Q4 2022 Stitch Fix Inc Earnings Call
Please standby.
Good day, everyone and welcome to the Stitch fix fourth quarter 2022 earnings call Today's conference is being recorded.
At this time I'd like to turn the conference over to Hayden Blair.
Please go ahead.
Good afternoon.
Thank you for joining us today to discuss the results for stitch fix this fourth quarter and full year 2022.
Joining me on the call today are Elizabeth Spaulding CEO it fits right.
Dan.
Yeah.
We have posted complete fourth quarter and full year 2022 financial results and our press release and the quarterly results section of our website investors that stitch fix dot com.
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 forward looking statements.
Reported results should not be considered as an indication of future performance.
Please review our filings with the SEC, we're discussing the factors that could cause the results to differ.
In particular, our press release issued and filed today as.
As well as the risk factors sections of our quarterly report on Form 10-Q for our third quarter previously filed with the SEC and the annual report on Form 10-K for fiscal year, 2022, which we expect to be filed tomorrow.
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.
Conciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations 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 Investor Relations website.
A replay of this call will be available on website shortly.
With that I will turn the call over to Richard.
Thank you Hayden and thank you all for joining us for stitch fix it Q4, 2022 earnings call.
FY 'twenty two was a pivotal year for Skechers as we embarked on a significant transformation with the full rollout of freestyle.
Freestyle combined with our original fixed offerings broaden our ecosystem and our ability to solve the hardest as consumer shopping and styling problem.
Fit discovery and human relationship.
These differentiators remain as relevant as ever as we provide our clients with the right product at the right time.
We learned a lot over the course of FY 'twenty, two and we are building on our areas of progress.
In this challenging macroeconomic environment and as we continue to work through our transformation.
We recognize that returning to profitability is the utmost important.
This is our top priority.
This will happen by both returning to active client growth.
And by optimizing our cost base.
We are pleased with the progress that we made in Q4 on right sizing our cost base and we are on track to exceed the top end of our expected annual savings in FY 'twenty three.
Today, I will first provide detail on our financial performance in Q4, and FY 'twenty two.
Then I will discuss how we are building on our learnings from the past year to drive net active client and improve how we operate the business.
Both scale and profitability.
Dan will then share more details on our cost management and productivity efforts.
First on our financials.
The reality is a record inflation level and a deteriorating retail landscape resulted in slower discretionary spend in apparel and presented us with an increasingly challenging fourth quarter, particularly in June and July .
Q4, net revenue declined 16% year over year to 482 million driven by 9% year over year decline in net active clients.
Which ended FY 'twenty two at $3 8 million.
Adjusted EBITDA in the quarter was negative $31 8 million.
Revenue per active client grew 8% year over year to $546 in the fourth quarter.
Looking at our full FY 'twenty two net.
Net revenue declined 1% year over year.
So $2 $1 billion.
Along with an adjusted EBITDA loss of $19 5 million.
Despite the freestyle revenue grew 21% year over year with penetration from our fixed client base steadily increasing since its launch.
Now, let me share more on our go forward strategy for FY 'twenty three.
First we're capitalizing on the health of our existing customer base by nourishing, our core differentiators and improving our unique experience.
Second we're focused on net active client growth by broadening our marketing portfolio.
We're finding the onboarding experience to capture both new and prospective clients.
And targeting strategies that Reengage previously active clients.
And finally.
We're committed to managing our cost efficiently and strengthening our infrastructure in order to build a profitable business that is ripe for future expansion.
Starting on the first point.
We know we win when our clients feel heard when we send the right item based on personal preference and fit and when we pushed style batteries in new ways.
Our powerful combination of data science and creative human judgment has enabled us to ship over 75 million fixes and to fulfill over $10 million presale orders to date.
We also know that the first few experiences with stitch fix represent a critical opportunity to build a long term relationship and keep our clients coming back for more.
In FY 'twenty three building on our strength of listening and responding to client requests.
And meeting the moment, we are evolving our stylus request notes to include the ability to add specific occasions, so that our stylists can deliver stronger choices it needs discovery moment.
We also plan to insert more opportunities to collaborate with our stylists community in real time.
Additionally, we're working to deliver a diverse assortment that showcases our varying price points.
Especially in a time when consumers are more cost conscious.
We believe these efforts will drive higher engagement and further cements stitch fix as D go to online styling partner for both current and future customers.
I'll answer the second point.
We recognize that reigniting the active client flywheel is vital for growth.
We know that success will not only come through new client activation, but also through perspective clients.
And re engaging clients, who haven't shopped with us for over 12 months.
In mid September we released our first ever multinational brand campaign.
With the goal of communicating how stitch fix work.
Celebrating the personalization that we deliver.
While traffic improved through the second half of FY 'twenty two.
We expect this campaign to drive a sizeable increase in impressions across television paid social and branded content partnership.
And by building brand awareness will increase traffic to our ecosystem.
We also launched an affiliate Influencer network in early August .
So small today, we plan to scale quickly with a goal of incorporating our stylists throughout FY 'twenty three.
As a way to tap more into our unique differentiators.
And lastly over the course of FY 'twenty two.
We made improvements post the freestyle launch to get conversion to a better place since its low point earlier in the year.
And we're making further investments in the client Onboarding journey to drive conversion rates even higher.
These investments include style quick simplification and seamless log and experiences in order to reduce barriers to entry and more immediately show how we serve client interests.
We also have many prospective clients, who give enough information, but have yet to convert and many who haven't shopped with us for over 12 months.
Both of which represent opportunities for re engagement.
We're approaching these moments of Reengagement with new strategies, given our expanded offering.
As an example, we are enhancing our E mail program to include Algorithmically generated product previews at better showcase our inventory and are leveraging more stylist centric messaging and content.
On the third and final point on enabling profitable growth and expansion.
In the near term and as Dan will share more we are taking a variety of important actions to continue to improve our free cash flow.
More broadly we are focused on developing our infrastructure to drive profitable growth and support our future expansion.
With our tech infrastructure, we're investing in our structured data platform and more modular architecture to enable faster launch of new client features.
We're also innovating on our core algorithm to allow for dynamic engagement and real time styling.
With this complex work well underway, we're confident in our technology strategy.
By evolving our underlying infrastructure, we're creating a stable foundation for scale and are setting the stage for profitable growth in FY 'twenty four.
I'd like to conclude by thanking our team for all their hard work and innovating on behalf of our customers.
We will continue to adapt as needed to build value for our shareholders without.
Without losing sight of the customer centric culture that define stitch fix.
I'm proud of the team that we've built this strategy. We have now set in place I feel encouraged by what this next chapter brings for stitch fix.
We're clear eyed about the current challenges at the macro environment presents and we remain focused on the key initiatives discussed today in order to deliver exceptional shopping and filing experiences to our clients and to achieve profitability in the future.
With that I will turn the call over to Dan.
Thanks, Elizabeth and Hello to everyone joining us on today's call.
As Elizabeth discussed our business is undergoing a significant transformation, which we are pushing forward in FY 'twenty three.
At the same time, we recognize the challenges presented by the current macro environment.
And as such we continue to direct our business in a financially responsible manner.
In Q4, we generated net revenue of $482 million down 16% year over year, driven by softness in fixed volume, which was partially offset by demand and freestyle.
July was especially challenging in tandem with macroeconomic deterioration throughout the summer months and as consumer discretionary spend pulled back from apparel.
Notably these trends have continued in the first half of Q1.
Active clients ended Q4 down 3% sequentially and 9% year over year at $3 8 million.
Q4, gross margin was 40% driven largely by increased inventory reserves and higher liquidations to the excess spring and summer goods.
Adjusting for this increase in our inventory reserve and higher liquidations gross margin was 42, 5% a decline of about 400 basis points from a year ago.
This reduction is primarily due to tightening product margins from rising inflation and.
An increased penetration of national brands as well as an increase in transportation costs.
Sequentially gross margin was flat when adjusting for the increased inventory reserves and higher liquidations.
Turning to inventory, we ended Q4 with net inventory down 7% year over year, and down 7% quarter over quarter to $197 million.
We took action in the quarter to rightsize their inventory through our July limited sales event, and third party liquidations, which focused on moving spring and summer product.
Looking ahead, we are continuing our efforts to right size, our inventory position to be in line with demand.
For any excess inventory will look at utilizing limited sales events.
Maybe to use third party liquidators and <unk>.
Inbound receipts or holding inventory based on the right economic decision.
We'll likely continue to see elevated inventory levels in the first half of our fiscal year, we expect to see lower levels relative to demand in the back half.
Advertising was just under 10% of net revenue in Q4 slightly down over Q3, but up 390 basis points versus the same quarter last year.
For the full year FY 'twenty two advertising represented approximately 9% of net revenue.
For FY 'twenty, three we expect to maintain levels of spend at around 9% of net revenue as we grow the virality of stitch fix as well as continue to improve on our core performance marketing channels.
Expand into newer channels such as SCM.
Influencers and affiliates.
Moving on to adjusted EBITDA.
Q4, adjusted EBITDA was negative $32 million.
This excluded $26 million in restructuring and other onetime charges.
We ended Q4 with no debt and $231 million in cash cash equivalents and highly rated securities as well as an undrawn $100 million revolving line of credit.
Now onto our outlook.
There are a number of factors impacting the predictability of our forecast.
As we turn the page on FY 'twenty. Two we are focused on the goal of achieving adjusted EBITDA profitability and positive free cash flow.
Our path to profitability consist of customer centric actions intended to grow active clients.
Increasing leverage in gross margin.
Improving fixed and variable productivity.
And driving positive free cash flow.
Elizabeth discussed our focus and actions on driving active clients.
On gross margin, we expect both Q1 and full year gross margin to be around 42%, primarily reflecting an improved inventory position and expected lower transportation costs versus the fourth quarter of FY 'twenty two.
SG&A, excluding advertising and stock based compensation was down 8% sequentially and essentially flat year over year, when excluding restructuring and onetime charges.
Well, we are pleased with our expense control in Q4, we will continue to focus on reducing fixed cost and improving variable productivity.
As we optimize our cost structure, we will continue to evaluate our real estate footprint and prioritize our investment in product and technology.
With these efforts in place we are on track to exceed the high end of the $40 million to $60 million in expected annual cost savings, we discussed last quarter.
In addition to cost savings. We're also focused on driving towards positive free cash flow and expect to improve our overall cash conversion cycle.
Slide 23 by right sizing inventory.
Extending vendor terms.
And investing in Capex with near term positive ROI.
Moving to our outlook.
It's important to note that lower active clients in FY 'twenty, two will have an impact on revenue, particularly in the first half of the fiscal year.
With this in mind, we expect total revenue to be between $1 76, and $1 86 billion for full year FY 'twenty three.
We will manage the business towards a goal of being adjusted EBITDA and free cash flow positive sometime in FY 'twenty three.
For the full year FY 'twenty three we expect adjusted EBITDA to be between negative 45 and negative $25 million.
Moving on to Q1.
Largely due to the dynamics previously discussed on the current state of net active clients and the associated ongoing impact of macro challenges. We expect Q1 revenue to be between 455 and $465 million.
Due to our ongoing efforts in reducing our cost structure. We expect Q1, adjusted EBITDA was substantially improved versus Q4 of FY 'twenty, two and be negative $15 million to negative $10 million.
This guidance assumes net active clients will be down quarter over quarter, but less so than the sequential change between Q3 and Q4.
As we reinforced multiple times during this call we are laser focused on our return to profitability.
We recognize the importance of building a solid foundation, so that we can grow from a position of strength.
This will be achieved by a return to net active client growth and continuing to optimize our cost structure.
With that I'd like to turn the call over to the operator for Q&A.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment in order to allow time for additional analysts to ask questions. We ask that you. Please limit yourself to one quest.
And one follow up question before re entering the queue again press star one to ask a question.
We will take our first question from you.
Youssef Squali with true of Securities.
Please go ahead.
Great. Thank you very much hi, guys. Just a quick two quick questions for me one more.
Can you just speak to the on boarding process and improvements you've made there. Obviously you are deciding to increase your marketing, which would lead me to believe that you believe that you're on boarding process and conversion rates et cetera.
Have improved relative to where they were even three months ago.
So maybe maybe.
He kind of quantification of where we are in the process would be really helpful. And then as you look at the business.
Beyond 2023, and I know there are a lot of moving parts here, but relative to kind of how you guys looked at the business.
Yes, you know a couple of years ago, what kind of growth do you think this business can support you know all things considered looking at the Tam changes et cetera is this still you know kind of a double digit business double digit growth business do you feel or or is that something that now we need to adjust as we think through the opportunity.
Thank you.
Hey, Youssef thanks for the questions. Yeah on the first point you know we've made a lot of progress on conversion over the last couple of quarters and you know we we.
We have seen a return to levels that we had seen in the past that said, we believe we can still make progress in upside in some of the consumer pain points that we know of them. You know we made it easier to get back into our fixed experience. We've made improvements in iterative testing on.
More of an understanding of what stitch fix is about we know it's a an unusual service until we've done I think a lot of good iterative improvements I'm, making that easy for clients to understand you know.
That said, we still see opportunity to make it even easier to get inside in terms of seamless login, we still provide kind of that step where you have to provide your email upfront and so all of those are areas, we're going to keep working on so we've made progress we continue to make progress, but we see more work ahead and then on the marketing front.
And you know, we're continuing to expand and strengthen our portfolio.
Both with new clients, but also with signed up prospects those are folks who have given us all their information, but have not converted as well as reactivation and so we are always super disciplined with how we spend you know in that sort of 9% to 10% range and are making sure that we are getting a return on any investment we make.
And we'll keep broadening that portfolio.
On the beyond 2023 kind of beyond this fiscal year I mean, if you think about stitch fix is still a pretty small business and an enormous apparel market. You know, we're about a $2 billion company and a $400 billion U S. Only addressable market and we know that by opening up the freestyle experience together with Texas.
That is both created incremental <unk> within our existing client base, but we believe at two to three X times increases the Tam as being a fixed only business.
So we're just incredibly focused this year on continuing to improve the customer experience get on that positive net active track, which we do expect to turn the corner on that active clients sequentially over the course of at some point in FY 'twenty three.
And just ensuring we have the stable foundation of profitability to build on beyond this year.
Okay, great. Thanks for the help.
We will take our next question from Cory Carpenter with Jpmorgan. Please go ahead.
Hey, Thanks for the question.
Maybe to start on freestyle could you talk about your priorities for freestyle specifically this year in.
How much of your marketing spend you expect to deploy against freestyle.
Related to that last quarter, you made the decision to direct new customer traffic to the fixed slow exclusively is that still the case and any plans to to redirect some of that back to just restart in the future. Thank you.
Yeah. Thanks, Cory for the question you.
You know we continue to make improvements in the freestyle experience you know we had talked to them in the last quarter or two around search and that's become you know that was one of our most asked for features with clients that has done well I'm doing things like beta testing seeing outfits and search I'm just continuous improvement of really integrating.
More of our styling Ladd differentiation you know those three areas that we think we do better than anybody else that are really solving the hardest problems of fit discovery in human relationship.
Really our ambition is to just make that more and more integrated in our freestyle experience and really this blurring of the fix and freestyle offering. We know are our best happiest clients are engaging with both and just making it easier to be participating across that full that full ecosystem.
You know if you were to Google search a particular item you can land on our product detail page or a category patients start right with freestyle, but our core front door experience. We're really focused on just getting people into our full ecosystem and what we've found is starting with a fixed as a great entry point and so we're very focused.
There right now just because we like what we're seeing but we'll continue to experiment with that throughout the year, we do acquire clients through kind of landing on product detail pages, but I'd say, our core customer activation focus is really through I'm, starting with the full ecosystem, starting with FX right now.
Okay. Thank you.
We will take our next question from Simeon Siegel with BMO capital markets. Please go ahead.
Thanks, Hey, good afternoon, everyone, sorry, if I missed it but did you say, how we should think about the go forward clients versus our Pac embedded within the <unk> and full year revenue guidance and maybe just speak to the comfort and the improvement embedded over the year.
<unk>.
I mean can you just clarify the question are you asking what we expect on active clients or what are you asking yes.
Yeah, just any context within the you gave the revenue guidance for the first quarter and full year, so any context.
That breaks down between price versus declines.
Got it yeah, we didn't we don't guide specifically to active as I mentioned in response to a moment ago. We do anticipate at some point over the course of this year, turning the corner on improvement and positive net active.
Simply by virtue of the fact that we're starting the year with $3 8 million versus over 4 million clients such as has a really big impact on the absolute revenue for the for the year. So that is really the biggest driver and as you know like as we acquire clients, they're spending builds over time and so we're just not going to see the benefit of that impact them, but let me pause.
Was there and see if Dan anything to add on that in terms of how it translates to revenue.
The only thing I'd add on the active clients in our pack.
I did say in the earlier remarks that well net actives will be down for Q1 there'll be down less so than the Q3 to Q4 sequential change that we saw in FY <unk>.
<unk> 22 and two.
As we get closer to adding net active clients that will likely had the impact of bringing <unk> down simply because these newer clients aren't on our platform long enough.
To spend a disproportionate to clients that are that have been here and spending on a on a regular cadence with us. So that's the way we think about our pack here. So again as we continue to diminish the decline in net actives and ultimately start to grow net access I would expect <unk> to be impacted by that.
But it will have a net positive of course and revenue a subsequent fixes and subsequent and engagement with freestyle take on with our newer clients.
Great and then just given the strength of the data that you have are there any learnings between the clients that have lapsed. So is there any I don't know if theres age demographic choppy Guernsey like just you guys have a wealth of data. So as you look at the cohorts or you look at the groups that have appealed off anything that you could learn from that.
Yeah, I mean, I would say a few things in general our clients are the happiest when they feel like we heard their preferences and he responded accordingly and present the right product at the right time, which you know we get we get right a lot of the time, but we don't always get it right and so our ability to immediately.
The address you know if we didn't get it right through them.
Redoing their fix experience or connecting them with the stylus like that's actually a lot of what we're gonna be focused on this year is bringing more of that stylus front and center in that active listening I mean, it is a big part of what has made us so successful and so using that data to both reactivate clients, which we actually have a pretty healthy reactivation rate.
See more upside there was actually positive year on year, our reactivation of FY 'twenty two verses FY 'twenty, one actually entirely driven by growth in free style and so you know what we believe is the broadening variety of our assortment the broadening of price points all of those good things will benefit the broader client population over time the ultimate.
It's that sense of a client feeling you know deeply heard and we put the right product in front of them at the right time, and so anytime we have you know that signal of where we can improve it is where we're focused you know both frankly with our active clients as well as with lots of clients.
Great. Thanks, so much onto that I will say, it's not a learning but it is for us because we've known it for a while it is worth reiterating is.
And our clients desire to get fit right, which we do very well is really important and they love that we've talked about a lot in prior calls.
It's worth repeating how important that is.
And how we focus on that and continue to try to get better and better at fit.
Great. Thanks Best of luck for the rest of the year.
Thanks Simeon.
We will take our next question from Mark <unk> with Baird. Please go ahead.
Hi, This is Amy testy on severity.
Yeah on the broader apparel pullback I was hoping to dig in a little bit more into consumer behavior changes are what you're seeing in terms of box frequency keep rate.
Average sales price and any details you can provide on.
Specific product category.
Yeah. Thanks, Amy.
You know I think we do a lot of research of what consumers are asking for we get signal on you know the majority of our fixes of where their preferences are and then of course, we're always tracking what average unit retails and what price points are resonating and you know I would say a couple of things first time, just like cat.
Great trends, we've definitely seen that continued shift back.
To work, where both with our men's and our women's segments Blazers are back to pre Covid levels. You know men's polo has had been a strong trend.
So we are seeing kind of category trends that we've you know thankfully been prepared for I will say that consumers are telling us. They are feeling more cash constrained you know we have different experiences within freestyle you know what.
We highlight items under 50 and in general we have seen our price points that are at more affordable average unit retails outperforming which is a strong signal that consumers are looking for value right. Now and then we do ask our clients without sort of their anticipated spending going forward and we have heard clients you know both in serving can.
<unk> in the U K and the U S that they may be buying fewer items perfect in the future and so we're just really preparing to have the right product at the right time.
I think thankfully in our business over half of it are clients, who are getting you know auto shipment with fixes, but we want to make sure that we're providing the value for them. In this moment will also be beta testing later this year, some new loyalty based programs and so our focus is really just making sure with both providing right product right time and reward.
Loyalty and value with our customers and that really signal that we get is incredibly valuable to make sure we have the right product.
Very helpful. Thank you.
We will take our next question from Edward <unk> with Piper Sandler Sandler. Please go ahead.
Hey, guys. Thanks, very much for taking my question I guess two fold first you know <unk> been pretty tactical with SG&A reductions, but if you could kind of help us just understand fixed versus variable SG&A, particularly in light of what could be a tougher demand environment and then as a follow up to that I just wanted to understand.
The markdown reserves that are embedded.
On the inventory right now how should we think about that or are they kind of true it up at this point, we'd like to open the quarter.
Thank you very much.
Yeah. Thank you Ed let me hand that one to today on to answer both of those.
Yes.
On the SG&A reduction as we said earlier, we are on track to achieve the high end to exceed the high end of the $40 million to $60 million, we talked about last quarter. The bulk of that is in fixed.
Which is what we targeted from a cost reduction standpoint, I will say, though that.
On the variable side, which is our warehouse, our selling and our stylists and our customer service we've seen.
Improvement quite a bit improvement quarter on quarter in that area as well across our variable nature. So we feel really good about our SG&A costs and continuing to leverage that we get both on fixed and variable.
I think they're both we're going to see leverage on both in FY 'twenty three.
That's the answer to your first question and to your second question on inventory reserves as we as I talked about earlier, we did increase our inventory reserves, primarily for excess spring and summer goods.
Good inventory we.
We are looking we do expect the back half of FY 'twenty three to improve our inventory position a lot of that depends of course on the macro environment, but we do feel like we have hit the top end of that reserve and we're not expecting.
Increases in reserves going forward simply because we're going to focus very much on right sizing our inventory.
We feel very good about the fall and winter inventory that we've got coming in and.
At this point.
I think we're in a good position from an inventory perspective.
Thank you.
We will take our next question from Laurent <unk> with Morgan Stanley . Please go ahead.
Great. Thank you I guess as we think about the factors that are that are weighing on net adds is traffic really the biggest headwinds followed by conversion and then churn or how should we think about kind of the different factors within that AD and then any update on what percentage of fixed customers have tried freestyle are made more than one purchase.
On freestyle I know you'd given some of those stats in the past thanks, so much.
Hey, Lauren Thanks for the questions. Yeah, you know I mentioned on the call that we saw steady improvements in traffic in the back half of FY 'twenty two and so we like the progress. We're seeing we've also made progress on conversion and our best traffic is that sort of direct and organic traffic and that's what we're continuing.
To push and make progress on you know I think we all just saw a huge rush to ecommerce a couple of years ago. Some of that has level back off and so our ability to just.
Continue to strengthen the mix of our marketing portfolio and sort of you know continue to expand our toolkit there beyond what with I would say a pretty heavily growth marketing focus a couple of years ago. So we like the progress we're seeing still have more to do you know that first multinational campaign that we just launched we think is going to help build considered.
Asia and things like our new affiliate Influencer network. So it's really a combination I would say of continuing to improve high quality traffic sources, bringing back in clients that we can reactivate together with continues a kind of continued gains in our conversion funnel, which we have gotten back to levels that we were out in the past what we saw.
Youll see more upside by just making it more frictionless and seamless to enter.
So I would say, it's really a combination of the two and then on your fix into freestyle you know I'd say that stayed up pretty heavy levels. I think we have reported in the past that you know it resonates with around a fifth of clients that come back again and again, if they're a freestyle first purchaser I think you're asking those specifically how.
Many of our fixed clients get into free style and I think we've shared in the past something like around 30% of our women's clients, we penetrated with freestyle and that's remained steady which we believe is below full potential frankly, and we're looking for the next ways to kind of reduce what I would say is the cognitive load.
Other brand new fixed customer alerting about freestyle and just continuing to make that easier and easier as an example in every six weeks and we have these ways to where at a style cards that we send it effects.
We see a future of just making those incredibly easy to buy with the fixed checkout process as an entry point into freestyle. So essentially just finding that next frontier of ways of moving that further step change, but I'd say, it's been pretty steady at that level today, but we don't think its full potential.
Thank you.
We will take our next question from David Bellinger with MK and partners. Please go ahead.
Hey, Thanks for taking my questions I've got a couple so my first one just on the guidance. It seems like there was some active client growth embedded in the back half of the year. So what gives you the confidence that the clients will rebound is there anything youre seeing into Q1 on traffic or conversion to support that and then my second one so our pack you expect it to be.
Down again in Q1.
Understanding the dynamic you spoke about earlier that initial users arent spending much right away.
Are you seeing anything beyond that anything on average order values for some type of a trade down effect or mix shift that's affecting that or pack number. Thanks.
Got it thanks, Dave at all I'll take the first one and then I'll, let Dan talk more about our pack.
Yeah, I mean, I think all of the things that we mentioned on the prepared remarks, and some of what I'm I responded within last few questions just the initiatives and the progress we're making on you know continued improvement on Onboarding them continued focus on bringing our signed up prospects reactivation, new traffic channels into our experience.
And so you know we are making progress and you know based on what we're seeing and based on what we believe will be kind.
Kind of lapping on a year on year basis, we anticipate that over the course of this year, we will turn the corner on the our Pac side, let me hand, it to Dan to share more on that a couple of a couple of comments on that.
Our clients who are purchasing.
Of course.
The average age of the average tenure of our client has increased as a result of our net active declines and so when that happens the older clients tend to have a slightly lower cap rate than newer clients simply because their closets get filled up over the course of.
10, 2030, 40 50 fixes.
But we are still seeing very solid keep rates and <unk> in both fixed and free style on the new clients coming in.
On a relative basis, so theres nothing.
Elizabeth had talked about potentially some impact and we do see around around the fringes on the claims that come in they might be lower price clients, but when you look at it holistically the ltvs, both for fixed and freestyle on a cohort basis of the new clients coming in still look very strong.
Got it thank you.
We will take our next question from Trevor Young with Barclays. Please go ahead.
Great. Thanks, Dan on the full year guide can you help us understand how you're thinking about that revenue growth cadence throughout the year in light of the down 20% in <unk> and the easing compares it sounded like one H under pressure, maybe some inventory overhang kind of challenging holiday, but then maybe second half has improved.
What would need to go right for you to exit the year in positive growth territory.
Yeah, It's a good question and so.
In Q1 of last year, we had a very strong quarter, we were up 18% year on year.
That is there that is at the time that we started to see the.
No.
The issues with our fixed funnel that we've discussed many times, but the impact of subsequent fixes gave us a very strong quarter.
We see you know we have an easier comparative in the as we go forward with in FY 'twenty three that coupled with.
Our net actives declining at a far slower rate than as Elizabeth mentioned, we do hope, we do have goals and hope to get to and we will get to sequential improvement in net actives in a quarter. This year all of that means that the growth rates that we see in the back half of the year will improve relative to the growth rates that we see in the first half of the year.
It.
Response to your second question, what do we have to see to exit the year.
We talked about net actives growing and as we as we go through quarter by quarter and see net active improves <unk> improve we do think we will end the year in a very strong position in the meantime, as you can see from our EBITDA guide our cost structure, we're very focused on that both in Q1 and full year.
And so given our focus on fixed and variable costs, we feel that we.
We will and Q4 in the back half of FY 'twenty three in a strong position.
Great. Thank you.
We will take our next question from Mike <unk> with Wells Fargo. Please go ahead.
Hey, everyone just two quick ones.
I think you said the freestyle was up 21% in Q4 can you just say specifically what the with the subscription business was down in Q4, and then Dan on the gross margins can you walk us through the reserve impact to gross margin. How we should basically think about the puts and takes on gross margin for next year. I think you said, it's 42% for Q1 in the fall.
Year should there be much volatility for the remaining Q2 to Q4 should be pretty much 42%.
Almost every quarter.
The ability to call out.
Yeah. Thanks, Ike I can take the first one on Monday.
Can add on them and talk about gross margin that freestyle growth rate just to clarify with our full year FY 'twenty two growth rate not a Q4 growth rate and on our full year basis, we were about negative 1% for the total business, we don't actually breakout by business unit, but I you can infer from that that there was growth in.
Freestyle slight decline within the fixed business I mean overall, it's really just a function of getting.
The net active growth back on track and we entered the year at that 22 with more clients than we exited and so that's a big driver of that fixed number and then just you know continued adoption and rollout of freestyle, which we know has been largely accretive and incremental to our existing <unk> client base.
Let me, let Dan comment on that the gross margin question, Yes, Mike to your question on gross margin, we talked we referenced it earlier that once you adjust for our incremental inventory reserves and third party third party liquidation sales.
Q4 was at 42, 5%, we guided for Q1 to be 42, and full year, we feel good about our overall product margins, we feel good about our gross margin line items. The one caveat of course is just the timing of inventory a lot of our inventory most of our inventory that we will receive in our first.
Half was ordered six months ago, we ordered inventory early because of supply chain challenges back then a lot of those supply chain challenges have since alleviated so the timing of the inventory.
Is a little bit uncertain as we go into our each one for our fall winter and that could create some variability, but we do expect the 42% to be consistent quarter on quarter absent of any inventory surprises, which at this point, we're managing quite closely. So you can infer that the 42% as relatively stable pen.
<unk>, some small changes quarter on quarter.
Got it thank you.
We will take our next question from Ashley <unk> with Jefferies. Please go ahead.
Hey, Thanks for taking our questions just on the fiscal year guide what kind of macro backdrop are you assuming throughout fiscal year 'twenty three and then a lot of retailers have been talking about higher promotions heading into the back half of the air can you update us on your promotional strategy now that you have the ability to use freestyle promotional tool.
Yeah.
Yeah I can start thanks for the questions Ashley I'll start with the promotional kind of behavior and then let Dan talk about the full year.
Guide expectations. So yeah, I mean, when we were a fixed only business, we really had no release valve or promotional offerings for our clients with the exception of our buy five discount, which obviously has been very popular with our customers over the course of the last eight months or so we've been able to experiment with a couple of limited.
If time offers where we're taking advantage of showing value to our freestyle clients.
As well as testing and experimenting with inventory thats not moving as quickly. So we had the first of those back in I think it was in Q late Q2 early Q3, and then again within Q4 and then we also did a labor day event, a few weeks ago and overall, we like what we've seen those events have exceeded our <unk>.
Expectations.
In certain situations, we really liked the ability to drive halo to the rest of our products and so you know we are going to be really thoughtful to do these episodically deliver value to our clients. We know the reason people come to stitch fix are different than being a promotional retailer and those are the places we need to most differentiate which are around fit product.
Scurry and human relationships that said, we also want to make sure we're presenting our clients with value and benefits over time. So we anticipate continuing to use those kinds of events I would imagine probably around the cadence of once a quarter with maybe some experimenting along the way.
One thing that's really unique about the freestyle experiences that each store is unique to each of our clients and so over time as we build more of our pricing capabilities more of our loyalty capabilities.
Being more even one to one focused in nature with what we offer to our clients as an opportunity down the road.
But overall you know we now have this a release valve that we wouldn't have had with FX only business.
I'll, let Dan talk about the full year question.
Yeah actually to your question on our full year I would see that we have not factored in any deep.
<unk> or the changes from where we're at now based on the visibility. We currently have so it's basically a status quo on where we're at now and what we feel is the right guidance to give on everything that we know now and what we've seen over the last several months with our trends.
Great. Thanks for the color.
We will take our next question from Tom Nick <unk> with Wedbush Securities. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
I wanted to follow up on Mike's question earlier about the gross margins.
And for.
For many many years this is a business where that gross margins kind of in the mid forty's.
Now that you've kind of been in the low.
<unk> <unk> 42 per cent range. The last couple of quarters. That's the guide for FY 'twenty three is this essentially linked to the new.
Gross margin for the company long term are there opportunities to take the gross margins higher like what.
How do we think about.
Puts and takes on gross margin can you get back to that kind of mid forties.
Gross margin that the company had four.
For many years.
Before the recent quarters.
Yes, it's a good question Tom.
The sequential changes that you are talking about you know where in each one.
FY 'twenty two we were closer to the 45% and an age too we were closer to the 42%.
It was really as I said earlier, the result of inflationary costs from a product standpoint, along with transportation costs, which is.
It's well documented on the increase that.
That's going on in the form of the from the carriers.
So we do expect that to continue on in FY 'twenty three there are opportunities to ultimately grow and improve margin.
For example, we've talked about this in the past our network is not optimized yet to have the lowest amount of transportation costs from a carrier or split shipments perspective. These are things that we're working on currently and so in these areas that are the biggest drivers of gross margin mainly transportation in product costs there.
There is opportunity.
Should be inflationary environment side, or as we get better and better with transportation and optimizing our carrier networks.
And again, that's more longer term, so I wouldn't say that 42% is the normal.
Going into FY 'twenty, four 'twenty, five and we'll look at that and update the update you guys as we get closer to the end of the year, but for.
For now 42% is more of a realistic just given the inflationary costs that we're seeing in both transportation and on the product side.
Understood. Thanks, Dan.
We will take our next question from Kunal <unk> with UBS. Please go ahead.
Hi, Thanks for taking my question.
Let's start with.
The traffic increases that you've talked about so you said there is a steady improvement in traffic.
Backlog conversion rate also improved.
Yeah.
A couple of things one is.
Your Lps.
LTM active client number declined.
Significantly high single digits on a year over year basis.
You are also talking about the average age of the client base has increased which means youre retaining some of the older customers. So what am I missing here.
Probably you probably I think more customers and yet you'll have more.
Customers.
Who did you lose and why is the LTM number down and then I have a quick follow up.
Hey, Thanks can all yeah I did mention that we saw steady gains in the back half relative to earlier in the year on traffic and then we have made progress on conversion. So those are both true.
Conversion rates are obviously different depending on the source of traffic and channel and so you know we like what we're seeing on driving more to the experience. The area that we still have room to improve is that direct and organic traffic, which which tends to be the highest converting traffic. So while on an apples to apples basis, we've made steady progress on conversion.
You know, we still see opportunity to drive that really high considered traffic that is super high intent on coming to stitch fix so areas of opportunity that we're very focused on are those signed up prospects have already come in given their information, but not converted you know increasing the penetration of those customers, we see as a big opportunity.
You know reactivating prior clients, where they know they found what they needed in the past, but maybe lapped over time and bringing them back and then things like I mentioned like the early <unk>.
To begin to scale our affiliate Influencer. So all of those tend to drive, especially the former that very high intent traffic. So not all traffic is apples to apples as part of what Youre hearing and then on the 10 year point, we just have not at the same magnitude of new customers is really the core issue, it's not that it's.
A different customer base. Its more we just haven't had the same order of magnitude of new customers, which early in lifecycle clients just tend to spend more with us than over say two to three year time frame there spend tends to go down a bit.
And so those are the dynamics that I think youre hearing.
To add anything to that no I think I'll just add.
Add on to what Elizabeth said, which I fully agree with them that once we turned the corner and add net actives that average tenure.
We will come back down.
And we will see that impact over the subsequent timelines as these new customers engage more with fixed and freestyle over there over their tenure. So we would expect that trend to reverse when we add new actors.
Got it and the follow up is on freestyle so freestyle started off.
Last fiscal year effectively and so if it started virtually from scratch in the middle of last fiscal year.
And maybe you had six to nine months off.
Revenue.
And then it grew 21% so did it grow from like 4% of brokerage revenue too.
10% of Coker go there you are.
How big is <unk> right now.
Yeah, I can start and Dan feel free to add so can all we actually began an experience of being able to shop your looks shop items you'd bought in the past fixed experience kind of late in fiscal 'twenty and then we started to ramp up more features and that shopping experience.
In fiscal 'twenty, one I'm, just as an add on feature for existing clients and we continue to build out more features and functionality and we will continue to do so it was just in last fiscal year of FY 'twenty two that we made it possible that you could start with that experience.
It was not brand new halfway through last year, but the features and the expansion of the branding of freestyle happened last fall.
Got it. Thank you so we don't break out yeah. It sounds great. Thanks, Scott.
Okay.
We will take our next question from Janet Kloppenburg with K JK Research Associates. Please go ahead.
Hi, everybody.
I just had a couple of follow on questions about <unk>.
<unk> execution and on the inventory content I was just wondering you talked about the wear to work trends being good.
Hi.
I think that might be helping drive the average spend.
Customer I'm not sure, but wondering if you feel like your inventory investments they are where they should be or still improving now and thats helping.
Drive the improved performance that Youre seeing right now maybe if you could talk a little bit about.
Your investments and wear to work and special occasion versus casual and trends Youre seeing there and also on mens performance because I know that that.
Our agenda has been weaker than women and just lastly, Dan on the inventory I know you're comfortable that it's coming down I was just wondering again on content and seasonal carryover, particularly through the late deliveries of some of them may be because of supply chain delays and how that looks going forward.
Okay.
Yeah.
Yeah, Janet I can start on that the merchandising I mean, we definitely have seen particular strength recently and just you know categories that frankly had been less popular during the Covid time frame are really starting to come back as I mentioned, you know blazer as being a good example of that in women's we also saw like a 30%.
Increase in seasonal heels clearly people are going back into the work environment. Even if it's hybrid work things like dresses has continued to be strong particular types of dresses like median maxi and then with men things that are versatile like polo shirts have continued to show strength, but I would say like athleisure.
Comfortable close those tend to still be very strong categories for us and so it's really the portfolio of products that I think have benefited us in that we've kind of played across you know we're not just athleisure wear not just work, where we're really able to adapt to the signal that we're hearing from our clients.
And you know over the course of this last year, we did add a number of national brands that we've tested into them, but the majority of our sales are still with kind of a combination of stitch fix only in private label that we're able to adapt reasonably quickly based on.
Preference.
Obviously, some categories are longer lead time like footwear. So I would say, we're seeing kind of continued consumer.
Consumer demand in things like Athleisure. In addition to workwear. So it's not just a buffet lunch up to about those categories.
And your plan Youre comfortable that are you comfortable that your inventories are in line.
I think with the with the category demand.
I think we're feeling like we have the right presence of category is I think like most of our category just the overall discretionary investment is what I think kind of all of apparel is probably experiencing right now but in terms of having you know affordable price point, having the categories that consumers are looking for I think probably.
Really the bigger headwind within retail apparel overall is just the shift that consumers are making given inflation gas prices I think it's more of a macro than a micro.
And let me I know you have the supply chain speed question. Thanks, so much take that one.
A question on the spring and summer goods.
That was the reason we gave.
When we talk to them about the 250 basis point impact on margin.
From 48% that we had in Q4.
I feel very good about the spring and summer goods and form or in the form of we've adequately reserved for that.
<unk> executed.
Quite a bit on on right sizing that inventory.
I'll say of course, yes.
Fly chain issues as it relates to fall and winter is where we're focused on now a lot of those orders were placed six months ago and so we have one more cycle here before we feel we can right size, our inventory and I would expect inventory to go up sequentially.
In Q1, although we are still working on right sizing that inventory so for the spring summer I feel very good and I also feel pretty good I feel very good about the back half that we will have our inventory right sized by the back half of our FY 'twenty three.
Okay. Thanks, so much I'll follow up on it later.
Yes.
We will take our next question from Dana Telsey with Telsey Advisory Group. Please go ahead.
Hi, Good evening, everyone. Just following up on Janet's question on inventory you talk about right sizing the inventory what levels do you expect it to be and is there a marker for the first half of the fiscal year end by the end of the fiscal year as Youre looking at it.
And then on expense reduction, which I believe last quarter, you had talked about the $40 million to $60 million annual cost savings.
How is that progressing and the one time restructuring charges of $15 million to $20 million in this past fourth quarter is that done or is there anything more we should look at.
And then just Elizabeth on product as you think about planning for the holiday season. What are you leaning into what are you seeing from brands from your own private label and how do you expect that mix to shape. Thank you.
And I'll, let Dan take the first couple of questions.
Hi, Dana.
To your first question.
We don't provide.
Forecast for inventory that said.
We feel that we can get an exit upwards of.
Four to five times turns on it on a gross inventory basis, we're not there now, but we feel ultimately we eventually can get to that level, that's probably longer term, but we're making good progress where we plan to make good progress throughout FY 'twenty three on right sizing, our inventory and keeping it at the right.
Alright level of turns on a go forward basis, and we'll update you more in future earnings calls on where we're at with respect to our inventory position.
On the on the cost and.
On the cost savings initiative.
We mentioned last quarter that $40 million to $60 million is what we expected to receive.
We are on track as we said earlier to exceed that number.
Most of that.
Lot of it is operational lives theres still a lot of initiatives that we have that we're working on so we will give an update on what that is going to be as we go through FY 'twenty three but I feel very good on the 40 to 60 on exceeding that 60 million threshold.
The bulk of that is on the fixed cost side on top of that we are expecting to get variable productivity for a lot of the work that we did in <unk> in Q4 on both the warehouse and styling side of the business and so that will help in the cost savings initiative going forward and then finally to.
Your.
A question on the restructuring charges, we may have small amounts of restructuring we don't anticipate anything for Q1 as big as Q4, there might be some small restructuring and onetime charge initiatives. We'll update you guys on that as we as we go into Q2.
But it will not be like it was of course in Q4 again stay tuned on restructuring and onetime charges.
And then I can just mentioned I think in your asking question that some of the trends, we're seeing on our assortment and heading into the holiday season, I would just say broadly you know we've learned a lot on sort of the discovery.
Within free style of some of the brands that we've added and in particular I think we've seen popularity with contemporary brands with accessible price points and limited distribution you know some of our top brands that we've seen in freestyle had been brands like modern citizen fair. Our moda brands are basically priced at that sweet spot of under $150.
In addition to particular strength in a number of our exclusive brands.
And spruce and 41 Hawthorne continue to be some of the biggest brands within our portfolio of both fixed and freestyle.
I think we're hearing in terms of client signal in our requests notes are you know going out again and preparing for the holiday season, we are more of a self purchase occasions still rather than gifting. So our focus is probably going to be on that in terms of you know dresses and going out there.
And we're ready for that.
So thank you for that question.
Thank you.
There are no further questions at this time Ms folding I'd like to turn the conference back to you for any additional or closing remarks.
Thank you everybody for joining us today and all the questions. We look forward to updating you on our progress.
This concludes today's call. Thank you for your participation you may now disconnect.
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