Q2 2022 Stitch Fix Inc Earnings Call
Good day, everyone and welcome to the Stitch fix second quarter 2022 earnings Conference call Today's conference is being recorded.
At this time I'd like to turn the conference over to Tony Shelburne. Please go ahead ma'am.
Good afternoon, and thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2022.
Joining me on today's call are Elizabeth Spaulding, CEO of stitch fix and Dan <unk> CFO .
We have posted complete second quarter 2022 financial results in a press release on the IR section of our web site investors start stitch fix dot com are.
A link to the webcast of today's conference call can also be found on our site.
We would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements reported results should not be considered as an indication of future performance. Please review our filings with the FCC for a discussion.
As soon as the factors that could cause the results to differ in particular, our press release issued and filed today as well as the risk factors section of our quarterly report on the Form 10-Q for our first quarter previously filed with the FCC and the quarterly report on the Form 10-Q for our second quarter, which we expect to be filed tomorrow.
Also note 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 in its entirety is being webcast on our IR web.
Site and a replay of this call will be available on the website shortly.
I'd now like to turn the call over to Elizabeth.
Thanks, Kenny as we pass the midpoint of our fiscal year, we've delivered second quarter results as expected.
We acknowledge we are not yet where we want to be with new client acquisition and conversion, which will weigh on our outlook.
As you saw on our press release, we have provided guidance for the third quarter as well as for the full year revenue. However, we have withdrawn our full year EBITDA guidance at this time, which Dan will discuss later.
Before I go into the details of our results I want to level set on where we currently are and stitch fixes journey and why we continue to be confident in our long term success, despite recent and near term challenges.
We remain confident we are taking the right steps to become the global leader in personalized styling and shopping.
We're continuing to improve onboarding and client conversion.
How we market and enhance our overall client experience.
We discussed on our call last quarter that our journey is not a linear one.
With that let me turn to our Q2 results and the factors that influenced our performance.
Topline revenue grew 3% year over year to $517 million.
Long with gross margins of 45, 1% and $10 million and adjusted EBITDA.
Our Pac reached a new record high of $549 in the second quarter and freestyle revenue grew at nearly 30% year over year.
We ended the quarter, serving approx approximately 4 million active clients, an increase of 4% from a year ago.
Active clients declined 4% quarter over quarter.
There were two factors that largely impacted gross adds.
First conversion of new visitors extra fixed and freestyle is not where we want it to be.
Given changes in iOS 14, marketing channels that have historically been effective for us are presenting challenges in effectively targeting clients.
I'll elaborate on each of these points further however, as a result, we experienced lower gross client additions and also opted to pull back on marketing spend in the second quarter.
We invested six 8% of net sales for the second quarter relative to eight 3% in the same period last year.
Also higher dorman fees contributed to lower active clients for the quarter. As a reminder, we had higher dormant seed in Q2 due to lapping of the high dollar referrals from last year, which we ended in Q3 of 2021.
I wanted to touch on the point I mentioned earlier about conversion and provide some further insight.
And our efforts to launch and promote freestyle, we chose to direct visitors coming to stitch fix dot com towards the freestyle experience it.
It is important to note that stitch fix dot com is the primary landing page for customers interested in ordering ethics.
Therefore, and leading clients to the freestyle experience first we inadvertently created friction for those seeking a fix.
In an effort to mitigate this friction we are beginning to direct stitch fix dot com traffic to a clear and easy fix onboarding path. We expect this to boost new fixed client conversion over time.
This change in Onboarding, so should not be taken as a change in our long term vision for freestyle, which is to unlock a much larger tam through daily shopping styling and inspiration.
As we've shared in prior calls we believe the Tam potential is two to three times larger than the fixed business alone.
We're still learning how best to onboard free South first clients and recognize we have work to do on the freestyle experience.
We've learned that freestyle first clients are coming primarily through product listing ads and other marketing channels that were not available to us prior to launching freestyle.
We will continue to test learn and iterate and how best to use these new marketing channels.
Also recognize that we have work to do to improve the freestyle client experience. So we can convert more visitors to active clients and make freestyle the growth engine, we expect it to be.
We have already made changes to enable a better logged out experience, including the ability to add multiple items to a shopping bag and checkout while logged out.
We also understand that there are a number of basic but necessary features we need to atrophy styles, such as search functionality, which we plan to introduce in the coming quarters.
Ultimately, we believe the efforts I've discussed both around fixed and freestyle will help drive improved new client conversion and.
And we will be prepared to ramp marketing spend when we get the client experience right.
The lower net client adds we have experienced in the first half of the year have impacted our revenue and are driving our revised outlook for the back half due to the compounding nature of fewer new clients buying power.
However to reinforce my comments really started the call. We are confident in our long term strategy and we're seeing clear signals that we are taking the right steps for the future of the business.
We believe the combination of fixed and freestyle demonstrates the potential of our future ecosystem as we observed behaviors of our existing and new clients.
Our Pac reached a record $549 in the second quarter up 18% from a year ago.
A result of higher average order values in our fixed business, which are up 5% from the second quarter of fiscal 2021 as.
As well as the increment holiday provided by freestyle to our existing client base.
<unk> revenue grew 29% year over year and penetration from our fixed business is steadily improving with over 32% of our women's fixed clients purchasing by freestyle today.
Additionally, our recently acquired customer cohorts are engaging with us more holistically spending over 25% more on average than fixed and freestyle combined then clients acquired in the comparable month in 2020 , one and over 15% more on average than in 2020.
The 90 day, our pack a measure of quarterly net revenue divided by clients that made one or more purchases within the same quarter is up 8% year over year.
With the combination of sticks and freestyle. We believe we are better able to meet the consumer needs to fit and discovery and search based shopping there.
The return rates, we see in freestyle, which continue to perform at less than half of E. Commerce peers underscore why we are confident in our direction.
I will share some final thoughts with you after Dan goes through our results and our guidance in more detail.
Thank you Elizabeth and Hello to everyone on the call.
Today, I'll walk you through our quarterly results as well as share the inputs that build our outlook for Q3 and full year.
In the second quarter total net revenue of $517 million landed within the guidance range, we laid out last quarter and represents 3% year over year growth.
As Elizabeth noted earlier revenue for the quarter was largely impacted by client conversion as we iterate on new acquisition and Onboarding methods.
We also continue to learn and iterate on freestyle, which grew 29% year over year.
Our women's business inclusive of both fixed and freestyle grew slightly in our men's business was down as we continue to expand assortments with a focus on adding more nationally recognized brands.
At the same time, we were pleased with this with the sustained momentum in our kids and U K businesses, where we saw 19% and 73% growth respectively on a year over year basis.
Net revenue per active client for the second quarter was $549, representing our third consecutive quarter of record our pack.
As a reminder, our package based on net revenue over the last four fiscal quarters divided by ending number of active clients in the most recent quarter.
Yeah.
When we take our newest subset of clients and assess the related 90 day, our pack that number continues to rise at a healthy pace up 8% year over year.
Additionally, subsequent checkouts per new client have increased nearly 20% since FY 'twenty, giving us confidence that we're on the right path once clients into our ecosystem.
We ended Q2 with approximately 4 million active clients. This was down 161000 from the prior quarter as we continue to face challenges on optimizing the client experience and onboarding for new clients.
Net actives were also impacted by iOS 14, privacy changes that limited our ability to target and measure advertising.
As well as higher dorman fees due to the lapping the high dollar referral program for new customers in the first half of 2021.
Q2, gross margin was 45, 1% representing growth of 214 basis points from a year ago, primarily driven by leverage in shipping costs due to higher average order values and improved product margins.
Gross margin declined 190 basis points quarter over quarter, driven primarily by higher inventory reserves.
Q2 advertising was six 8% of net revenue of 149 basis point decrease from the same quarter last year and a sequential decrease of 188 basis points from Q1.
As mentioned previously we continued to face challenges in new client conversion and therefore pulled back on advertising in the second quarter to remain efficient with our spend.
As Ive stated several times before we adjust the spend to ensure we are managing to our targeted return on ad spend.
As we work to improve Onboarding and conversion.
We will ramp our marketing as appropriate to optimize for long term free cash flow.
Yeah.
We will also continue to test into new marketing channels and May increase spend in these channels based on our testing results.
Other SG&A, excluding advertising was 44, 2% of net revenue in Q2 of 156 basis point increase from the same period last year and a sequential increase of 560 basis points from Q1.
The increase year over year and quarter over quarter was primarily due to increased head count, including head count in our product and tech organizations.
The increase versus Q1 was also impacted by lower net revenue quarter over quarter.
Adjusted EBITDA in the second quarter was $10 million, largely reflecting the lower marketing spend during the quarter.
Okay.
Net inventory ended the quarter at $183 million essentially flat quarter over quarter.
Well, 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 seeing four to five week lease for a large portion of our product, but we do not believe this has had a material impact on our business given our current inventory levels and our mitigation efforts such as earlier bookings.
Free cash flow year to date was $94 million, primarily due to favorable working capital.
In early January our board of directors authorized a $150 million share repurchase program.
During the quarter, we repurchased $11 million worth of company stock against the $150 million authorization.
We ended the quarter with no debt and $349 million in cash cash equivalents and highly rated securities.
For Q3, we expect net revenue in the range of 485 million to $500 million, representing a decline of 10% to 7% year over year.
We expect adjusted EBITDA in the range of negative $30 million to negative $25 million or EBITDA margins of negative 6% to negative 5% of net revenue.
This takes into account the lower new client ads for the first half of the year, resulting in continued weaker revenue due to a lower number of subsequent fixes in the second half of the year.
This guidance assumes that net active clients remained flat to slightly down quarter over quarter.
Given the softness of active clients in the first half and the uncertainty in the timing of improvements in conversion we are lowering the prior full year revenue guidance, we shared on our December seven 2021 call.
For the full fiscal year, we now expect revenue to be flat to slightly down year over year.
This full year guidance assumes active clients are flat through the end of the year as we continue to learn and optimize for new client conversion.
We are actively evaluating our marketing spend as we manage these improvements to onboarding and conversion and therefore are withdrawing full year EBITDA guidance at this time.
We were very disappointed that we're not showing growth for the third quarter and full year. However.
However, the positive unit economics on the freestyle business gives us confidence that the combined experience is the right path forward.
When excluding marketing the contribution profit of freestyle is 10 percentage points higher on a per order basis versus our very profitable fixed orders.
Once we scale. This business, we believe it will provide leverage in our overall margins.
As we previously mentioned, we expect to increase marketing as our conversion improves and as we test into newer marketing channels. We will also take a renewed focus on our cost structure with an emphasis on fixed and variable cost productivity.
Our efforts will take time and it's critical that we demonstrate execution over these next few quarters, which includes building an exceptional client experience that leads to increased new active clients and growing penetration in freestyle.
We look forward to updating you on our progress as we go through this transition.
Thank you Dan looking forward, while we know we have challenges ahead, we remain focused on continuing to expand and transform our offering and to drive awareness of stitch fix as the destination for personalized shopping styling and inspiration leveraging our unique combination of data science and creative human judgment.
As I noted earlier, the fixed model gave us a 10 plus year advantage of bringing data science and creative human judgment together.
Wowing us to solve and address the most critical pain points for consumers and online shopping the.
The challenges of fit discovery and building relationships.
On fit we better meet the consumer needs to fit then search based shopping highlighted by our return rates and freestyle, which continued to perform at less than half of traditional apparel e-commerce .
On discovery.
Outfit inspiration is a meaningful differentiator for stitch fix therefore, we recently scaled our stylus generated outfits to be a higher percentage of what clients can browse and freestyle.
Since launch Stylus have created nearly $2 5 million outfit, which has resulted in a lift to overall sales.
On buildings feedback based relationships.
A core part of what powers, our ability to personalize selection are the moments of interaction and engagement that clients have with our stylists and broader stitch fix community.
<unk> provides rich actionable feedback as they see the value and getting better fixes and freestyle experiences.
Showcased by the $9 5 billion style shuffle ratings to date.
Item level feedback in fixed preview and community inspiration board.
By extending our model, which freestyle we aim to meet the on demand expectations of today's consumer in a unique way powered by personalization and styling capabilities, which is stitch fix this core.
We continue to deeply believe in freestyle and appreciate everyone's patience as we evolve it to be the growth engine, we expect.
I believe we are well positioned to execute against our vision and we continue to take steps to further strengthen our team.
Turning to the recent appointment of our new CTO fashion Darwin, we have made a number of other seasoned hires across our product engineering and algo team.
We will plan to share more detail on our progress and roadmap to improve the client experience in the coming quarters.
With that we are ready for your questions operator, I'll turn it over to you.
Thank you if you'd like to ask a question. Please sidney by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again that is star one if you would like to ask a question.
And we'll take our first question from Youssef Squali with.
<unk>.
Great. Thank you very much Youssef squali of truth. So two questions for me. Please one just doubling back.
Double clicking on on on the.
The issue at hand, the on boarding and client conversion and retention.
Have you been able to to kind of figure out exactly what the root cause is because we've talked about it on the last earnings call. It seems like the reasons have changed a little bit I just wanted to make sure that.
We're still talking about the same issues and then.
How are you guys try it.
I I think Elizabeth you talked about.
Some early tests to try to revert that that trend that that give you confidence that you know on boarding and client conversion will will improve over time, although it will take time. So that's the first question and then second maybe Dan.
You're withdrawing the the EBITDA guidance. So I'm just trying to understand the logic for that since you are guiding to a flattish.
Flat to slightly down revenue what are the puts and takes that.
We we have to take into account as we look at the bottom line for 2022. Thank you.
Thank you Seth I can start on the first question on Onboarding conversion and then I'll hand, it to that Dan for your second question. So as we mentioned.
To some extent on the prior call and now I think we've continued to learn more.
That we have really focused for stitch fix dot com on redirecting that traffic to ethics first onboarding flow. We believe that we created friction when we introduced free style to the landing page give any intent at the majority of those clients coming to our site with four effects.
We're learning a lot right now about what those expectations are and so we have now honestly, we probably have realized in retrospect, we could have moved faster, but we're where we want to be now and are now continuing to make progressive improvements in incremental testing. So we've reverted in many ways to make it easy to get directly to that fixed.
And then we're doing a bunch of other things right now in parallel to make it an even lower friction experience for our clients things like testing newer and improved landing pages, a frustration that we have the plant even before we introduced freestyle was having confidence that they were gonna see merchandise and price point that they liked so introducing testing.
On a landing page that gives a better sense of what stitch fix has to offer as well as just making it frankly very very simple and clear of what do you expect once inside the experience.
Another area that we see opportunity of testing incentives, that's a pretty common thing with new customers coming into a new experience.
And then what we mentioned on the prior call and we continue to be working on it.
It's just more of a progressive onboarding experience that makes it really easy to get into fixes plus restart from the very beginning we require quite a bit of information to personalize and we think there are ways to progressively got that information over time, and then I think the other area in parallel that I mentioned on the call is that we are opening up.
These new marketing channels that we have yet to scale. So clients that are landing and that's logged out experience of a product listing AD. We believe these clients are very high intent freestyle, they're ready to buy something and there are a lot of basic but necessary improvements that we're making to that experience as well we'd be onto already makes some like on getting the shopping bag.
But over time on getting the exploration of product categories, you know, giving access easily to engage with a stylist and so it's really a combination of those things that we're working on now and believe we have a good sense of what needs to improve for consumers.
I'll, let Dan answer that the EBITDA question.
Yeah, Hi, you ship to the to your second question one of the reasons why.
We're not giving EBITDA guidance for Q4 now is we have.
A reasonably healthy budget plan for marketing in Q3, as we mentioned as improvement as conversion improves we'll spend more on marketing.
Because it will be within the logos that we have and we're also testing new marketing channels and so the way to think of Q3 is going to be similar to Q3 of last year and approaching that.
You know that 10% a marker that we have of advertising.
And then we'll see how that performs in Q3 as we continue to look at the conversion and the efficiency of the marketing channels and then we'll make decisions on Q4 and while that has a direct correlation of active just the revenue is much more predictable because a lot of the revenue that we get when we get in actives in subsequent quarters and subsequent fixed.
So that's the reason why we are waiting for in Q4, it's really a function of the marketing that we have planned and how it performs in Q3.
Okay. Thank you.
Okay.
Thank you we'll take our next question from Mark Mahaney with ISI.
Okay.
Okay. Thanks.
Let me try to start off with two questions, what's happening with retention rates. So I.
I think one of the thoughts we had was that freestyle would help maybe boost retention of existing customers more value prop more use cases, so what's happening with retention and then secondly.
On the iOS 14 challenges like.
How confident are you that there is a work around and this is kind of an industry. This is obviously an industry wide issue and do.
<unk>.
Do you think that Youll.
What's your thought about how to get back to where you were before there were some very effective marketing campaigns ran prior to that but that was based on personally identifiable information that's just not.
Available now so.
How would how does that get solved or does it only partially solved and where do you think those solutions will come from thanks a lot.
Yeah. Thanks, Mark I can start on the retention and then I'll hand, it to Dan Dan for the second one.
Yeah, we really like what we're seeing on retention rates I think both we mentioned in the call the higher average spending per client being up 25% year on year with our newer cohorts participating in both fixes and freestyle. The other thing, though that we're absolutely benefiting from from the combination of we believe fixed preview together.
With freestyle are higher retention rates and we look at our seven day auto ship churn you know our clients sticking with us on maintaining their programs with an auto ship and then we also look at retention after the first fix and we've actually seen very meaningful improvements on both of those north of 20% year on year and so we feel very good.
The improvements that we've made in our experience are driving higher client retention. We also feel very confident that we're acquiring very high quality clients removing things like those high dollar credit referrals that we talked about in the past. So the combination of those we think we have a very very healthy client mix within our ecosystem and more more to do with.
You know there are product categories that are also driving that up where we know clients are spending on different product categories and freestyle on iOS 14, I think the one comment I'll make and then I'll hand, it to Dan as you know, there's just frankly a ton of marketing channels that we have never participated in that are just very very early that are now opening up for us that are less impact.
<unk> by the IRS privacy changes, but.
But let me, let me hand, it to Dan to share more there.
Yeah Mark.
We.
We do suspect the privacy impact will be to be impactful in the short term until you know other channels help us find a way around that that said, we are optimizing for different creative and testing ways to continue in that channel, but I think Elizabeth touched on the more important point is the additional channels.
We have available to us and some of that mainly SCM based channels, we find traffic to be very positive to the site now again conversion isn't where we want to be on the freestyle experience, but we have a lot of added features a lot more selection coming in and a lot of optimizations that we're working on Elizabeth shared some.
Those early on in the call that we feel will improve conversion in the near and medium term and as we improve conversion. We will continue to spend more on those channels. So that is not a traffic issue.
Really a you know a client facing issue that we're very focused on to improve conversion so with a different marketing and that's just one channel. There. There are several others that we're experimenting on and there are several others that were to continue to improve including our organic social.
In other channels that we think can be a significant traffic drivers for.
For a potential active clients.
Okay. Thanks, Dan Thanks Elizabeth.
Yeah.
Thank you we'll take our next question from Ross Sandler with Barclays.
Hey can I follow up on Mark's question on retention. So I think you said UK and kids are growing nicely and freestyle is growing nicely. So just looking at the core women's fix business could you talk about retention.
Are you seeing there.
In the context of as Youre building out freestyle.
Trying to revitalize the.
Selection, how do you feel about your selection in your inventory position in the core women's fix business.
And just remind us Dan.
The high dollar referral program I know, that's creating a tough comp when do we fully kind of lap through that is that.
One was that my kind of peaking last year.
Context on that would be helpful. Thanks, a lot.
Thanks, Ross I can take the first one which I think you're trying to get some insight to women's and men's and how that's performing and we feel good about what we're seeing on retention you know, obviously women's being the largest part of our business that drives a lot of those are pack numbers and we continue to see really good things in terms of overall.
Spend in new categories that are being driven by freestyle like footwear second layers, we started to introduce more sleepwear in the Q2 period and all of that we feel really great about that what we're seeing in terms of growth rate. There is really a function of the new gross adds that are just lower than where we'd like them to be.
Given all of the other part of the conversation here on both improving the client experience, making it easier to enter both through.
Stitch fix dot com and then our new landing experience as well as the efficacy of marketing channels. So we feel good about the retention rates those are improving we'll feel good about average spend it's really about driving net new clients into the ecosystem, which is something isn't it first and foremost priority for the team.
On the lapping of the high dollar incentive referrals, Dan do you want to take that one on when we finish that lapping yeah. I will we ended that program in late February . So we do have a month that we just finished lapping it wasn't as impactful as Q1 and Q2.
But we did have some of the hydro referrals, but we are through it now as we as we enter margin and go forward.
I also did want to just follow up on your question on men's the men's brands.
No I think that is an area and in womens where we added.
It's a national recognized brands and specifically on the men's because I mentioned it earlier on we have added some very prominent brands that were happy with Nike vans Levi's champion and Uggs were added and we have more planned for the back half of the year. So we are moving forward with bringing more nationally recognized brands to the men's business.
Okay.
Okay.
Thank you we'll move on to our next question from Simeon Siegel with BMO capital markets.
Thanks, Hey, good afternoon, everyone.
Might be a mouthful, but the 90 day our pack is a helpful metric. Thanks for giving that do you want to give the actual dollar number. That's there. In addition to the growth rate do you plan on giving that metric going forward and then do you have a similar 90 day type of active client growth metric and then Dan just any any color I get the marketing conversation because you can.
Think about <unk> and the full year any color on gross margin or non marketing SG&A you can speak to.
Yeah.
We are looking at looking at different metrics on actives on the 90 day side and what we're what we're waiting on is just to understand the freestyle actives and what that looks like it might there might be mix impact there and so we're hesitant to give that number out until we actually see the trend on it. So we can explain it better it's a great question and.
It's something we want to actually look at doing so we just need a little bit more time as we look at the clients who come in directly to freestyle versus those who come in with fixed and then engage in freestyle and so theres some mix going on in there and so we want to make sure that we can explain that adequately so stay tuned for that.
And to your question on more insight into marketing.
And I just wanted to clarify I said earlier that on the marketing for Q3.
Going to be around that 10% Mark of revenue, which is something that we are we generally have hit in the past and that's where it is for Q3.
And then to the point on margins, we do expect margins to be in line with where we have them right now with some potential pressure in Q4 as again just given the cost structure. We don't think it's going to be meaningful yet, although we are starting to see that.
We said last last quarter that for the full year, we expect gross margins in that 45% and we're still on that trend.
Great. Thank you and then just maybe Holistically you mentioned the higher margins of freestyle. So that as you scale that helps do you want to just talk through maybe why so what makes the pre salt margins higher.
Yeah, It's a great. It's a great question and so you know there are there are different puts and takes on freestyle in the gross margin line.
But the biggest impact is.
The relatively small styling components. So when we do styling for freestyle it scales across the whole of the whole freestyle experience and so we do have stylists working actively on outfits and other features within freestyle, but it scales across the whole experience and so we see a significant improvement in contribution profit I think.
The other side of that is.
It's just the the Ao vs. The average order values that we see in freestyle are very strong and very healthy and they're not as Elizabeth mentioned, our return rates are relatively low.
Versus normal in the industry and that helps.
Net of returns.
And so we have lower return shipping costs because of that so those are the two primarily factors that drive that that improvement in contribution profit, which is excluding marketing that I referenced earlier in the call.
Great. Thanks, a lot best of luck for the rest of the year guys.
Thanks Simeon.
Thank you we'll take our next question from Mark <unk> with Baird.
Hi, Good afternoon. This is sure Goldberg on for Mark Thanks for taking our question and we're hearing more brands and retailers call. It strengthened work in occasion driven categories are you seeing the same in isn't is your inventory mix position to take advantage of a recovery in these categories.
Yeah. Thanks, Sara for the question I can't answer that I E. We actually see a lot of fluctuation depending on the month and a lot of the benefit of the signal we get from clients, whether it's in our request knows whether it's what they're engaging with in freestyle gives us.
Quite a lot of ability to adapt.
In Q2 versus Q1, we saw an uptick in casual for women's both in fixed and freestyle, we did see an uptick in social on occasion, where during our Q2 in part because we increased our investments as a merchandise team to add more for the holiday season for our clients and then.
On the Workwear front, we did begin to see some increases there pre January but in the month of January we actually saw a reduction.
<unk> relative to the growth we had seen at the beginning of the quarter and we often see that trend as we have seen spikes in COVID-19 and so with the omicron variant. We think that was a big driver of it that might've been questioning a bit some of the return to work and so we saw a bigger gains in athleisure during that month. So it's been a little bit up and down I mean, I think if we look over the arc of the law.
Last six plus months, we have seen growth and those work and use occasions and more going out than we did a year ago, but we continue to see a lot of strength.
It athleisure and comfortable categories that we believe will continue to be a big driver, especially with hybrid work, we feel really good about overall, our merchandising mix and our ability to adapt.
And also just the higher quality of trend spotting that we have between client notes and a lot of the signal that we capture in the experience.
Yeah.
Great. Thank you.
Thank you we'll take our next question from Tom mute leakage with Wedbush investment Bank.
Hi, everybody. Thanks for taking my question.
I want to follow up on the <unk> been about the.
The onboarding conflict in the kind of directing people to.
Freestyle first holiday.
The friction for that.
The fix the fix first.
Customers.
This may sound, a little silly, but.
I mean, given that you know freestyle has a much bigger tam opportunity.
Yes.
Fixed.
And Shannon.
Verbal order economics.
Could maybe make the case that.
Okay.
Not really a bad thing kind of having the onboarding.
Be more style oriented maybe you would have some friction in the near term, but as freestyle grew.
That would become kind of less and less about.
Hindrance.
I guess I guess I'm kind of trying to think like why not sort of go.
Maybe more aggressive towards freestyle are kind of all in on freestyle.
You know kind of fix maybe sort of dwindle down over time, So you can see.
Like the prospects for.
Freestyle.
Economics of freestyle are much more favorable.
Thanks, Tom for the question.
I think we absolutely believe in the growth potential for freestyle and really what we think of as the ecosystem of freestyle plastics is freestyle in many ways equals.
Dialing on demand it takes the best parts of what stitch fix does it so unique which is removing all the noise for consumers and helping them does he think that fit them Jesse things that demonstrate their preference and style and with the value added touch of outfits and styling advice on how to we were thank you now we all get dressed every day, even though we might buy one.
Item at a time, we wanted to know how we're going to actually where it and all of those things are demonstrating the results, we really love to see them freestyle that said the ecosystem together is where we see tremendous value in our best clients are participating in both in a very value added way they loved the advice and the guidance that they got through the fix experience and we would imagine over time.
Duality, plus more around inspiration and community of being really a rich part of the overall experience and so in terms of you know.
Going after Jeff's freestyle, it's really the ecosystem that we see as valuable and meeting all of these purchase of needs for consumers and we know that there are some consumers that really would love for us to do all the work for them. They will probably be very fixed focused customers and then theres a lot of consumers who love to shop. In fact, what we think is the highest value women's segment a more fashion.
Segment, who spends the most really does enjoy shopping and sort of leaning forward and natura freestyle and that on demand experience. We think is giving us the ability to better capture that.
And that consumer segment their share of wallet and so it's more of an and then in or in our minds and getting better and better and better at an exceptional customer experience and allowing landing through high search based intent channels that Dan mentioned, you know those are still really nascent for us for many E. Commerce players 80 to 90.
Percent of their traffic is coming from channels that we historically have not participated in at all whether it's SCM SCO.
Item based advertising, we just haven't participated in those channels and while we're starting to see really healthy traffic from those we still haven't scaled the marketing to do that.
And so I think what we believe in terms of the core dotcom is let's make sure we're getting it right for fixes today, that's still where a lot of our core dot com traffic is coming from but over time, what we would imagine is converting those clients into a combination of six plus freestyle right out of the gate and making it very easy for them to access.
Yes, personalized shopping immediately and we're not we're not even really in the testing mode of that yet, but that's where we see the future and to your point fully unlocking this Tam, which we think is two to three acts on the fixed business alone.
Okay. That's helpful. Thanks very much.
Thank you we'll take our next question from Kunal <unk> with UBS.
Hi, Thanks for letting me ask the questions a couple if I could one on the on the core fixed side and the other one on freestyle and so as you look at the core fixed side.
The way I kind of understood one this high.
Hi.
Customers were like 75 to 100000.
You get what you lost this quarter it was like 161.
Which means that the gross adds were not coming much much lower does that potentially point to like maybe a saturation out there.
In terms of if you wanted to hit any one that was already considered in subscription and so now you're like you're kind of looking at much lower gross add number in the future that's on the core fixed side.
On the on the freestyle.
As you look at like you know with the market's gone up open mobility opened up on Micron gone.
You were facing a lot more competition from offline online omnichannel retailers.
No.
The whole works so as we think of like freestyle economics going into the future should we think of like the higher marketing intensity associated with freestyle just because the competition is so much higher and then.
A quick follow up to that would be if you are going to institute a search based.
Uh huh.
<unk> core customers.
That is the that is the styling algo and all the data that you're using to kind of present, just the right thing for the right customer how does that work with search you can find like you know if I'm if I'm, telling you exactly what I wanted.
Thank you.
Could all lots of lots of good questions. There why don't I start and then Dan feel free to chime in I think your first question was around the health and acquisition of core fixed given the lapping of referrals and I think a lot of that's been answered in our prior questions around conversion and marketing spend given the conversion funnel improvements that we need to continue to make together with.
Reductions in marketing spend that really is the driver versus I think I was hitting a saturation point of fixes. We feel confident there is still headroom there to be able to bring clients into that business. Your second question around freestyle and how that will be impacted by stores opening back up the omni channel.
We believe that we are highly differentiated in our ability to address the biggest challenges that ecommerce faces and even frankly in store try on of apparel, which is fifth discovery.
As well as human relationships, if you think of it as a consumer even walking into a physical store.
98% of what Youre seeing in that store is not relevant in a lot of the frustration that consumers have around finding items that fit them and finding things that are they're going to love and that match their style and pushed their boundaries and that's what we do best and so we.
We believe firmly that consumers will continue to migrate.
And look for more convenience based experiential way.
Ways of shopping and that's what we believe we are uniquely suited in a category of one to deliver on higher marketing you know I think we're learning all these new channels and that's still early days and remain to be seen kind of how that evolves and then on your last point on search based shopping we want to do that you know as the most consumers that are highly <unk>.
Highest ASP per feature within freestyle, even for existing clients that love what freestyle is.
Might be trying to find a particular brand they might be in the mood for a very particular item and what we intend to do is.
Launch an alpha version of that future very soon but over time, they get really unique to what stitch fix does that you know well.
Be surfacing items that are in your size, but will also add features over time like you know showing it in an outlet based laid out showing how you could wear it maybe with items that are already in your closet and so we see a table stakes version of the importance of search to just make the overall freestyle experience better but over time, we intend.
To further enhance the way, we do search to be uniquely stitch fix based experience.
Yeah, I'll just add one comment in the middle question on the freestyle experience.
Just to give a data point is.
Our outfits based widget, which is highly personalized oh, we have nearly 40% of our purchases coming from that which just shows you how different our freestyle experience is relative to others and we're going to do more on that Elizabeth talked about the search a search bar or a search widget being differentiated so I just want.
Wanted to throw that data point out there, it's very meaningful it's something we're very happy to see that and there is so much more we can do with that just given our technology and our stylists.
Thank you.
If you don't mind.
And if I'm still alive.
One quick follow up question on one of the things that we had kind of heard all true is that you have a list of like a humongous number of people that have been touch with customers in the past that you could target with the with freestyle.
How how good the response has been on that front.
Thank you so much for answering all my questions. Yeah. That's a great question are we actually really like what we're seeing there we think it's still nascent but to your point you know we have several million clients, who have entered that dormancy stage that we think would love to come back to stitch fix. So we you know we always have kind of some always on channels within our CRM.
<unk>.
To activate historic clients and our historical activation with obviously affects we introduced freestyle as an activation channel a year ago little over a year ago, plus once we have that available to our clients. What we've seen year on year for Q2 is that our reactivation are actually up.
Over 10% and the entirety of that increase is through free style. So fixes were about flat in terms of reactivation that freestyle was a whole new channel of being able to reactivate clients, which gives us a lot of optimism that that is an exciting way to bring clients back in and I think part of that is finding out the right way to reach.
And meet the attention of those clients, we largely do that by email today and so as we continue to explore and get better at a lot of these new marketing channels. We've been talking about what are the ways to reignite excitement with those historic clients that you know maybe loved us before and might love us again, especially as we.
We're expanding our ecosystem.
Thank you really appreciate it.
One of the questions.
We can now.
Thank you we'll take our next question from Cory Carpenter with Jpmorgan.
Hi, This is Katie on for Cory. Thanks for taking my question. We noticed that you ran its first ever sale in January .
Can you just discuss what any lessons learned would you consider doing that again and can you talk about your promotional strategy more broadly.
Yeah, I'll, let thanks, Katie I'll, let Dan take that one yeah. We did we did run a promotional event.
We've also run a clearance event as you probably saw and I think we've said or I'll say that the clearance event is it really just us.
US looking at some inventory and clearing it out in a way that can benefit our.
Our clients as well as just better for US financially. It was very small it was under 3%.
Of our inventory that participated in it and we view that as a test and we thought it went very well and so we'll potentially do more of that in the future, albeit at probably a programmatic way and then we have a we have run.
Some some different promotional events as well.
Some get X dollars Opex orders and would that also was very successful our clients do like that.
And it's a way for us to engage in them and we'll continue to run those programs as well, but again on a programmatic basis in a thoughtful way.
Yeah, and Katie maybe the one thing I would add is with opening up freestyle I think there are more opportunities for us to play into consumer sentiment at different time periods. You know one thing that has always been a great value to our clients is our by five discount with Texas and now with freestyle you know there are moments like end of season or even.
Special offers for clients within their own personalized store.
So we see a lot of opportunity to be boats differentiating on these areas of fifth discovery and relationships as well as providing great value to our clients in ways that are opening up to us through freestyle that were harder to Dubai fixes.
Great. Thanks.
Yeah.
Thank you we'll take our next question from.
Brocato with Wells Fargo.
Hey, guys two.
Two questions a quick one for Dan Dan Just said I think you gave a lot of color, but can I. Just ask you explicitly are you guys expecting the adjusted EBITDA margin in Q4 to be negative.
Further.
Color would be helpful. And then Elizabeth more higher level for you I guess my question is.
There are some issues in growth you can see.
And it sounds like you guys are ready to kind of re ramp up.
Growth of Opex and marketing.
When you kind of figure some things out I guess my question is.
What does it what would it take for you to kind of take a bigger step back and maybe look to cut subs and focus more on a smaller sub base. I mean, you guys had your biggest your largest operating margin. When I think you operated a little over 1 million active customers I'm, not saying, that's where you need to go but but what would it take for you to kind of reassess the cusp.
<unk> base and try to run maybe a smaller but more profitable business I'm just kind of curious your thoughts at a higher level there.
Yep.
Why don't Dan start with EBITDA and maybe he can give his initial thoughts on the second one and I can add on.
On the EBITDA again, because as we acquire active it does take time for them to spend and our ecosystem. So.
One of the reasons why we didn't give guidance is because we wanted to understand what our marketing spend in Q3, and how efficient is as well as those who continue to see progress in conversion. So.
I would expect EBITDA to be negative in Q4, but again, where we're not a we're not giving specific guidance at this time.
And on your second question I, just want to make sure to clarify what you're asking on the growth question is what you're asking would we rather have fewer higher quality customers I wasn't quite sure. What you were asking about the second question yes.
It's a high level question, it's just basically looking at the.
Sure.
Active customers have gone up the margins have come down and I'm looking over a multiyear period and then when we're talking about re accelerating growth opex I'm trying to acquire new customers again.
Again, it's more.
It's very high level, just thinking about do you ever think about maybe this business would be more profitable more successful whatever the word is if you. If you focused on maybe a smaller subgroup of the active subs that are loyal and spend more and have a better margin and a lower CAC.
Just trying to understand how you think about that and maybe what what would cause you to think about that in lieu of growth.
Got it.
Think we feel really good about the kind of customers, we've been acquiring and actually on a profitability basis, our customers are staying longer and spending more with us this year than last year or the year before so we are actually improving.
Customer value by enhancing the experience with things like fixed preview other things, we intend to do through the fixed model and styling services. We think can add value there over time together with freestyle. So we think we're finding more ways to drive value with each client we.
Also really like what we see on to Dan's point, the unit economics, both with fixes and even better with freestyle and so part of the profitability question. I think is a marketing question and part of it is a fixed cost structure and so Dan alluded to some improvements that we anticipate making on that side, but as we continue to scale. The business. We believe that this.
It can be a very profitable business over time, we are just still in the business model evolution as well as the scaling phase and then on the marketing front.
Our beliefs that and expanding into things like freestyle participating in things like SCO participating in a lot of other marketing channels like affiliate marketing Influencer marketing you know I would argue that some of the channels that we have been reasonably relying on the past got more and more expensive over time, and we are going to be participating in a much wider portfolio and the.
Future and even things like top of funnel that drive efficiency and lower funnel that really has been.
Summit untapped for stitch fix so I think we believe actually.
A bigger business prevent presents more opportunity rather than narrowing the customer base.
I don't know Dan if you wanted to add any no I think again I just want to reiterate I think the comment was made.
Terms of total margin on again on the contribution margin side, which excludes marketing I do think that we have.
We have maintained and gotten slightly better and as we mix out we hope to get a we expect to get even better soon so the question that to Elizabeth point is really about about marketing.
While the performance based channels I have seen some we've seen some challenges in those we do feel like there are many other channels that we know well.
We'll generate new actives, whether it's in the fix into fixed plus freestyle or in the freestyle and hopefully into fixed and freestyle I mean, that's really our goal here. So.
I think the the margins that we have will provide leverage over time I said that earlier on we still believe that and.
And on the fixed cost side, you know, we will see improvements as we go forward and leverage as.
As we turn the corner and start growing active again.
Got it thank you.
Thank you we'll take our next question from Roxanne Meyer with <unk> partners.
Great. Good afternoon. Thanks for taking my question I actually have a few.
My first question is on pricing the industry, obviously is in a more inflationary environment with many.
Many across the industry raising prices. So I guess I was curious with your <unk> V up for fixes in the quarter up 5% how much was due to pricing that you took versus units and whats your thoughts on pricing going forward.
Yeah, I'll take that one hi, Roxanne.
None of it was due to pricing we have not significantly raised prices. It was primarily due to keep rate within fixes them. We're lapping the full cycle of our algorithm regenerated previews, which has had a positive impact plus the experience went through in our ecosystem is very positive.
And then on the <unk> side, you have the mix of fixed plus freestyle contributing favorably.
So it wasn't any of it wasn't on pricing.
And going forward, we're continuing to look at it at the cost of our product.
And suspect they are like we may tweak pricing I don't think it's going to be significant in terms of increases we think you know what.
We're we're pretty analytical and methodical about looking at our pricing, especially with our <unk> brand and then on international brands, We're taking a hard look at pricing and I do not expect that to go up and in fact could possibly come down just as we see what's going on in the marketplace.
Okay great.
And then just trying to reconcile your your revised guidance for the full year when you take into account your expectations for flat active customer growth.
It assumes that your revenue per client fall sequentially in the next two quarters and you know that comes on the back of an 18% healthy increase this past quarter. So just trying to understand the dynamics and what's going on with your expectations for revenue per client.
Yeah, Yeah, I'll take that one that's a good question and you know part of that is just the function of the lower net adds in each one.
The newer clients just spend more relative to tenured based clients. So it really is a mix impact a lot of them and when we look at a cohort impact of course as we mentioned we see positive in year over year growth. When we look at it and we do it on a 30 day and 90 day cohort like for like basis. So that is positive, but we might.
See I drop you're right on the revenue and active guidance that we gave simply because we're mixing out to food fewer new actives now as we improve conversion and actives that will reverse itself as we go forward.
Okay. Thanks, Thanks for that color and then just last you know trying to think about the average spend in freestyle for a fixed customer versus a pure freestyle customer.
And then just wondering about how do you how do you think about your ability so far to match client preferences as dictated by the questions that you have out there in your algorithm with the offering she's actually presented and I guess that would manifest itself by by that active spend.
A lot.
Yes, I can start on that Roxanne and Dan can weigh in.
The majority of the clients and freestyle are still our fixed first clients just given by nature of the fact that we very recently opened that up.
We like what we're seeing with these early new cohorts, but it's admittedly small still and so I think to Dan's point. There was an earlier question on this unrelated to our pack.
As we have more data and more longitudinal data will feel more comfortable sharing what we are seeing you know we have seen those freestyle customers coming back we have seen them opting into fixes to some extent.
But I think we have more data together to understand that and then I think on your question of relevance, we actually feel really good on a cold start basis to be able to show relevant style based inventory. It is a very new kind of shopping experience, we think of it as styling on demand to Dan's point, 40% of the sales are through.
Outfits. So some of these baseline features that make it easier for customers to have a reference point to other ways, they shop or some of what we need to add.
And that's a lot of the work we have in front of US in addition to making it highly differentiate it.
Don't know Dan if you would add anything on average spend and freestyle anything else no I do I think I completely agree of course with everything <unk> said I will just add that.
Fixed customers do engage in freestyle, we do see both their fixed and their freestyle go up and so that's just really back to the point of how the two really work in tandem together.
From a from an overall client experience standpoint, and Elizabeth is right like we are gathering the data on freestyle for those who come in and who is first intent and first purchase is a freestyle only.
And eventually we will share data on that but we just need to collectively have more time to gather what that looks like over time.
Okay. Thanks, that's helpful. Thank you so much.
Thank you all for joining US today, we look forward to updating you on our progress next quarter.
Thank you and that does conclude today's conference. We thank you all for your participation and you may now disconnect.
Okay.
Yeah.
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