lower fixed conversion rates than we expected. We will continue to test and iterate the optimal client experience and conversion paths for new clients. During this learning stage, we will efficiently deploy our marketing dollars for learning and we will scale them when the time is right.

At the early stages of this learning journey and as a result of our testing in Q1, we experienced lower fixed conversion rates than we expected.

We will continue to test and iterate, the optimal client experience and conversion paths for new clients.

During this learning stage, we will efficiently deploy our marketing dollars for learning and we will scale them when the time is right.

Now onto our second topic our differentiation. We are at the very beginning of this next chapter for Stitch Fix to transform and evolve on our unique fixed model for styling clients into the global destination for personalized shopping, styling and inspiration. The last 10 years of our Stitch Fix journey sets the stage for the future with our highly differentiated approach to Marion data science and creative human judgment. Central to our model, our rich data feedback loops that harness our millions of clients and our proactive relationships and sharing those preferences and many points of feedback on nearly every item we ship. For example, over 50% of fixes include client notes with our stylists that inform emerging trends. Clients provide five points of feedback on over 80% of items shipped and now clients are providing a growing foundation of engagement data in our Freestyle experience.

We are at the very beginning of this next chapter CHRISTUS fixed to transform and evolve our unique fixed model for styling clients.

Into the global destination for personalized shopping styling and inspiration.

The last 10 years of our Citrix journey sets the stage for the future with our highly differentiated approach to Marion data science and creative human judgment.

Central to our model, our rich data feedback loops that harness.

And with clients.

And our proactive relationships and sharing those preferences and many points of feedback on nearly every item we ship.

For example.

Over 50% of fixes include client notes with our stylists that inform emerging trends.

Clients provide five to feedback on over 80% of items shipped and now clients are providing a growing foundation of engagement data in our freestyle experience.

Similarly Style Shuffle, our game a five rating experience in our App that 1 million clients play monthly informed which items in our catalog will succeed with different clients. For example, within 48 hours of a new item being ingested into our product catalog, we have tested and understood the likely success rate of that item, informing which fixes as well as which freestyle shopping needs are most likely to benefit from that item.

<unk>, which items in our catalog will succeed with different clients.

For example, within 48 hours of a new item being ingested into our product catalog, we have tested and understood. The likely success rate of that item, informing which fixed as well as which freestyle shopping needs are most likely to benefit from that item.

These unique feedback loops enable a deep understanding of the drivers of customer preference and Fix applicable in styling services and shopping. These moves are responsible for our strength in fixed keep rates over time as well as contribute to the success of our exclusive brands.

Lickable and styling services and shopping.

These moves are responsible for our strength in fixed keep rates over time as well as contribute to the success of our exclusive brands.

They also enable our Freestyle return rates to be materially better than other apparel e-commerce. To our knowledge, no other retailer is generating insights at this scale to inform a personalized shopping experience. Now our final topic. Where we are in our journey with Freestyle in Texas in the areas of focus for the coming year and beyond. Over the course of Q1, we fully open Freestyle new consumers they began to market the offerings.

To our knowledge no other retailer is generating insights at this scale to inform a personalized shopping experience.

Now our final topic.

We are in our journey with freestyle in Texas in the areas of focus for the coming year and beyond.

Over the course of Q1, we fully open freestyle new consumers they began to market the offerings.

We enhanced the home feed experience to create many different entry points into shopping to help address the purchase intent of each client. From a growing number of branded curated shock unique to each client. To carousel on trending outputs for the client to launches of new product lines, including our elevate black-owned brand grantees. And the launch of Milton made a new sustainable and US-built basic line. We also began testing influencer curated text as well as enable clients to see more richness and our product detail pages with a growing foundation of [inaudible] imagery. Going forward, we have three areas of priority for our continued build-out of Freestyle. First, we are strengthening the customer experience through product feature enhancements and expanded inventory selection.

From a growing number of branded curated shock unique to each client.

To carousel on trending outputs for the client to launches of new product lines, including our elevate black owned brand grants.

And the launch of Milton made a new sustainable and U S built basic line.

We also began testing influencer curated text as well as enable clients to see more richness and our product detail pages with a growing foundation of animal imagery.

Going forward, we have three areas of priority for our continued build out of freestyle.

First we are strengthening the customer experience through product feature enhancements and expanded inventory selection.

One key area of investment is reducing friction for new clients to access Freestyle to testing new onboarding approaches that balanced personalization with speed of access into the experience. We expect this to be highly impactful work, there and only a fraction of our new traffic fully completes the style profile. Inside Freestyle, our secret sauce is dialing on-demand. Everything we show each client is unique to them. And reflects what will best fit their body represents as well as push at the boundaries of each client's personal style and provides value-added features such as algorithmically generated outfit.

We expect this to be highly impactful work, there and only a fraction of our new traffic fully completes the style profile.

Inside freestyle, our secret sauce is dialing on demand everything we show each client is unique to them.

And reflects what will best fit their body represents as well as push at the boundaries of each client's personal style and provides value added features such as algorithmically generated outfit.

We have begun to make discovery easier for customers to find items they want. For example, we recently added a fresh fines category, which clusters comatic items based on future attributes Chad by our merchants and stylus such. Such as Paul Hughes straight leg jeans, and all that glitters.

For example, we recently added a fresh fines category, which clusters comatic items based on future attributes Chad by our merchants and stylus such.

Such as Paul Hughes straight leg jeans, and all that glitters.

We will also continue to invest in our brand and category expansion of our assortment. For example in Q1, we added over 20, new womens' and mens' brands. Over the course of FY '22, we anticipate adding over 50 brands and continuing to test, which are traffic-driving products as well, which are more likely basket pillars.

For example in Q1, we added over 20, new womens and mens brands.

Over the course of FY 'twenty, two we anticipate adding over 50 brands and continuing to test, which are traffic driving product as well, which are more likely basket pillars.

Over the course of Q1 National brand Freestyle revenue contribution grew to 19% in October versus 12% in September as we enhanced our assortment as well as points of access. While we see the importance and ensuring we have the great national brand to attract and delight clients. We are also intending to begin to build greater external brand equity with our strongest performing exclusive brands.

While we see the importance and ensuring we have the great national brand to attract in July client.

We are also intending to begin to build greater external brand equity with our strongest performing exclusive brands.

For example, <unk> Algo represents roughly 10% of men's Q1 revenue and marketing groups represented roughly 13% of women's Q1 revenue. Both of which enjoy success rate higher than our best national brands. Second, we are preparing our technology foundation for scalability. There are various elements of our technology that needs to evolve to support the next chapter at Stitch Fix.

Both of which enjoy success rate higher than our best National brands.

Second we are preparing our technology foundation for scalability.

There are various elements of our technology that needs to evolve to support the next chapter at stitch fix.

We realized that it will be important to evolve our overall tech platform to help us achieve our goal. This multi-year investment will include a move to a shared services architecture relative to our current separate stacks for each line of business. Expanding the real-time availability of our personalization data and implementing the next generation of our vendor interaction API.

This multi year investment will include a move to a shared services architecture relative to our current separate stacks for each line of business.

Expanding the real time availability of our personalization data and implementing the next generation of our vendor interaction API.

Specifically, on the personalization topic, we are now shifting our algorithm to combine detailed client-based feedback on our products and personal style preferences with real-time user behavior in our freestyle usage. All the technological investment areas are critically important to where we are headed.

All the technological investment areas are critically important to where we are headed.

It will take time to have them all in place, but it is an investment that we believe will pay off in a big way over the long term. We will keep you up to date on the progress. And lastly, we are building new marketing activation channels for new consumer growth.

We will keep you up to date on the progress.

And lastly, we are building new marketing activation channels for new consumer growth.

Historically, we have access to a subset of client acquisition channels as a result of our business model. These include word of mouth performance great channels, such as Facebook and Instagram as well as incentive-based referrals.

With the launch of Freestyle and the ability to share our product catalog as a vehicle for consumer engagement. We are now entering into a number of new marketing channels, including Google product listing ads Influencer marketing and we will eventually participate in SCO. With that, I will hand it over to Dan to discuss our financial results and provide our updated view on FY '22.

With that I will hand, it over to Dan to discuss our financial results and provide our updated view on FY 'twenty two.

Thanks, Elizabeth and hello to everyone joining us on today's call. In Q1, we generated net revenue of $581 million, representing 19% year over year growth. We saw continued momentum in women's as well as in kids and in the UK, where we nearly doubled revenue when compared to the first quarter of last year.

In Q1, we generated net revenue of $581 million, representing 19% year over year growth.

We saw continued momentum in women's as well as in kids and in the U K, where we nearly doubled revenue when compared to the first quarter of last year.

Additionally, Freestyle is growing 40% year over year as we ramp the offering. We grew active clients to nearly $4.2 million, an increase of 470,000 clients or 11% year over year. However, sequential net client additions of 15K were below our expectations.

We grew active clients to nearly $4 2 million, an increase of 417000 clients or 11% year over year.

However, sequential net client additions of 15 K were below our expectations.

As Elizabeth mentioned briefly since the full rollout of Freestyle, we've been iterating on new client acquisition and onboarding method and that has had an impact on fixed conversion. Also in the first half of fiscal 2021, we launched a high dollar value referral program for new customers, which ultimately brought in clients, who did not remain active as long as we had hoped. We have since ended the program.

Also in the first half of fiscal 2021, we launched a high dollar value referral program for new customers, which ultimately brought in clients, who did not remain active as long as we had hoped.

We have since ended the program.

However, our net client adds were impacted by this in the first quarter and we expect to continue to see the effects of this into the second quarter. And finally, we continue to face challenges in both historical and new channels as we evolve our marketing strategy. We expect a sequential decline in actives in Q2 and anticipate active returning to growth in Q3.

And finally, we continue to face challenges in both historical and new channels as we evolve our marketing strategy.

We expect a sequential decline in actives in Q2 and anticipate active returning to growth in Q3.

We continue to test, learn and evolve our onboarding process and our marketing channels with a focus on adding new clients that engage with us over the long term. As a result, we're seeing healthy retention and engagement rates for new and recently acquired clients, which is driving the highest [inaudible] we've ever experienced. Q1 gross margin was a record 47% representing a 220 basis point increase from the same quarter last year, largely driven by improved product margins as well as shipping cost optimizations. Advertising was 8.7% of net revenue in Q1 compared to 10.5% in Q1 of 2021.

As a result, we're seeing healthy retention and engagement rates for new and recently acquired clients, which is driving the highest <unk> we've ever experienced.

Q1 gross margin was a record 47% representing a 220 basis point increase from the same quarter last year, largely driven by improved product margins as well as shipping cost optimizations.

Advertising was eight 7% of net revenue in Q1 compared to 10, 5% in Q1 of 2021.

We continue to test new marketing channels, including SCM brand and Influencer marketing. As we ramp these channels throughout the quarter, we opted to not overspend in marketing, while we refine our onboarding experience. As we continue to prove onboarding, we will also continue to ramp our marketing as appropriate to optimize for long term free cash flow. Q1 adjusted EBITDA was $38 million, reflecting sustained revenue growth strong gross margins and lower marketing spend.

As we ramp these channels throughout the quarter, we opted to not overspend in marketing, while we refine our onboarding experience.

As we continue to prove Onboarding. We will also continue to ramp our marketing as appropriate to optimize for long term free cash flow.

Q1, adjusted EBITDA was $38 million, reflecting sustained revenue growth strong gross margins and lower marketing spend.

Net inventory ended the quarter at $184 million down 13% quarter over quarter. While we continue to add selection throughout the quarter, we did experience delays in receipts, primarily due to shipping delays in the global supply chain.

While we continue to add selection throughout the quarter, we did experience delays in receipts, primarily due to shipping delays in the global supply chain.

We are currently experiencing delays from one to four weeks and we expect these delays to continue in Q2 and beyond. We delivered $125 million of free cash flow and ended the quarter with no debt and $401 million in cash cash equivalents and highly rated securities.

We delivered $125 million of free cash flow and ended the quarter with no debt and $401 million in cash cash equivalents and highly rated securities.

Given our strong balance sheet, we are well-positioned to make the necessary investments to become the global destination for personalized shopping while maintaining an unwavering focus on managing costs by operating efficiently.

As we've shared today, we are in a moment of transformation, which will be a multi-year endeavor. The investments we are making now will allow us to unlock the long term opportunity that Freestyle presents. As Elizabeth mentioned, we're very early in our journey, especially with Freestyle.

<unk>, we are making now will allow us to unlock the long term opportunity that freestyle presents.

As Elizabeth mentioned, we're very early in our journey, especially with freestyle.

In parallel, the apparel industry continues to be impacted by the macro supply chain challenges related to port congestion and logistics constraints. These unknowns have been factored into our outlook. Looking forward, for Q2 we expect net revenue in the range of 505 million to $520 million representing growth of 0 to 3% year over year. We expect adjusted EBITDA in the range of negative 5 million to $5 million or negative 1% to 1% of net revenue.

These unknowns have been factored into our outlook.

Looking forward for Q2, we expect net revenue in the range of 505 million to $520 million representing growth of zero to 3% year over year.

We expect adjusted EBITDA in the range of negative 5 million to $5 million or negative 1% to 1% of net revenue.

For the full year, we now expect revenue to be in the high single digits year over year, and adjusted EBITDA margins to be between 1% and 2%. This guidance reflects our expectation of lower net adds than clients discussed previously as we continue to optimize the client experience and onboarding and advance of accelerating further spend in marketing.

This guidance reflects our expectation of lower net adds than clients discussed previously as we continue to optimize the client experience and onboarding and advance of accelerating further spend in marketing.

It also reflects the ongoing macro impact on global supply chain challenges in the industry. As we've discussed today, we are in the first inning of a long game and will likely take several quarters to start seeing the impact we expect from our efforts. As we continue to learn, we are confident we are pivoting quickly to respond to any challenges we encounter.

As we've discussed today, we are in the first inning of a long game and will likely take several quarters to start seeing the impact we expect from our efforts as.

As we continue to learn we are confident we are pivoting quickly to respond to any challenges we encounter.

We remain excited for the journey, we have embarked upon and confident that we are positioned well to become the global destination for personalized shopping. With that, we're now ready for your questions. Operator, I'll turn it over to you.

With that we're now ready for your questions operator.

Operator, I'll turn it over to you.

Thank you. If you'd like to ask a question please signal by pressing star one on your telephone keypad. If youre using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Again, press star one to ask a question. And we'll take our first question from Mark Mahaney with Evercore ISI. Please go ahead.

<unk> line will indicate when your line is open again press star one to ask a question and we'll take our first question from Mark Mahaney with Evercore ISI. Please go ahead.

Thanks, two questions. Please could you talk about the impact from fixed preview what impact that's had in terms of spend per customer? The number of items fixes the number of items per fixed that people are keeping. And then secondly, could you just go through again, the net add shortfall in the quarter? I get the idea of Fe part, but the other factor that dragged down in the first quarter and is likely to continue in the second quarter could you double click on that, please? Thanks.

Spend per customer.

The number of items fixes the number of items per fixed that people are keeping and then secondly could you just go through again, the net add shortfall in the quarter I get the idea of Fe part, but the other factor that dragged down in the first quarter and is likely to continue in the second quarter could you double click on that please thanks.

Hey, Marc. Thank you for the questions. Yeah, I will answer those and Dan feel free to add on so on Fix Preview, we really like what we have seen with that experience and has continued as we further the rollout. So overall, we've seen increased average order values largely as a result of higher cap rates, you know clients have an opportunity to see ahead, select a few things and then the stylist finishes the fix and that has had a positive impact on average spend.

A few things and then the stylist finishes the tax and that has had a positive impact.

We also have seen improvements year on year on client retention, which we also think can be attributed to the positive experience of Fix Preview coupled with Freestyle. And then on the net adds. We pointed to really three different drivers, which we are focused on. So the first is, as both Dan and I mentioned, we're incredibly focused on evolving the onboarding process to [Stitch Fix] for clients that are experiencing and wanting to get into fixes as well as Freestyle and so we see opportunity. We've already made some adjustments that we as we've entered into Q2 and just more learning to just make it frankly a lot easier for new clients that want to get shopping right away to get into that experience as quickly as possible. The second that we pointed to, I think you were alluding to Mark.

And then on the net adds.

We pointed to really three different drivers, which we are focused on so the first is <unk>.

As both Dan and I mentioned, we're incredibly focused on evolving the onboarding process to <unk>, both for clients that are experiencing and wanting to get into fixes as well as freestyle and so we see opportunity. We've already made some adjustments that we as we've entered into Q2 and just more learning to just make it frankly a lot <unk>.

for new clients that want to get shopping right away to get into that experience as quickly as possible. The second that we pointed to, I think you were alluding to Mark.

We've always really had a good client growth from referrals and incentive-based referrals. We tested a program last Q1 and into Q2 of last year that was offering a higher referral fee and that was something upon analysis, we realized was not generating the kind of clients that we want in our ecosystem. And so we've ended that program, but that has that hing an impact on the gross adds but net adds as a result of dormancy. And then the third is kind of the impact of IDFA and iOS privacy changes, which we're continuing to learn and improve our performance within marketing just given those changes similar to many other companies that market.

Having an impact on the gross adds but net adds as a result of dormancy and then the third is kind of the impact of <unk> and iOS privacy changes, which we're continuing to learn and.

Prove our performance within marketing just given those changes similar to many other companies that market.

Yes.

Thank you, Elizabeth. Next, we go to the line of Ross Sandler with Barclays. Please go ahead. Hey, guys. I guess I'll ask about the revenue guide. So you mentioned that you are having all these supply chain delays in getting products and I know that inventory levels kind of dictate how many fixes and how much freestyle you can send out in any given day, week, month, quarter.

Next we go to the line of Ross Sandler with Barclays. Please go ahead.

Hey, guys.

I guess I'll ask about the revenue guide.

So you mentioned that you are having all these supply chain delays in getting product and I know that inventory levels kind of dictate how many fixes and how much freestyle you can send out in any given day week month quarter.

So how much of the [DSO] is related to the client net ads that you just talked about versus not having enough inventory to then fulfill the demand that might be out there? And I guess just stepping back from these issues. How much of this do you think is kind of temporary versus pretty easily eligible that could we get the growth rates back up in a matter of a couple of quarters. What's your view on that? Thank you.

Fulfill the demand that might be out there and I guess just stepping back from these issues.

How much of this do you think is kind of temporary versus.

Pretty easily.

Eligible that could we.

Get the growth rates back up in a matter of a couple of quarters what's your.

What's your view on that thank you.

Yeah. Thanks, Ross, maybe I'll start at a very high level, and then I'll hand, it over to Dan. I mean I definitely think we think both of these are temporary just the supply chain issues we would expect to subside over the coming year plus. And then onboarding, we're learning a lot right now and we're confident we're going to improve over the coming quarters. But with that, let me hand it to Dan to give more detail.

Thanks, Ross, maybe I'll start at a very high level, and then I'll hand, it over to Dan I mean, I definitely think we think both of these are temporary just the supply chain issues, we would expect to subside over the coming year plus.

And then Onboarding, we're learning a lot right now and we're confident we're going to improve.

over the coming quarters.

But with that let me.

Hand, it to Dan to give more detail.

Yes, I'll, just add that with respect to the client actives and the impact that has obviously. The client actives in Q1, and as we mentioned into Q2, we'll have some downstream impact although we do expect to return to growth in Q3 as we enter the spring season for client [adds]. So we do view that as temporary although it does have a quarter on quarter effect.

The client actives in Q1, and as we mentioned into Q2, we'll have some downstream impact although we do expect to return to growth in Q3, as we enter the spring season for client so.

So we do view that as temporary although it does have a quarter on quarter effect.

In relation to inventory, we do have certain categories that we would like to have more inventory and not all categories and that does have an impact going into the back half of the year. We're managing that as tightly as we can by looking at placing orders early in trucking through all the logistics, we'll have to wait and see how that impacts our Q3 and Q4. So back just to round this out, back to Liz at this point, it's really both and we do view them both as temporary.

We do have certain categories that we would like to have more inventory and not all categories and that does have an impact.

Going into the back half of the year, we're managing that.

Tightly as we can by looking at placing orders early in trucking through all the logistics, we'll have to wait and see how that impacts our Q3 and Q4. So back just to round. This out back to Liz at this point, it's really both and we do view them both as temporary.

Next, we go to the line of Cory Carpenter with JPMorgan. Thanks for the questions. I had two. Maybe first I think you mentioned in the prepared remarks dealing with short term impact of cannibalization. Could you just expand on that comment a bit maybe what you're seeing on the cannibalization side? And then just in terms of COVID, how sensitive is the business or consumer demand to COVID headlines? Are you seeing much impact at all when can you just flesh out where you feel like we're kind of past that at this point? Thank you.

Each of the questions I had two.

<unk>.

Maybe first I think you mentioned in the prepared remarks.

Julian with short term impact of cannibalization could you just expand on that comment a bit maybe what you're seeing on the cannibalization side and then.

Just in terms of.

Covid, how sensitive is the business or consumer demand Covid headlines are you seeing much impact at all when can you just flesh out where you feel like we're kind of past that at this point. Thank you.

Yes, thanks for the question, Cory. So on the cannibalization point, I mean I guess I would think about that a couple of different ways. First is we feel really good about the additive nature of fixes together with freestyle for clients in our ecosystem. And I think the record high of $524 on our pack has a really strong signal of the benefit of having both Freestyle and Fixes as well as the evidence of category growth rates in categories that have typically been underrepresented by fixes like footwear. So that we feel really good that on a long term basis, we're generating over time will be generating higher LTVs with our clients. Short term cannibalization that I was referring to is more as we think about onboarding new customers through our experience.

So on the cannibalization point I mean, I guess I would think about that a couple of different ways. First is we feel really good about the additive nature of fixes together with freestyle for clients in our ecosystem and I think the record high of $524 on our pack has a really strong signal of the benefit of having both please.

Allen, Texas as well as the evidence of category growth rates in categories that have typically been underrepresented by fixes like footwear. So that we feel really good that on a long term basis, we're generating over time will be generating higher ltvs with our clients.

Short term cannibalization that I was referring to is more as we think about onboarding new customers through our experience.

Over time, we anticipate generating more traffic to site through both StitchFix.com through product detail pages, and new channels, but in the short term people are making a tradeoff between do I want to try and fix, do I want to try freestyle. And so that's the learning phase that we're in right now that we see opportunity to get better and better at and really grow the overall net adds with our clients, but I think in the short term we anticipate some learning over the coming quarters to really get that right. And one of the short term adjustments you've already made there is we know really high intent clients such as want to be styled wanted to get a fix making sure we get that signal and take them directly into that experience. But those are some of the learnings that we've had in the quarter plus that we have since opened Freestyle.

The overall net adds with our clients, but I think in the short term we anticipate some learning.

coming quarters to really get that right. And one of the short term adjustments you've already made there is we know really high intent clients such as want to be styled wanted to get a fix making sure we get that signal and take them directly into that experience.

But those are some of the learnings that we've had in the quarter plus that we have since opened Freestyle.

Next, we go to the line of Edward [inaudible] with Keybanc capital. Please go ahead. Hey. Thanks for taking the questions. I guess first you expected net new customer number. How much of it is driven kind of both the gross numbers being softer versus higher churn on the existing customer base? And I guess just stepping back I know you identify the onboarding process as a particular sticking point.

Hey, Thanks for taking the questions I guess first you expected.

Net new customer number.

Much of it is driven kind of both the gross numbers being softer versus higher churn on the existing customer base and I guess just stepping back I know you identify the onboarding process is it particular sticking point.

It's been kind of the same process for an extended period of time. So I guess why is it that you think you are starting town or some of these newer problems today? Is it that maybe you are starting to exhaust the people that would be open to those types of products? You need to kind of reintroduce it to them or kind of help us understand why it is an issue today versus maybe 6-12 months ago. Thank you.

Thanks, Ed. So on the net adds front it was really a combination of those two things. So both acquiring for your clients, we opted to spend less on marketing and then also the headwind of just the temporary effect of a higher dormancy rate. On the onboarding, we really had never onboarded clients directly into freestyle. The plurality of our clients even today is still using freestyle our fixed customers that we've introduced the freestyle. We have started to add a lot of new clients that will be adding more as we improve our onboarding experience to freestyle, but I think what we're learning is how do we make it as simple as possible for people to start to explore. There isn't a logged out exploration experience yet with Stitch Fix and so you can land on our product detail page through Google product listing ad or a Facebook AD on a particular item or you can come to StitchFix.com. We did make a number of improvements before launching Freestyle where our signal capability on fashion and style preference I would say has improved quite a bit over the last several months. But just this idea of how do we make it actually even easier to just get shopping right away? And I think now that it's open we're seeing places and opportunities to continue to test and expand that.

So on the net adds front it was really a combination of those two things so both.

Acquiring for your clients, we opted to spend less on marketing and then also the headwind of just the temporary effect of a higher dormancy rate.

On the Onboarding, we really had never onboarding clients directly into freestyle the plurality of our clients. Even today is still using freestyle our fixed customers that we've introduced the freestyle. We have started to add a lot of new clients that will be adding more as we improve our onboarding experienced a freestyle, but I think what we're learning is.

How do we make it as simple as possible for people to start to explore there isn't a logged out exploration experience yet with <unk> and so you can land on our product detail page through Google product listing ad or a Facebook AD on a particular item or you can come to stitch fix dot com, we did make a number of improvement before launching freestyle ware.

our signal capability on fashion and style preference I would say has improved quite a bit over the last several months. But just this idea of how do we make it actually even easier to just get shopping right away? And I think now that it's open we're seeing places and opportunities to continue to test and expand that.

And I did want to go back I apologize, Cory. I missed the second part of your question on COVID. So in addition to those questions from AD with COVID headlines what impact do we see. I think maybe there is two things that we have seen with that historically in all the chapters of [inaudible] over last year and a half. First, as we tend to see new signals of what consumer product category preferences are, typically when we go into a shelter in place mode. There's been more nesting, more comfortable clothes versus when we see a reopening. Like for example in Q1 of this year, we saw a 100% increase quarter on quarter on people looking for commuting based clothes so kind of going back in the office. So what we typically see is just changes in category preferences.

I think maybe there is two things that we have seen with that historically in all the chapters of career over last year and a half first as we tend to see new signals of what consumer product category preferences are.

typically when we go into a shelter in place mode. There's been more nesting, more comfortable clothes versus when we see a reopening. Like for example in Q1 of this year, we saw a 100% increase quarter on quarter on people looking for commuting based clothes so kind of going back in the office. So what we typically see is just changes in category preferences.

And then I think in general there has been just the trend to online accelerates during these time periods of higher rates of COVID, but on the flip side as a general category, we know that apparel some of that shopping does go down. So net net it's been a positive for us, but really the trend-spotting is now what we look for as we go through chapters of COVID.

Higher rates of Covid, but on the flip side as a general category, we know that apparel some of that shopping does go down. So net net it's been a positive for us, but really the trend spotting is now what we look for as we go through chapters of Covid.

Thank you. We'll go next we go next to the line of Erinn Murphy with Piper Sandler. Please go ahead. Great. Afternoon, two questions for me as well first on the men's business that has been weak for a couple of quarters. Now can you just talk about what do you attribute that to? Then secondly, what's the right way to think about marketing spend here in the second quarter? And then if you look back into the second half of the year. Thank you so much.

Great.

Afternoon, two questions for me as well first on the men's business that has been weak for a couple of quarters. Now can you just talk about what do you attribute that to.

Then secondly, what's the right way to think about marketing spend here in the second quarter? And then if you look back into the second half of the year. Thank you so much.

Thanks, Erinn. I can start with the mens question I'll hand it to Dan on the marketing question. Yeah, I mean overall, the UK business doubled in the quarter. Women's and kids are both very strong. I would say men's has been slower to reaccelerate in this COVID-19 time period. We're testing a lot of new things, we've added actually a lot of new brands, we are starting to acquire customers through that product detail page experience. A few highlights we're excited about as we've seen footwear and denim is a great starting point for those clients. So we're learning what they're looking for in this time period.

Yeah, I mean overall, the UK business doubled in the quarter Women's and kids are both very strong I would say men's has been slower to reaccelerate in this COVID-19 time period.

We're testing a lot of new things, we've added actually a lot of new brands, we are starting to acquire customers through that product detail page experience. A few highlights. We're excited about is we've seen footwear and denim is a great starting point for those clients. So we're learning what theyre looking for in this time period.

But I think what we've realized that some of our messaging on fixes and that approach was just last resident during the COVID time period. I think we're pretty excited about what freestyle represents amber and really test and learn mode to get that business accelerating once again. On the marketing side, let me hand it to Dan. Yeah, Erinn, on marketing going into Q2, which can be a weaker quarter for us at least in the November-December time period due to holiday, we're looking at slightly lower marketing spend probably from Q1, but for the full year, we are likely going to spend close to what we spent last year. So think of that is 9% to 11% of revenue as we ramp up into spring.

We're pretty excited about what freestyle represents amber and really test and learn mode to to get that business accelerating once again.

On the marketing side, let me hand, it to Dan.

Yeah, Erinn on marketing going into Q2, which can be a weaker quarter for us at least in the November December time period due to holiday, we're looking at slightly lower marketing spend probably from Q1, but for the full year, we are likely going to spend close to what we spent last year. So think of that is 9% to 11% of revenue as we ramp up into spring.

As we improve our onboarding experience and as we continue to branch out and new channels. We are going to test iterate and learn. And scale what's working well for us from a traffic and conversion standpoint, as well as the new channels that Elizabeth alluded to such as the ICM channels and the Influencer and brand based channels all of which were ramping. So in total it's, we're really looking at back to that 9% to 11% of marketing spend.

Going to test iterate and learn.

And scale, what's working well for us from a traffic and conversion standpoint, as well as the new channels that Elizabeth alluded to such as the ICM channels and the Influencer and brand based channels all of which were ramping so in total it's.

we're really looking at back to that 9% to 11% of marketing spend.

Next, we go to the line of Kunal Madhukar with UBS. Your line is open. Hi. Thanks for taking the questions. Hopefully, if I could one, Freestyle revenue increased 40% year over year UK revenue has doubled. What does that mean for the core business US revenue? Did that increase or decline? That is one. And secondly, can you talk to the effectiveness of the Algo plus Stylist plus the Preview. Then 80% of the Fixe,s the first Fixes have at least one accept, which means 40% don't have any accepts. And there could be more non-accepts within that 80% kind of vicinity. So how effective is the Algo? How effective is the Stylist and how effective is the Preview? Thank you.

Hi, Thanks for taking the questions hopefully if I could one.

Please turn revenue increased 40% deal whether you get revenue has doubled.

What does that mean for the core business U S revenue.

Did that increase or decline.

That is one. And secondly, can you talk to the effectiveness of the Algo plus Stylist plus the Preview. Then 80% of the Fixe,s the first Fixes have at least one accept, which means 40% don't have any accepts. And there could be more non-accepts within that 80% kind of vicinity. So how effective is the Algo? How effective is the Stylist and how effective is the Preview? Thank you.

And secondly can you talk to the effectiveness of.

The Alibaba.

Yes.

The preview.

80%.

All the fixes the flow switches, however, at least one et cetera, which means 40% don't have any assets.

There could be more broad access and within that 80% kind of this entity, So hope where somebody just days.

Effective as the algo.

Our effective as the stylist and highly effective as the PV.

Thank you.

Yeah. Thanks, Kunal. I can take that and Dan, feel free to chime in. Yes, we did mention those growth rates with Freestyle. And the UK. So freestyle is still a much smaller percentage of our business than Fixes. So the core Fix business is growing. The UK is an earlier stage market and we love what we're seeing there because there's a lot of confidence of global expansion. And we know, as I mentioned with Freestyle, that as we get more new customers into that experience, which we're very early stage on that growth rate really represents subsequent purchases by existing Freestyle customers that were already Fix customers. So I think we're very early stage of opening up Freestyle to new customers.

Yes, we did mention those growth rates with freestyle.

And the U K to freestyle is still a much smaller percentage of our business in Texas for the <unk> business is growing.

The UK is an earlier stage market and we love what we're seeing there because there's a lot of confidence of global expansion and we know as I mentioned with freestyle that as we.

Get more new customers into that experience, which we're very early stage on that growth rate really represents subsequent purchases by existing freestyle customers that were already six customers. So I think we're very early stage of opening up freestyle to new customers.

And we are still seeing growth in that core Fix business. On the effect of Algo plus Stylist plus Preview. We've mentioned the strength and it was an earlier question on what are we have seen with Fix Preview. And we have seen just continued positive increase on keep rate and overall average order value, which really is a sign of the strength of that signal of being able to generate previous for clients and really get the Fix experience right. For clients that don't request specific asks within their Fix, which is about half of our clients. The first step is that Preview is actually algorithmically generated and we've done a lot of testing to show the power of that experience. And then we know in the second step that our Stylists that a lot of value of finishing that Fix out.

On the effect of Algo plus stylus.

Preview.

We've mentioned the strength and it was an earlier question on what are we seen with fixed previously I have seen just continued positive increase on keep rate and overall average order value, which really is a sign of the strength of that signal of being able to generate previous for clients and really get the fix experience right.

For clients that don't request specific asks within their fix which is about half of our clients. The first step of that previous actually algorithmically generated and we've done a lot of testing to show the power of that experience and then we know in the second step that our stylists that a lot of value of finishing that picks out.

I think you referred to that 80% successful for Fix. And we've seen that to be actually a very strong indicator of their first experience and it's a pretty high bar we set for ourselves. It both means that the client not just kept something but they also are positively anticipating their next Fix. And we're constantly working to improve that stat, but if you think about it. This is a pretty a very different experience from typical shopping and yet to have that high percentage be successful is a really good sign of the power of the combination of our data science together with Stylists.

If you think about it.

This is a pretty a very different experience from typical shopping and yet to have that high percentage be successful is a really good sign.

The power of the combination of our data science together with stylists.

Thank you. Next, we go to the line of Youssef Squali with Truist Securities. Your line is now open. Thank you. Two questions from me, please. First, your fiscal year guidance implies I think about 10% growth in the second half. Can you maybe just parse out the mix of growth in unit versus price? Is it fair to assume that the bulk of that 10% is still going to come from price rather than unit growth or active client growth? And then relative to that and maybe stepping back and looking at the bigger picture. If I look at your performance last quarter and then this past quarter the last two quarters. It seems like your LTV to CAC has gone up pretty dramatically. So has your thinking about maybe the growth prospects of the business changed to a certain degree and therefore, you may be putting maybe more emphasis on the economics of the business on the profitability or LTV to CAC standpoint, considering how much better have gotten relative to what you thought maybe a year or two ago? Thanks.

Next we go to the line of Youssef Squali with Truest Securities. Your line is now open.

Thank you two questions from me. Please first your fiscal year guidance implies I think about 10% growth in the second half can you maybe just parse out the mix of growth in unit versus price is it fair to assume that the bulk of that 10% is still going to come from price.

Rather than unit growth or active client growth and then relative to that and maybe stepping back and looking at the bigger picture. If I look at your performance last quarter and then this past quarter the last two quarters.

It seems like your LTV to CAC has gone up pretty dramatically. So how is your thinking about maybe the growth prospects of the business changed.

<unk> certainly degree and therefore, you may be putting maybe more emphasis on the economics of the business on the profitability of our LTV to CAC standpoint, considering how much better. It has gotten you relative to what you thought maybe a year or two ago.

Yeah. Thanks for the great questions, Let me hand these to Dan. Hi, Youssef. You're right. On the back half it does imply around that 10% growth rate. And it is both unit and rates as well, we do as I mentioned earlier, we do expect actives to grow in the back half of the year, especially as we enter into the spring season. We are continuing to see very solid order economics in terms of AOV for both Fix and Freestyle. So it is a combination of both in the back half. It's not a rate only. We do expect units enacted to grow as well. To your second question, on LTV to CAC, I'll remind everyone. We've talked briefly in prior calls about the unit economics of both Freestyle and Fix which are very strong.

Thanks for the great questions, Let me hand, the Sudan.

You said youre right on the back half it does imply around that 10%.

<unk> growth rate.

It is both unit and rates as well, we do as I mentioned earlier, we do expect actives to.

Going to grow in the back half of the year, especially as we enter into the spring season.

Sure.

To see very solid order economics in terms of <unk> for both fixed and freestyle. So it is a combination of both in the back half it's not a rate only we do expect units enacted to grow as well.

To your second question on LTV to CAC.

Ill remind everyone. We've talked briefly in prior calls about the unit economics.

Both freestyle and six which are very strong.

If you exclude marketing on an overall basis, we're north of 30% in contribution profit. So very strong unit economics, very strong order economics, and we're investing a lot in the product and the tech to continue to grow and scale. And so I would not say that we're optimizing for profitability over growth. What we're optimizing for is an amazing client experience that will ultimately lead to higher growth rates and long term free cash flow. And the unit economics that we have, the order economics, the unit economics in the overall contribution profit that we generate allows us to invest heavily in the customer experience, which will accelerate growth on a forward-looking basis.

Good marketing on an overall basis, where were north of 30% and contribution profit. So very strong unit economics, very strong order economics, and we're investing a lot.

And the product and the tech.

<unk> continued to grow and scale and so I would not say that we're optimizing for profitability over growth. What we're optimizing for is an amazing client experience that will ultimately lead to higher growth rates and long term free cash flow and the unit economics that we have the order economics the unit economics in the overall.

Contribution profit that we generate allows us to invest heavily in the customer experience, which will accelerate growth on a forward looking basis.

Great. Thank you, both. We'll go next to Lauren Schenk with Morgan Stanley. Your line is open. Hi. This is Nathan Feather on for Lauren Schenk. Can you just quantify the impact of supply chain disruptions in 1Q and what you're thinking about for the remainder of fiscal '22? And then is that supply chain impact primarily in lower inventory and therefore revenue that you're able to actually get in those specific categories? Or is there some impact to gross margin as well with higher rates? Thank you.

Thank you Luke.

We'll go next to Lauren Schenk with Morgan Stanley. Your line is open.

Hi, This is Nathan <unk> on for Laurence Inc. Can.

Can you just quantify the impact of supply chain disruptions and <unk> and what youre thinking about for that Peter.

The remainder of fiscal 'twenty two.

And then is that supply chain impact primarily in lower inventory and therefore revenue that youre able to actually get in.

In those specific categories or is there some impact to gross margin as well with Harvey. Thank you.

Thanks, Nathan let me hand both questions to Dan. Yes. In Q1, the impacts were muted from supply chain simply because we had ordered in advance of the major delays as our ordering is six to nine months out. That said, we are starting to see the impacts of it coming into Q2. I made the comment on our inventory being down sequentially, we are seeing 1 to four-week delays in inventory. And so we are seeing certain categories lighter in inventory than we'd like. Other categories are fully funded and that does have the impact of Freestyle impacting Freestyle in the back half just because we can't offer the full selection of the catalog in certain categories. Now we are working to manage and mitigate that to the extent possible by placing orders even earlier than we normally would. And ensuring that we are doing everything on our end to alleviate any of the supply chain constraints. But yes. It does have an impact in the back half of the year for us.

In Q1, the impacts were muted from supply chain simply because we had ordered in advance of the major delays.

As our ordering is six to nine months out.

That said, we are starting to see the impacts of it coming into Q2.

I made the comment on our inventory being down sequentially, we are seeing 1% to four week delays and inventory and so we are seeing certain categories lighter in inventory than we'd like other categories are fully funded and that does have the impact. It does have the impact of freestyle impacting freestyle in the back half just because we can offer.

The full selection of the catalog in certain categories. Now we are working to manage and mitigate that to the extent possible by placing orders even earlier than we normally would and ensuring that we are doing everything on our end too.

To alleviate any of the supply chain constraints, but yes. It does have an impact in the back half of the year for us.

Okay, great. Thank you. Next up is Mark Altschwager with Baird. Your line is open. Good afternoon. Thanks for taking my question. I guess Elizabeth, first, to clarify some of your earlier comments on cannibalization. Are your learnings that more new clients coming to Stitch Fix are opting for Freestyle versus trying their first Fix? Or are you seeing that existing clients are either canceling Fixes or changing the fixed frequency once they are becoming more aware of the Freestyle offering? Yes, thanks, Mark for the question. We're seeing really strong metrics on retention of clients with Fixes and in general the continued health of that business. What I was more referring to is in the onboarding process, we're kind of introducing a little bit of a paradox of choice and for some of our clients. They probably are very high intent that just want a Fix.

Next up is Mark <unk> with Baird. Your line is open.

Good afternoon. Thanks for taking my question I guess Elizabeth first just to clarify some of your earlier comments on cannibalization.

Are your learnings that more new clients coming to stitch fix are opting for freestyle versus trying their first fix or are you seeing that existing clients are either canceling fixes or changing the fixed frequency once they are becoming more aware of the freestyle offering.

Yes, Thanks, Marc for the question.

We're seeing really strong metrics on retention of clients with fixes and in general the continued health of that business. What I was more referring to is in the onboarding process, we're kind of introducing a little bit of a paradox of choice and for some of our clients. They probably are very high intent that just want a fixed and.

I think we acknowledge and Onboarding, we may be distracting some of those clients with shopping and freestyle when in reality. They just wanted the support of our stylists. So that's an area of one opportunity and we've already made some adjustments on that and then for those that are really interested interested and just personalized shopping making sure that they get access and availability to that is.

Quickly as possible.

But I think what we found is we.

We expect over time, those two things to be highly additive, but in the short term and part of what we saw in Q1 with that not being as additive as we thought it would be in our new onboarding of conversion, but not an issue to your question of once those clients are inside of our ecosystem.

Thank you and just one more if I may.

You talked about the transformation being kind of a multiyear endeavor and it sounds like there is some bigger tech investments that you are planning here in the near term. So my question is how should we be thinking about kind of the medium term revenue growth algorithm do more of these multiyear investments need to be coming online in order for revenue to kind of reaccelerate back to.

The target ranges, we were seeing prior to 2022.

Yes. Thank you for asking that let me, let me start and then I'll hand, it to Dan I mean first of all I would say, we feel like we probably haven't been as explicit as we could be on the magnitude of transformation that we're going through it's a very exciting phase for the business. If you think about the first.

Nine years of our existence. It was building this incredibly disruptive model of fixes.

And now in the last year and a half we've embarked on our second chapter and it really changes so many elements of our business to build on the foundation personalization that we built so it absolutely takes advantage of our understanding of the stylograph benefiting from a million people playing style shuffle monthly understanding what drive.

Debt, but.

But opening up personalized shopping has a huge set of investments for us to understand and make on making our infrastructure scalable ensuring we're building it to launch into new markets, taking our algorithms that were largely behind the scenes and making them highly available and client facing and so a lot of what we're doing right now are making those investments.

Since we don't have an exact timeline.

But it also means building the right team. So another big focus and you can see that in areas like SBC as we're really growing our tech talent.

Added a new Chief people officer, we've added a number of Vps and directors will actually be looking for a new chief product officer and next fiscal year, our current chief product officer will be departing so theres just a lot of investments, we're making to get that right over the coming quarters and we anticipate we're doing this for the long game of acceleration in the future we haven't.

Given a specific timeframe.

Dan I don't know if you want to add on to that and sort of the investments that we're making.

I will.

I'll just add that obviously there is the investments that are that are shorter term that will have a bigger impact such as our investment in increasing selection.

<unk> that were making the features.

In the Onboarding experience the product features that will launch and then as you noted the investments that we're making in tech and infrastructure, which are basically investments that we need to scale into new categories and new regions those will be a bit more long term.

So I can't answer your question, specifically on growth rates, but there's a lot. We're doing that is going to have an immediate payback and theres a lot that we're doing for the long term to scale into new categories, new products and new regions.

Thanks for all the detail.

And we do take our final question today from Simeon Siegel with BMO capital markets. Please go ahead.

Bottom earlier, one did you say what are you expecting just for gross adds in the guided decline in actives next quarter and then.

The same idea, but a little bit zooming out I think we used to talk about the lapsed customer database being thats really large opportunity to mine for freestyle adopters. So any update on that lapsed customer reactivation learnings you've gotten from the rollout and then just lastly, Dan congrats on that gross margin strength.

Talk about how you view gross margin opportunity from here, maybe speak to the differences between freestyle.

And then any important inventory management discrepancies between the two sorry that was a lot. Thanks guys.

Simeon you were I think we may be missed the very beginning of your question. What I heard was a question on gross adds relative to net in Q2, then activating our prospects and then gross margin were those the three questions or did we miss something in the upfront.

No that was perfect time.

Hey.

Why don't I have mentioned that the prospect opportunity then I can let Dan chime in on the gross adds as well as the gross margin. The first and third question on so I'll take the second.

Yeah. So as Ive mentioned, we have actually millions of clients, who have signed up historically with stitch fix but not converted to fix and so we are always testing doormat reactivation with those base of clients and now that we have freestyle available we're excited to embark on greater marketing and activation.

For those clients and we have seen some accelerated performance with that group, but nothing so big that were kind of pointing it out separately, but we're excited with what we're seeing and see opportunity to just.

Have more to offer to that client base with the opening up of freestyle.

I think it still represents a somewhat untapped opportunity and as we continue to expand the client experience.

I would say is like clients that are in that population that are within one month three months six months. Those are a lot more likely to be engaged in folks that went through that sign up flow two years ago. So we're really focused on the more recently engaged the rest of those folks almost behave like pure new prospects, but it's absolutely a segment that we have.

Marketing too and learning how to activate them with freestyle in addition to success.

Ill hand, it to Dan for the other two questions.

Yes.

Part on gross adds I think it was in reference to Q2 and.

Obviously.

Q2 is one of our weaker quarters that said gross adds so we do expect.

To be.

To continue similar in a similar vein that we saw in Q1, and then before starting to grow in Q3.

And so.

Just given the marketing channels that we have and what we're seeing with the healthy clients that we are acquiring <unk>.

Gross adds will be similar in Q2 versus Q1 and the reason for the guide down in net adds is simply because of the high dollar referrals that we referenced earlier on we are comping that as.

Is that program ran through Q2 of last year before we ended it. So that's a very that has a short term comp that we have which is the reason for the guide on net net.

Net act as being down quarter on quarter before we start to see growth again in Q3.

In terms of your question on gross margin the 47% was a very strong gross margin that we had in Q1, we do expect that gross margin to come down slightly over the next several quarters for a variety of reasons. One we are seeing a mix into more national brands. As we continue to launch that will have a slight impact.

On gross margins and we also are seeing product cost continue.

Start to come up which is really across.

Many industries for that matter.

Higher raw material costs higher shipping costs.

And we do expect gross margins to come down.

And be similar for a full year perspective, as they were in 2021, which was up 45%. So from a full year perspective, we see gross margins trending in that direction for the remainder of the year and for the full year.

Great. Thanks, So much guys best of luck for the rest of the year happy holidays to you and your families.

Thanks Simeon.

Thank you everybody for joining us on today's call. We look forward to keeping you updated on our progress.

Thank you. This does conclude today's teleconference. We thank you for your participation you may disconnect your lines at this time.

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Thanks.

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[music].

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Yes.

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Yes.

[music].

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[music] data.

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Thank you.

[music].

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Okay.

[music].

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[music].

Okay.

[music] data.

Okay.

Thank you.

Okay.

[music] great data.

Okay.

Yes.

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Yes.

Thanks.

Yes.

Okay.

[music].

Okay.

Thank you.

Okay.

Thank you.

Okay.

Yes.

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Yes.

Sure.

Yes.

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Thank you.

Thanks.

Right.

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[music].

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Yes.

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Thank you.

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Please proceed.

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Got it.

Yes.

Okay.

Yes.

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[music] data.

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[music].

Great.

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Yes.

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Sure.

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Thank you.

Yeah.

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[music].

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[music].

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[music].

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[music].

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[music].

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[music].

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Sure.

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[music].

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Thank you.

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Yes.

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Yes.

No.

Thank you.

Please.

Yes.

[music].

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Yes.

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[music] data.

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[music].

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Sure.

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[music].

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Thanks.

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Yes.

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[music].

Yes.

Thank you.

[music].

Okay.

Yes.

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