Q3 2022 Stitch Fix Inc Earnings Call
Good day, everyone and welcome to the Stitch fix third quarter 2022 earnings call Today's conference is being recorded.
And now at this time I'd like to turn the conference over to Alexandra Visco Hong Kong. Please go ahead ma'am.
Good afternoon, and thank you for joining us on the call today to discuss the results of our third quarter of fiscal 2022, joining me on today's call are alleged that Spaulding CEO of stitch fix and Dan <unk> CFO we.
We have posted complete third quarter 2022 financial results in a press release on the IR section of our web site investors Dot stitch fix dot com.
The 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 SEC for a discussion of 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 Form 10-Q for our second quarter previously filed with the SEC and the quarterly report.
<unk> on Form 10-Q for our third quarter, which we expect to be filed today.
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.
This call in its entirety is being webcast on our IR website and a replay of this call will be available on the website shortly.
I would now like to turn the call over to Elizabeth.
Thanks, Alexandra and thank you all for joining us for Stitch fix is Q3 2022 earnings call.
Before we dive into our financial results I'd like to take a moment to remind everyone where we are in the broader stitch fix journey to put into context. The actions, we're taking to improve performance.
As you know we are in a period of transformation from a fixed only business to a fixed plus freestyle ecosystem.
This enables us to serve our clients on demand styling needs as well as to begin to acquire new clients through personalized shopping.
That's opening up a much larger opportunity with a Tam that is two to three times greater than the fixed only business.
We are building upon our core strategic assets of rich data science, plus the personal touch of human stylist.
This is a necessary and significant undertaking that requires us to adjust our original system marketing tools and selection to ultimately deliver enhanced customer experiences.
While freestyle has already demonstrated strong unit economics, and meaningful client value expanding freestyle into a client acquisition vehicle is an iterative process.
As we discussed previously establishing a fixed plus freestyle ecosystem will take time and will not be linear.
We are moving forward deliberately and thoughtfully with a sense of urgency addressing the areas that are within our control.
In Q2, we saw that our new onboarding flow created friction for customers eager for FX, therefore impacting conversion.
In parallel similar to many in our industry, we continue to navigate the ongoing effects of Apple privacy changes, which is impacting traffic to our site.
Both of these have made new client acquisition is challenging.
We are working through both of these with tremendous focus.
Today, I will provide more detail on the steps we have taken to mitigate these challenges and what is to come.
Additionally, as we promised in our last call. Our team has taken a deep look at our business and our cost structure.
We have done a detailed review of how we deliver our experience and we've begun to take action to become more efficient and deliver profitable growth over time.
Both Dan and I will spend time on this momentarily.
Now onto our Q3 financial and operating results.
While we are confident in our strategy. We have in place we are not satisfied with our Q3 performance, we can and must do better and we're focused on execution as a team.
Topline results as well as active client counts were largely within our expectations.
<unk> net revenue of $493 million, reflecting an 8% decline year over year, and an adjusted EBITDA loss of $36 million.
Active clients declined 5% year over year, and 3% on a sequential basis, ending Q3 at $3 9 million.
We have made several improvements to the new client engine, which I will speak to in a bit.
Revenue per active client or our pack reached $553, our sixth consecutive quarter of <unk> growth and our 90 day <unk> also remained strong.
Fifth our Pac expansion is the result of the incremental <unk> are.
Fixed plus freestyle usage by our clients as well as the ongoing benefit of keep rates with fixed preview.
<unk> revenue grew 13% year over year with outsized growth in categories like special occasion, and social we're.
In fact freestyle revenue from dresses grew more than 75% year over year, which is over five times the rate of growth of dresses and fixes.
Freestyle continues to drive incremental <unk> in client spend once inside our ecosystem.
And we are increasingly encouraged by the activity of our emerging freestyle first customer base.
Today, approximately 20% our freestyle first customers come back and purchase again within 30 days.
Okay.
To improve our clients' experiences we recently updated our core recommendation algorithm to our novel client time series model architecture, which unifies data from client interactions across both beck's and freestyle hit.
Historically, our algorithms focused on understanding our clients that have specific attributes.
In contrast, this model focuses on understanding the client through their interactions with stitch fix over time.
I tested this new model demonstrated significant improvements to client outcomes with a nearly 6% lift in freestyle revenue and a 4% lift in freestyle reorders over a 30 day period compared to our previous algorithm.
It is now rolled out across the freestyle experience.
Now onto our progress on conversion and marketing.
Given that conversion of new visitors was not where we wanted it to be in the second quarter. We took actions to refine the on boarding experience and our landing page. This has resulted in approximately 40% improvement in new client conversion in the third quarter as compared to the second quarter.
First we began directing all stitch fix dot com traffic to a simplified fixed birth onboarding path now clients entering through stitch fix dot com are directed to schedule effects. Upon completing a style profile after scheduling their freestyle shop is unlocked.
Our landing page experienced better clarifies, our offering and highlights our key differentiator.
Now feature more community based stylus content, and we enable visitors to interact with style shuffle before creating an account.
While this is indeed positive progress, we're still not yet at our desired conversion level.
In addition, overall new client traffic to our website was down in Q3.
As I noted at the outset of the call both factors conversion and traffic ultimately played a role in the 3% decline in our total active client counts quarter over quarter.
We are deeply focused on driving traffic into our ecosystem.
Reigniting new customer conversion.
As part of these efforts we are further diversifying our marketing portfolio with the support of our new Chief Marketing Officer.
We are moving more into digital channels, such as Tictoc and Youtube as well as leaning into the use of Influencer partnerships.
To that end, we recently launched an integrated men's campaign with Keegan, Michael key called Stitch fix it.
During this campaign, we not only saw an increase of over 60% and men's traffic that over the prior weeks and also strong efficiencies in our direct response AD CPA.
Additionally, as we said we would do last quarter, we have successfully rolled out personalized search.
With this feature client search results are based on relevant and only show in stock items that match individual style preferences fit and size.
We believe this will drive continued engagement once inside our ecosystem for our clients as this has been they're both highly requested new feature.
Now I want to shift to what I mentioned at the top of the call regarding decisions, we are making to adapt how we operate to position ourselves for profitable growth.
In light of our recent business momentum and an uncertain macroeconomic environment, we have taken a renewed look at our business and what is required to build our future.
Today, we are sharing changes that we estimate will result in FY 'twenty three annual expense savings of $40 million to $60 million.
These savings will predominantly come from the difficult decision to reduce our workforce.
This includes a reduction of approximately 15% of salaried positions and represents approximately 4% of our roles in total.
Dan will spend time going into detail on our broader cost structure and expected savings.
We also expect to see meaningful operational improvements from the restructuring.
We are centralizing a number of key capabilities and streamlining decision, making to drive efficiencies in how we operate and deliver experiences.
We are also ensuring that we're allocating resources to our most critical priorities.
Going forward, we will continue to innovate our client experience and broaden our offering and.
In parallel we will continue to identify opportunities to drive efficiencies in how we operate and deliver our experiences while investing strategically in both technology and product.
I would like to thank those team members with whom we are parting ways for their many contributions to stitch fix and show our clients.
Our priority is to support them through this transition in every way that we can.
In summary, we strongly believe in and remain focused on our mission. We are transforming the way people find what they love by combining data science and the personal touch of human silo.
While we have work to do to expand our fixed plus freestyle ecosystem and reignite our new client engine. We have made progress in key areas in the third quarter.
We remain focused on executing our fixed plus freestyle strategy with excellence.
We are thoughtfully and deliberately and making the necessary decisions to drive our business forward and we commit to providing you updates as we make progress on our efforts.
I will now hand, it over to Dan.
Thanks, Elizabeth and Hello to everyone joining us.
I'll first spend some time on the drivers of our Q3 results.
And the actions, we are taking to position ourselves for profitable growth.
And then I'll walk through our Q4 financial outlook.
In Q3, we generated net revenue of $493 million, representing an 8% decline year over year.
This reflects the compounding effects of lower net active clients year to date, which ended Q3 at $3 9 million.
Active clients declined 200000, or 5% year over year, and 112000 or 3% quarter over quarter.
Well largely expected. This decrease was primarily related to ongoing conversion challenges, which we are working through as well as lower traffic, which many are experiencing across our market segments.
While we continue to diversify our marketing portfolio. It will take time for new channels to drive meaningful traffic and new client.
Q3 gross margin was 42, 6% 340 basis points lower than Q2 of last year, driven by increased transportation costs and tightening product margins.
Transportation cost increased due to increased shipping rates, including fuel surcharges and higher split shipments and freestyle.
Product margins were impacted by higher product costs as a result of rising inflation and increased penetration of national brands and our brand mix.
We expect to continue to see elevated product and transportation costs in Q4 and therefore.
Similar to gross margins in Q4 compared to Q3.
Q3 advertising was in line with expectations at $51 5 million or 10, 4% of net revenue, reflecting increased spend in the Influencer channel.
Other SG&A, excluding advertising was $235 million or 47, 8% of net revenue an increase of 640 basis points year over year.
The increase was primarily due to higher fixed labor costs, including stock based compensation.
Okay.
Q3, adjusted EBITDA was negative $36 million, reflecting lower net revenue lower gross margins and higher fixed labor costs versus last year.
Net inventory ended the quarter at $213 million, a decline of approximately 1% year over year.
Drove Q3, we experienced delayed receipts of three to four weeks on a subset of inventory due to the ongoing nature of shipping delays and port congestion with the global supply chain.
We do not believe revenue was impacted in the quarter with the exception of a few categories in our men's business, where we saw higher than normal sell through rates.
Similar to our spring summer buys or buying team is working proactively on our fall winter buys to get ahead of any delays that may occur due to the global supply chain challenges.
Finally during the quarter, we repurchased $19 million worth of company stock for $30 million year to date.
We ended Q3 with no debt and $283 million in cash cash equivalents and highly rated securities.
We have the financial flexibility to execute our strategy as we move towards profitability.
Yeah.
Turning to our cost structure as Elizabeth discussed we undertook a detailed review of our business and the cost structure needed to support it in order to ensure we are positioned for profitable growth in the future.
As a result of this review we have identified approximately $40 million to $60 million of expected annual savings in FY 'twenty three driven by a reduction in our workforce.
These expected savings are calculated off our annualized Q3 expense base and are inclusive of investments in areas such as product and technology.
Yeah.
The impact of positions, which include approximately 50% of our salary positions and 4% growth in total.
Then all of our general and administrative functions and levels as well as styling leaders.
As a result of this action, we expect to incur restructuring and other one time charges of approximately 15 million to $20 million to be recognized in Q4.
We're also looking at other fixed and variable operating costs, including rationalization of our real estate footprint.
Now onto our outlook in Q4, we expect net revenue in the range of 485 million to $495 million, representing a year over year decline of 15% to 13%.
As a reminder, last year, we saw a greater increase in net revenue from Q3 to Q4 than we did pre COVID-19 due in part to macroeconomic factors.
Excluding restructuring and one time charges of $15 million to $20 million. We expect Q4 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 guidance assumes that net active clients will be slightly down quarter over quarter.
In terms of the current macroeconomic environment, we continue to navigate the ongoing uncertainties that many in our industry are experiencing including supply chain constraints global inflationary pressures and potential shifts in customer demand.
We are optimistic quarter path to capturing the opportunities ahead.
These transformational moments take time, we are confident in the company, we are building and our ability to overcome our current challenges.
We're committed to optimizing and managing our cost structure within our business as we focus on returning to profitable growth.
With that we're now ready for your questions operator, I'll turn it over to you.
Thank you as you would like to ask a question. Please signal pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to that your signal to reach our equipment.
Again that is star one if you would like to ask a question. We will take our first question from John Lee with Evercore ISI.
Great. Thank you for the question. So I just wanted to Dan if you could just unpack a little bit your last comment about the shift in customer demand.
Is does.
If you can kind of I guess unpack a little bit as it is a shift in categories and verticals are you seeing any kind of recessionary pressure or wallet shift kind of a pull back into this away from discretionary just wanted to see you kind of have you guys have seen any impact.
Kind of the recessionary impact on the consumer demand.
Other thing is I appreciate the color on the net adds for the next quarter overall.
Overall, how should we think about the recovery path the landing page experience.
Should we see that kind of a normalizing over the next couple of quarters. If you can give us a timeline on when.
When the trough is thank you.
Thanks for the question.
I appreciate it I think your first question was asking about recessionary effects and if we're seeing a shift so far in consumer demand and.
As we look at our consumer behavior, we can unpack them different price point preference consumers different demographics and really over Q3, we did not see a meaningful impact within our customer cohort.
We mentioned in terms of our pack, we saw a continued strength there.
And when we dissect that by user group and user segment, we continue to see year on year growth across our different demographic and user groups I think what Dan was referring to was just an anticipation that we are.
Continuing to see inflationary pressure for the broader U S consumer and UK consumers that we serve and that we know that typically we're heading into what many are predicting is a recessionary period that we may see an impact so to date, we've seen real strength in our consumers, but we're just you know letting folks know that like many others, we're thinking about that.
The second question I think you were asking with more on.
Clients are normalizing and you know what we saw was as we mentioned we would do in Q2 real strength and improving our conversion funnel that was up 40% quarter on quarter, we see actually more opportunity for upside there.
The challenge that I think we continue to face like many others has been more of the traffic to our site and so we have made progress diversifying our marketing channels and we have more work in front of us and we know it'll take time and so you know one of the I'd say top priority for US right. Now is just reigniting that net active client growth flywheel, and we'll continue to make progress updates.
On that each quarter.
Yeah.
Yeah.
Great. Thank you.
We will take our next question question from Youssef Squali with two securities.
Yeah.
Hi can you hear me.
Yeah, Hey, Youssef picks.
Excellent Hey, Elizabeth Hi, guys. Thank you for taking the questions I have two.
One just going back to the conversion issue. So I think you talked about the improvement that you've seen sequentially by 40%, but maybe you can frame that relative to kind of where you are relative to where you need to be and I guess.
Kind of a.
A related topic in terms of your willingness to kind of lean into marketing we've.
We've seen recently that you've started leaning in and I think even spoke to it a little bit but how.
How far are you from getting to a point.
Where you want to actually lean and a lot more aggressively to try to reignite the growth that you are.
Kind of have spoken to.
And one last question for Dan If I may.
Are the cost savings from the latest round of layoffs enough to get you back to profitability in 2023, as we saw on EBITDA basis. Thank you guys.
Thank you. So if I can take that first a couple of questions and then hand it over to Dan Yeah. You know as I mentioned, we did make real progress on the conversion funnel and when I talked about conversion that was through our core domain at stitch fix dot com and we are pleased with the progress that we've made there. We think there is more upside if we just look longitudinally.
Over the last couple of years. So we think that we still can get some upside.
I think we've made a the majority shift but theres still some left there that we could see continued improvement on.
What we know is part of our future is free style, becoming a first time customer acquisition vehicle and diversifying our marketing channels and we are still very early in that journey I did mentioned on the call. The fact that we now have this cohort of freestyle first customers. We're encouraged by what we're seeing in terms of their repeat purchase behavior. We.
We need to be very encouraged by our ecosystem customers using fixed and freestyle, we really have not ignited marketing spend to your question on leaning in to freestyle, becoming a customer acquisition vehicle and that's really through high intent shopping we know that half of all apparel shopping begins with a pretty high intent purchase so when people search for something.
Through Google or other sources, they see an influencer AD with a particular product that is all not new marketing for us and as we see improved conversion rates on folks landing on our product detail pages. We will eventually be on gating our category pages. That's when we really intend to start to layer in more marketing spend in lean.
And so more to come on that we're incredibly focused on improving the customer experience to do that and then we are learning with some of these channels. We've historically been less focused on like Influencers and integrated marketing and.
We're encouraged by the early results, we're seeing like that men's campaign I mentioned.
And more work to do to make sure. The experience is where we want it to be before we more deeply embossed.
On the path to profitability I'll hand that to Dan.
Yeah, Thanks, a lot.
As we move through our transformation a 600 freestyle we are positioning ourselves for.
For profitable growth in the future.
<unk> alluded to that will come from that active client growth with the client experience that we're investing in and also the optimization of our cost structure, which we talked to you on the call. We will give you updated guidance along the way and I don't have a specific timeline in mind, yet, especially given all the macro economic factors.
We believe Q4 is our trial on profitability and we believe that.
Slide 23 at some point, we can return to profitability. So I don't have specific timing in mind.
But we'll give more guidance along the way.
Okay. That's great. Thank you both.
Thank you, we'll now take our next question from Trevor Young with Barclays.
Great. Thanks on the inventory side up 16% Q on Q. It seems like there's still some of the residual inventory delays at three to four weeks versus four to five weeks last quarter and perhaps that's maybe a little more narrow in scope how're.
How are you balancing kind of that existing inventory build versus some of the commentary you mentioned about preparing for the winter inventory versus some of the consumer softness maybe youre seeing it more broadly I guess, how comfortable are you with current inventory levels product assortment.
So I'll look for promotional environment as we head into the back half of the year.
Thanks, Trevor I'm I will let Dan largely take that question I one thing I'll just comment on at the beginning and then he can talk about the levels. We're at for Q3 mm Sim.
Similar to the prior quarter, we did see some delays, but we felt like we were in a good position with our women's business with our men's business we did see.
Longer delays that once that product came in and we saw good performance with so we're just really making sure we have the right product at the right time for our customers and in many situations. We have increased how were buying ahead to be prepared to have the right goods at the right time on that kind of levels and outlook I'll, let Dan take that.
Yes.
We were slightly down year on year as we go into are really into her at the end of our spring inventory of course summer selling season. So much of the sequential increase that you did see was for seasonal merchandise that that we were happy to see as we get ready for the.
Our summer sales are the summer so that we feel very good about the inventory position, we're in and on a year on year basis, we feel like we don't have the success of inventory that many in our industry are experiencing we feel like we are managing the global supply chain well we.
We had good order in our ordering our fall winter buying now early to get ready for that in anticipation of that we feel really good about the health of our inventory assortment.
We can give within fixed and freestyle going forward.
Not much to say beyond that.
And again, it's a position that we wanted to be and with the right assortment currently.
Great. Thank you both.
I guess I didn't answer the second part we have experienced limited time offers and clearance events in the past.
You mentioned about sales on that and we will likely continue some of that with freestyle in the future and we'll update you more on that as we go forward.
Thank you, we'll now take our next question from Cory Carpenter with Jpmorgan.
Hey, thanks for the questions.
Just on the restructuring just curious you know why why now what you thought was the right time to that and then should we expect any impact to growth from the restructuring and then separately maybe Elizabeth could you talk a bit about six preview I think you mentioned earlier that youre seeing improvement to take rate, but if you could just talk about an update on the type of adoption and the results that's driving that.
Great. Thank you.
Yeah. Thanks, Cory on the why now you know we know that we're in a tough macro economic time period. We also want to make sure that our cost structure and our operating model is positioned to build our future and we saw areas of opportunity in some places where we could centralize and simplified some of our functions. We also wanted.
To be cognizant of setting ourselves up for profitable growth as we head into FY 'twenty, three and beyond and so it you know the timing was right. It was a responsible thing to do for the business.
And really being focused on setting ourselves up for FY 'twenty three and beyond in terms of impacting growth. I mean, we were very very focused as he mentioned on the call and making sure. We're continuing our investments in areas that most impact our customer experience those areas being technology, our product functions you know continued investments in.
Areas that most differentiate that client experience and helps us to continue to build out this fixed plus freestyle ecosystem and the diversification of our marketing channels. So we were very cognizant of making sure. We can continue to make those investments as Dan and I both alluded to.
On fixed preview I think maybe what you're referring to as I. Just mentioned that are our pack continues to demonstrate the positive impact we've seen from the ecosystem of adoption of freestyle as well as the full rollout of fixed preview.
So really no new news there you know as we've mentioned multiple quarters ago as we had.
Done the work to build that product experience and then rolled it out that is an experience relative to our legacy CX offering does provide higher keep rate and higher average order values and we can't have continued to see that play out over time, we will be lapping that in the future now that we are entering a time period, where it was fully rolled out but we're happy.
With the results from that and we continue to see we will make ongoing improvements to fix preview you know one of the learnings. We've had is a client gets a preview and they don't accept anything from the preview that can be you know not surprisingly a moment, where the clients is how are you going to have what I want and so we've been testing new features to make.
Sure that we can immediately address that type of a preview to make sure that it's a positive client experience. So we're encouraged that we can now start to make the next wave of improvements to that product feature but overall, it's been a win both for the U S and the U K market.
Thank you we'll take our next question from Kunal <unk> with UBS.
Hi. Thank you. Thank you for taking my question quick one on the personalized search could you just launched.
Talked with all the detail that you hope.
Of course, they search auction would have been would have been probably the first time to launch why does it take to smoke or.
To launch a personalized search.
Hey, Chris Thanks for the question.
The original fixed or are their original freestyle experience began as really a an add on to our fixed business, where we knew that clients would love to purchase items that would go with items that they had gotten in their fix and so filling out an outfit filling out things that they could.
Please there looks with and we know it's still that 40% of our sales in a much more fulsome freestyle experience that'd be one that we're still building out still come from outfit that is a key differentiator for our experienced and as we embarked on building out more of freestyle over the last year, we added things like product categories more new brands and you know we now have.
A home feed where you can shop looks in your community using computer vision.
But really our first part of call had been being able to just serve up personalized recommendations or outfit feeds in categories and so you know I think there's just many features that we still have yet to offer and personalized search was one that was one that was highly demanded and we wanted to make sure that as we launched it we both tested it but also.
That we are serving up items that are ones that will fit our clients. They will reflect things that are immediately in stock that will fulfill their price preferences and now we will start to layer on things to that precise search feature like outfits given how compelling. It is so I think it's just one of many things in our product roadmap that we will be rolling out over time.
Thanks, if I could follow up with maybe maybe another couple if I could one would be on the on the inventory side. So you kind of talked about.
The slightly higher.
Inventory on a Q O Q basis, but then when we look at like across.
Different retailers physical retailers almost all of them have like very very high inventory. So as you look at like maybe a higher promotional environment going into our fiscal fourth quarter.
Ill.
What would be the average would be our partner brands.
<unk> been to be similar or how do you. How do you think about like our bank loans for the fourth quarter.
Okay.
Follow up on the on the on the restructuring that just happened with the restructuring.
How does it impact or will it impact your your porcelain styling.
Process.
Well the fixes thank you.
Thanks, I think your the first part of your question was on our inventory and I think it was a little bit more around the broader environment of whether or not we're in this promotional time period I mean, as you know stitch fix typically is not a highly promotional retailer you know we focus on getting clients goods that are the perfect fit and style for them and really this notion.
One of getting a client the one pair of jeans, they love versus showing them tons of genes that are on sales like our goal is to get you. The item that you love and so in general you know, we're focused on delivering that kind of a personalized experience to our clients. We did test in Q3.
Three our limited time offer where we did test some of our goods a very small number of goods on a promotional discount and we were encouraged by what we saw in terms of the halo effect on our broader consumption within freestyle and we know that there are goods that we want to be able to clear out of our inventory. So it is something we anticipate doing in the future but.
We don't anticipate that impacting our our Pac if we do anticipate that we would share it but in general we feel like what we're doing is really creating more purchase occasions more product categories. Our clients can lives through the expansion of freestyle together with fixed and typically we're solving three big problems for our clients.
The discovery of items. They went to found on their own tremendous debt and then the relationships with our styling community and their relationship through styling outfit and so our focus is making sure that is done at a value, but not you know winning on promotional pricing and then on the restructuring question. I think you were asking about our styling community. We did have an.
Impact to that the leadership layer, but we did not reduce our styling teams. So theres no change in how we're delivering our styling experience right now.
Got it thank you so much.
Thank you.
Yeah.
Thank you we'll take our next question from Simeon Siegel with BMO capital markets.
Hi, This is Gary concern on for Simeon today. So a couple of quick questions. If you don't mind and thanks for taking my question. So first of all of them on the corner on the cost savings.
Most of those most of or labor related are those going to me.
This is the kind of the immediate impact of that one.
Our next year or is that or is that going to kind of ramp over time.
And then secondly, I'm kind of curious you I believe it was mentioned that they are pegged brokers up again did you give a number on that I think you did last quarter.
Thanks for the questions I'll take the second one and then Dan can talk more about when the cost savings will materialize.
We did not share a 90 day or pack number on this call are we we did share just the continued strength, we're seeing in our pack overall and just the continued incremental ideas both fixed and freestyle.
On the cost savings why don't I hand that one over to Dan.
Labour side, we will see an immediate impact that we might have some smaller one time charges in Q1, but the ongoing impact will be immediate but part of the $40 million to $60 million was over and above the labor savings just other costume initiatives like I said rationalizing our real estate footprint.
<unk> in our fulfillment network.
That will will happen over time.
As we sublease of excess capacity that we have there's demand out there for warehouse space et cetera, but we will see in our music and immediate impact from Q4 into Q1 on fixed opex savings specific to labor.
Got it and then real quick if you don't want a follow up.
I believe you talked about kind of east coast with ARPA growth was driven from a preview and freestor I'm, hoping in there I'm just curious if you could give a breakdown within our pack of what's the kind of the breakdown was price versus mix.
What that would look like with premier what kind of drove the broader increase supported it break it down and those components are possible.
We don't actually break that out, but I will say as we've shared in the past with fixed preview that that's had a positive benefit largely on keep rate, meaning the number of items that are clients.
Maintain you know in part if you think about what that customer experience is about is the clients getting really two chances to weigh in on what they get in their effects. Both when it shows up but beforehand, giving feedback of 10 items that we found in a preview so not surprisingly that results in a higher keep rate and so that's the biggest driver of fixed preview and then the combination of.
Now you know 30% of our clients and we've shared in the past within our women's business. For example, using both experiences those are incremental you know its different product categories that they tend to be purchasing and freestyle, we see outsized performance and things like second layers in footwear in dresses and so it's really the incremental 80 or more units for.
The most part you know there may be small pricing benefits, but for the most part it's that we're selling more goods to our clients through a broader experience.
Great. Thank you Stuart.
Thank you we'll take our next question from Laurent <unk> with Morgan Stanley .
Great. Thanks, I wanted to ask about the customer onboarding process and your comments about stretching all customers to the FX business.
And then once they scheduled freestyles unlocks I guess.
Is the idea that a customer could be a freestyle only customer has that changed.
And if so is that sort of a permanent decision or are you still sort of iterating. Thanks.
Thanks, Sara for the question it is still possible to be a freestyle first customer what one of the things that I think we've learned over the past several months is if you're a really high intent shop for a lot of that traffic is coming through.
Search I was looking for a particular items they might be coming from some of the new work that we're doing in other new marketing channels, where we're talking about a particular item and so if those clients land on our product detail page and over the coming quarters. They will also be able to land on a product category page and explore our catalog those clients can become freestyle first clients.
Immediately it's still a small population and to the question that you Seth asked earlier on when are we going to start to really lean into that marketing and that experience continues to improve we think that will become a bigger source of our customer base. The bigger source of our AD spend and so that high intent shopping we really view as a vehicle for freestyle, becoming a key.
Customer acquisition vehicle.
On the core stitch fix dot com, you know until our brand awareness for freestyle and the fact that you can shop with stitch fix gets higher we are going to focus that as a fixed first channel and then immediately into freestyle, we anticipate that over time that would change, but we feel like that's the best way to serve our client demand right now through stitch fix dot com.
Okay. Thank you.
Thank you we'll take our next question from Mike Rousseau with Wells Fargo.
Okay.
Hey, guys. This is Jesse so Wilson on for Ike I was just wondering if you could remind investors of your inventory acquisition strategy.
It's all based on acquiring full price goods and then as you look forward.
Work with your partners to acquire inventory for the fall and winter weather.
What are you hearing from them when it comes to.
Inventory availability and what they're planning for the remainder of the year.
Yeah.
Yeah, I can start and then Dan feel free to add on a I.
I mean, the way that we work with our vendors. So if you think about our good maybe just to step back for a second we have our own exclusive brands. We have goods that are stitch fix only that we work with third party suppliers, but they were producing only for US and then we have a number of more established brands that we work with whether those are up and coming up and coming D to C brands or you know.
Established national brands, the majority of our sales actually come from the first two in terms of exclusive brands and stitch fix only and so we have a lot of discretion within those in terms of working with our suppliers to get those goods produced in general as everyone knows the supply chain has slowed down and so we're typically just them buying ahead and.
The longer timeframe, although some of our goods such as our exclusive brands, we still have a lot of flexibility on so I'd say the one thing that has changed in particular is just having more foresight to what we're buying into and then really leveraging as much adaptability as possible within things like our exclusive brands and Citrix only because we are very very high control there.
And so that is probably one of the biggest shifts we've made one of the big benefits of our business is how much client data and said no. We got so we can make adjustments pretty rapidly, especially given the nature of how many of our goods were actually in control of directly.
Anything else I'll, just add in terms of availability, we're not seeing a direct impact of anything related to COVID-19 lockdowns in China. There's some indirect impact just delayed shipments that had been ongoing but.
With this with respect to where we source from everything is up and running.
There's been no real impact on that side, just indirect which we are managing through ordering early and just managing the global supply chain.
Thank you very much.
Okay.
Thank you we'll take our next question from Ashley Higgins with Jefferies.
Hi, This is Blake on for Ashley Thanks for taking my question.
First wanted to ask about the.
About the restructuring savings of $40 million to $60 million. Just wondering if you could kind of maybe rank the biggest increases in cost you've seen versus last quarter.
Does that seem like they're going to maybe offset that.
Next year, I know, you mentioned inflation supply chains and things like that if you could just maybe talk a little bit more about those categories.
Yeah, I can let Dan take that I guess, one clarifying point, though I would make is.
The cost improvements that we made through the restructuring are really on our fixed cost basis in some of the things that you just mentioned with shop more on our gross margin. So in essence, though I think there's work that we're doing on both fronts, but Dan I'll, let you maybe add on to that maybe if you could clarify specifically I wasn't quite following.
The $40 million to $60 million, which as we said earlier is a reduction of our our SG&A and the way to think about that as our SG&A, excluding advertising and SBC. It is it is a.
Reduction from that base, but.
But let me have you ask the question again, just so I make sure I answer it.
Yes, sure I guess you mentioned some pressure on the on the gross margin I guess.
Mentioned earlier that you hope to get breakeven EBITDA next year, which is a little bit less than consensus was modeling. So just trying to think of the the main offsets.
Two these incremental cost saves.
Yeah, I think the way I would look at that is.
The comment we made at sometime in FY 'twenty three.
We would we are.
We are.
Planning to be profitable the timing of that is uncertain just given all the macro economic factors.
That we're going through an I've talked about the cost savings side on the on the gross margin side I think we talked about Q4 being similar to Q3 and I think we've said before we would expect.
Ongoing.
Inflationary pressures from a product cost standpoint, as well as higher fuel fuel charges, mainly due to pricing and fuel surcharges and I also mentioned higher split shipments and freestyle. So we would expect those to continue one closer to the current run rates.
And that will have some impact in FY 'twenty three but again, we'll provide more guidance on FY 'twenty three when we report Q4.
Okay. That's super helpful and on that note did you I might have missed it but did you say what marketing was supposed to be in Q4, I know you've talked about 10% of sales recently, but did you give that guidance.
We didn't but it is.
We expect it to be in that 9% to 10% range that we normally see.
<unk>.
Got it.
And then.
One last question.
So it'd be hard to answer but you have mentioned.
From a high level over time.
As.
Freestyle changes as maybe the bigger customer acquisition source, how do we think about the timing of that.
Yeah, I can touch on that I mean, I, we don't have any specific timing to share right. Now I mean, we are just very focused on continuous new feature rollout and continuous improvement of that customer experience. The example, you know we share today were around things like personalized search or the algorithm that has really improved the customer experience of our.
Recommendations and so we're just in a continuous.
Continuous drumbeat of expanding those features I think one of the big things that we're working on right now is on getting a category based shopping experience and that will I would imagine to take the next few quarters, we will give updates along the way and as that experience gets better and better we will begin to spend more into marketing to director.
<unk> to that channel, we know that's a big part of how shopping occasions began and we know we can do that in a highly differentiated way given the nature of the way, we can present outfits and item recommendations that really save consumers time and helps with their discovery. So no no exact timing to share yet, but we know that.
That presents a lot of opportunity for us in the future and albeit small that a population of freestyle first customers. We have today, we're encouraged by what we're seeing and we're also encouraged by you know helping those freestyle first customers also experienced the broader fixed offering as well so more to come but that and just the overall new active.
Clients flywheel is by far the biggest focus for us as a team.
That's super helpful color. Thanks again.
Yep.
Thank you we'll take our next question from Tom <unk> with Wedbush Securities.
Oh, Hey, good afternoon, Thanks for taking my question.
Well when you look at the apparel industry broadly this year.
Yes.
General commentary has been that there's been this big closet refreshes here.
You know people are restocking.
The work yet.
Where do where they were.
Blair social events type of categories.
Uh huh.
It seems like an opportune time.
You know for your business to have these on.
Shoes and things like that like is there any concern that you kind of missed a bit of a golden opportunity too.
You'll bring in you know.
New cohort of clients when they're really looking to refresh their closets.
Do you think that you'd be able to pick up these customers.
Yeah, I mean, I think we're always going to see consumers seeking out new or better ways to shop, you know one of the things. We saw during the pandemic was just a systemic shift of more consumers shopping online now doors took back a little bit of that in the last few quarters, but by and large consumer behavior has shifted and theres always going to be shut.
And preferences for different types of apparel you know in this moment there is a big shift to dresses and vacation, where you know we saw 25% increase in vacation.
Then this quarter that was on top of actually 300 per cent last year. So we actually saw a lot of that going out again coming out of Covid last year. In addition to this year and so those changes we think are always going to be occurring on whats. So unique about our model is we can adapt to what consumers are looking for their preferences, we've been able to adapt and have the right.
Product in terms of these dressier occasions were seeing strength in our own brands that we've launched even in light of athleisure and you know some of that category slowing down a little bit we've actually seen increased performance in our own exclusive brand. If we want or that we launched so I think what's unique about our model is I think just fundamentally a lot of.
Or behavior will continue to shift and we're really just focused on being a better way for people to find what they love and that is a pretty age old problem that we don't see going away regardless of an economic cycle.
Got it.
That's a little aggressive.
For too long.
Okay. Thank you.
Thank you and we'll take our next question from Mark All charter with Baird.
Hi, good afternoon. Thanks for taking my question. So just starting out kind of a higher level question, but revenue per client continues to look pretty healthy I think you called out higher keep rates.
With fixed preview and then some of the issues that are weighing on the traffic and conversion do seem somewhat company specifics. So I guess, we're all watching the same macro headlines data, obviously, but I'm just trying to get a better sense of what you might be seeing in terms of your customer behavior that has you concerned on the macro world.
But maybe a bigger slowdown.
Yeah. Thanks for the question Mark.
Encouraged by what we've continue to see on our pack in client spending inside our ecosystem you know both the adoption of new categories. The continued health overall keep rate as well as buying into new product categories with freestyle and on a year on year basis, I think our cohorts you know, we just continue to really.
Like what were seeing I think to your point for US it's really about getting this new active client flywheel going and you know part of that for US has been macro you know I think the impact of Apple privacy has been one that we've continued to navigate through it and just really start to evolve and how we're driving traffic to stitch fix them in terms of the broader macro backdrop I mean.
We do anticipate that consumers are going to be seeking more value and we just need to make sure. We have the right product at the right time, we play across a very wide portfolio of price points. We know we can provide a lot of value with many of our exclusive brands. So we're just making sure we're serving the right product at the right time and just every.
Serving one client at a time every day.
Thank you and just a follow up for Dan and then on the SG&A as.
As we think about what next year might look like could you just give us a little bit more color on what the mix between fixed and variable expenses looks like in that other SG&A. After we incorporate the $40 million to $60 million in restructuring savings.
Yeah, I think without getting too specific because we don't break out fixed and variable.
Do see that $40 million to $60 million a good chunk of it is fixed but we'll also be in variable productivity.
We are seeing that.
That is part of the $40 million to $60 million. So I do think though the bulk of it will come on the fixed side simply because of the actions that we're taking today as well as rationalizing our real estate footprint, that's all part of our fixed.
Cost structure, so the bulk of it will be in that area.
And a lot of the variable in addition to the efficiencies would come along the lines with respect to revenue, which will guide more.
In Q1, we have our Q4 earnings call.
Great. Thanks for the detail.
Thank you and at this time there are no additional questions in the queue that does conclude today's conference. We do thank you all for your participation and you may now disconnect.
Okay.
Yeah.
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Yeah.