Q1 2023 Stitch Fix Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Hello, and thank you for standing by.
Welcome to the stitch fix first quarter fiscal 2023 earnings conference call at.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one one on your telephone.
Now my pleasure to introduce Hayden Blair.
Good afternoon.
And thank you for joining us today to discuss the results for <unk> first quarter fiscal year 2023.
Joining me on the call today are Elizabeth Spaulding, CEO of stitch fix and Dan <unk> CFO .
We have posted complete first quarter 2023 financial results.
Press release on the quarterly results section of our web site 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 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 and.
In particular, our press release issued and filed today.
Well at the risk factors section of our annual report on Form 10-K for fiscal year 2022, previously filed with the SEC.
And the quarterly report on Form 10-Q for first quarter of fiscal year, 2023, 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.
Reconciliation 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 and.
And a replay of this call will be available on the website shortly.
With that I will turn the call over to Elizabeth.
Thanks Peter.
We stated on last quarter's call following a transformative year with the rollout of freestyle.
We began fiscal year 2023, with a clear focus on growing our client base and achieving profitability.
As the macroeconomic environment continues to be uncertain. We are now further balancing the need to optimize our cost structure against achieving the long term growth objectives of the business.
We are confident in this approach and are determined to use this moment.
<unk> is to create a leaner more nimble and profitable stitch fix while continuing to enhance the experience for our clients.
In fiscal Q1, the retail industry experienced a meaningful pull forward at the holiday promotional environment.
Which continues to be more pronounced than expected due to weak consumer sentiment and excess inventories.
We believe this resulted in lower client spending and also had a large impact on our net active clients, which declined 11% year over year.
Overall Q1, net revenue declined 22% year over year to $435 6 million, which was at the low end of the range provided on the Q4 call.
Despite this we continue to deliver on operational efficiencies and cost control, which enabled us to beat our provided outlook on adjusted EBITDA of negative seven 4 million for the first quarter.
Dan will provide more details on the quarter in his section.
Okay.
Today, I will discuss our plan for the balance of 2023 and a few key areas.
First our focus on profitability and how we plan to further simplify our cost structure to create a more efficient operating model.
Second how.
We continue to strengthen our client experience with an emphasis on our biggest differentiators of discovery fit and human relationship.
And lastly, how.
We are evolving our marketing strategy to increase our focus on engaging and reactivating the audiences that already know us.
First on our focus on profitability and a leaner operating model.
On the last call, we said that we recognize returning to positive adjusted EBITDA and free cash flow was of the utmost important.
Okay.
This remains our central focus and the continued uncertain macro environment underscores the value of a leaner profitable business model that will allow us to adapt quickly in the future.
As such we are increasing our FY 'twenty three cost reduction targets that we announced two quarters ago.
$135 million from the $40 million to $60 million previously discussed.
While much of the new reductions will come from advertising, which I will discuss more later on.
We're also targeting more fixed and variable productivity at a number of areas.
We recognize we need to operate the business more efficiently and focus on the areas most critical to move us forward in the current environment.
We believe we can execute these initiatives while simultaneously enhancing our client experience.
Without compromising the long term growth potential our highly differentiated business model presents.
To reinforce our biggest focus is on achieving profitability.
That said.
We do want to give you an understanding of what we are working on in the background that is foundational to further enhancing our client experience.
Our clients choose stitch fix to find the items they would not have otherwise pamper themselves for the tremendous convenience our styling service provides.
And for the personalization, we deliver client style and fit.
We are the leaders in providing personalized styling support through our fixed model, which together with free cells on demand styling features like shop, your looks and trending for you drive higher conversion and lower return rates relative to traditional e-commerce retail.
Knowing that there are two specific areas of opportunity we are focused on enhancing to grow and retain our net active client base.
Making it easier to enter our ecosystem.
And ensuring our clients feel consistently heard and served in a personalized way to keep them coming back again and again.
In terms of entering our ecosystem.
We made progress in the first quarter testing, a new outreach strategy to a large number of signed up prospects, who have not yet purchased from us.
Which increased conversion by 30% over last quarter.
We are also working on faster sign up processes.
And more personalized search base landing pages to continue to make it easier for clients to get started with stitch fix.
In terms of appealing herd and served in a personalized way to keep clients coming back again, and again, we see clear opportunities to improve client retention at critical moments with fixed preview and fixed checkout.
For example.
We know that when clients keep at least one item and are looking forward to their next fix.
We're likely to have multiple future fix it.
The inverse is also true if a client by zero items in their first fix their three times as likely to cancel their auto ship in clients, who bought one item.
Given the criticality of these moments we are testing multiple new ways for richer interaction and listening.
Both before clients received their fixed as well as when they share feedback if we haven't hit the mark.
One tests underway include stylists expert contacting first time clients, who purchased euro items to get to know our clients better and to proactively suggests replacement items for freestyle for the client so that we can get it right.
We expect this higher level of personal touch and communication will be meaningful in improving client happiness and ultimately improve retention.
And lastly, we are evolving our marketing strategy to increase our focus on engaging and reactivating the audiences that already know us while continuing to lean into new acquisition channels.
This is a critical step towards increasing profitability as we will reduce marketing spend in the back half of the year.
As a business we have relied on digital performance based channels and lower funnel spending on client prospects.
While these channels did and stopped proved to be successful they are now less efficient than they once were.
In addition, we have a pool of over 10 million consumers that have already interacted with us.
But if not recently or ever made a purchase that we can more directly target or bring back into our ecosystem.
Recent testing showed the cost per acquisition for Reengagement of this pool.
<unk> less than prospective clients, who had never interacted with us.
Our experience has continued to evolve and we want to reach those clients, who already know us and help them rediscover their love for stitch fix.
In addition, we're continuing to expand our underpenetrated marketing channels, such as affiliate Influencers and SCO SCM.
Which will take time to develop into meaningful contributors, but will be important over time for new customer acquisition.
In summary, we remain confident in our unique and differentiated business model and a long term opportunity ahead of us and we are adapting to meet the moment in these uncertain times.
By focusing on these things within our control we will continue to set ourselves up to achieve adjusted EBITDA and free cash flow positivity in the near term, while maximizing our long term potential.
With that I will turn the call over to Dan.
Thank you Elizabeth and Hello to everyone on the call.
Q1, net revenue declined 22% year over year to $455 6 million, which came in at the low end of our guidance due to lower net active clients and a pull forward of holiday related promotions across the industry.
The deep discounting the industry has experienced well in advance of the normal holiday season, particularly impacted October freestyle revenue.
Adjusted EBITDA for the quarter came in at negative $7 4 million, which was above our outlook largely due to effective cost controls as we continue to drive towards our goal of positive adjusted EBITDA and free cash flow.
Net active clients in the quarter declined 11% year over year to $3 7 million.
Well this was an improvement from a sequential loss from Q3 to Q4 of last year.
Electric clients were lower than what we expected at the onset of the quarter.
While we are seeing an increase in new active customers. We continue to see a high number of customers delaying spending partially due to the macro environment.
Revenue per active client was approximately flat year over year at $525.
However, our analysis does show that clients are spending less across a broad set of cohorts and we expect this to continue given the economic backdrop and the deep discounting we are seeing in the retail industry.
Q1 gross margin came in as expected at 42, 1% down 490 basis points year over year, driven primarily by higher product costs higher.
Higher clearance and unfavorable transportation costs year over year.
Sequentially gross margin was up 210 basis points from Q4, due mostly to improved inventory reserves.
We continue to believe gross margin will be approximately 42% throughout the rest of FY 'twenty three.
Advertising was 9% of revenue in the quarter.
For the remainder of the year, we expect advertising as a percent of revenue to be lower than our historic rate due to the marketing shift Elizabeth discussed.
We will be laser focused on spending advertising dollars, where we see near term positive ROI and we will continue to build out new marketing channels.
For the remainder of this year, we expect advertising to be approximately 5% to 6% of revenue. So we'll continue to evaluate our advertising spend to ensure we are managing to the right return on investment.
Okay.
Net inventory grew 20% year over year due to higher receipt volume.
We did expect this higher inventory given our long lead times from order placement to receipt of inventory.
We aggressively adjusting our buying in Q4 of last year, and we expect inventory to come down sequentially in Q2 and continued to decline in the second half of the year.
Yeah.
Free cash flow for the quarter was negative $16 million and we ended the quarter with $209 million in cash cash.
<unk> ones and highly rated securities.
Now onto our outlook.
The challenging economic environment increases uncertainty around the trajectory of net actors and therefore revenue as we look forward.
We know that high rates of inflation are impacting consumer purchases and high levels of inventory are impacting pricing with deeper discounting across the retail industry.
Okay.
Yeah.
Additionally, we are reducing our advertising spend amidst a very promotional holiday season.
In these times, we are less certain how the revenue story plays out for the rest of the year and so our goal continues to be managing our overall cost while continuing to focus on improving our client experience with the goal of becoming adjusted EBITDA and free cash flow positive in the near term.
In light of this backdrop, we anticipate revenues to be between 410 and $420 million for QQ as we continue to see pressure on net active clients and expect the holiday promotional environment to continue throughout the end of the quarter.
Yeah.
We expect adjusted EBITDA for the quarter to be between negative $5 million and positive $5 million, primarily reflecting our ongoing cost structure efforts and a reduced level of advertising spend.
Given our current visibility around our marketing and retention efforts and balancing the uncertainty in this challenging backdrop, we are lowering our full year FY 'twenty three revenue guidance to be between one six and $1 7 billion.
This assumes no material change in the current competitive landscape and macro environment from where we are where we see it today.
Despite this we are raising our outlook on adjusted EBITDA for the year to be between negative $10 million in positive $10 million, reflecting a reduced advertising levels and ongoing cost management initiatives.
Before we turn it over to Q&A I want to remind everyone that even at current levels, our unit and order economics continue to be strong with contribution profit excluding advertising in the range of 25% to 30%.
We know there is further opportunity to improve both fixed and variable costs and therefore, we see an opportunity to increase our contribution margin in addition to improving fixed leverage.
In the meantime, we will continue to focus on the things we can control.
Deepening our differentiation improving our client experience and right sizing our overall cost structure, all with a focus on near term positive adjusted EBITDA and free cash flow.
During this sets us up to be in a strong position producing healthy and profitable leverage as the economy improves and for a return to growth.
With that I'll turn the call over to the operator for Q&A.
Thank you.
As a reminder, ladies and gentlemen to ask a question you will need to press star one one on your telephone.
And we ask that you please limit yourself to one question and one follow up.
While we compile the Q&A roster.
And our first question comes from the line of Youssef Squali with Shaw.
Great. Thank you very much hi, guys. So just a couple of questions from me one.
Unless earnings call you guys talked a little bit about some of the new product enhancements personalization features efforts that you guys were doing to drive engagement and improve the user experience. You also had a brand campaign that was launched if I remember correctly in mid September can you just speak to the performance too.
One of the efforts Youre, making where are you there second how the.
The campaign did relative to your own expectations and then broadly speaking.
How are you kind of positioned.
For the rest of the year from kind of an inventory standpoint, where would you like inventory to be at the end of the year. Thank you.
Hey, Thanks, Steve I can take the first part of that and then I'll, let Dan speak to our inventory position.
On the customer experience I think I alluded to some of this on the call, but we're pleased with the progress that we're making on clients entering our user experience. You know that was an area that we've been focused on over the last several quarters and we're significantly off of our lows and new client conversion, which gives us confidence that we're doing the right things to create an even more seamless.
Entry into new <unk> customers, and that's starting to pay dividends.
Did things like improved our dynamic landing pages, depending on where clients were coming from.
Including some improvements to the style quiz.
And we've begun to experiment with what were really featuring and talking about in terms of how it works in the stitch fix experience and sort of the unique differentiators of our styling experience and we're leaning into further improvements on that as we entered Q2 with things like delaying our E mail capture one time login just areas that we're very aware of that.
Create friction so pleased with the progress that we're making and continuing to focus on doing more there more broadly within the user experience. I also had mentioned these kind of critical moments of truth within fixed preview as well as within the checkout experience and so we've made a number of improvements on how we are circa.
Inventory to our clients I mentioned fixed preview that one were a little bit you know that as we launched and rolled that out over time.
Creased, our overall <unk> and retention as we rolled that out a year or two ago. We now see kind of the next wave of improvements of client listening and learning and we're eager to dive in there we like what we're seeing in these very early tests, but we've yet to scale them and more to come over the coming quarters.
Then kind of related to the.
It goes landing pages and how we're educating consumers that's a good bridge and to your question on the brand campaign that was the first time, we had done a campaign that was consistent across the UK and the U S and really focused on and always on messaging around how it works and really educating consumers on the unique differentiators and so the <unk>.
Consumer qualitative feedback that we've received from that is strong we like what we're hearing in terms of consumer appreciation of the value proposition. We also saw some improvements in organic traffic conversion that we think could be attributed to that the relevance of that campaign, it's something that we imagine kind of being layered with.
How are influencers are talking about stitch fix how we talk at our within TV and OTT. So it's something that we anticipate we will build on in the future and is.
Part of really conveying our unique value proposition.
I will let Dan touch on the inventory position question.
On.
As we mentioned in the protocol, we did expect this to increase inventory and we did expect this quarter the $220 million hit the peak and we are seeing that decrease throughout November and even through the first week of December . So the trajectory is right, where we expected we will be lower in Q2, we're going to continue to low below.
During Q3, and Q4 sequentially, because we have right sized our buying for the second half of the year. So that inventory will go down and I suspect it will be negative on a year on year basis.
In the back half of the year.
That's helpful. Thank you.
Thank you and our next.
Question comes from the line of Simeon Siegel with BMO capital markets.
Thanks, Hey, everyone hope, you're doing well and have a nice Thanksgiving.
And I was hoping you could give any color on gross versus net adds maybe in active clients. This quarter and then if I heard it correctly and apologize if I didn't I was hoping you could elaborate a little bit on the comment about consumers, having choices where to shop impacting the net adds I guess that sounds a little bit more typical for traditional retail. So so I guess you have.
Guys had been may be insulated given the oil picks shoppers. So are you seeing a pivot in the existing base or the customer approach to your company.
If the active client positioning is now competing against traditional retailers does that change how you focus on writing in forecasting the business again, if I, if I'm mistaken yet or misheard I apologize thanks guys.
Yeah. Thanks, Simeon I can start and Dan feel free to chime in as well so on the.
The gross versus net adds I think Dan touched on that where we did see an increase in clients.
Our gross add quarter on quarter. So Q1 versus Q4 that said, we also saw an increase in clients, who haven't shopped with us in 12 months plus.
That is something I think we attribute in part to the macro environment and just the pullback that overall I think the category is seeing in retail spending.
We believe that a lot of the efforts that we're focused on in terms of retaining clients longer improving the experience.
Reactivating clients some of what I talked about on the marketing front all will be important in terms of driving improvements over time.
The competition with traditional retail I think what we were referring to there is.
Quarter on quarter, we did see increases in things like our <unk> and our average.
<unk> unit retails that said we did see.
Softness in freestyle relative to what we would have anticipated and we could see as we compared it to a lot of the pull forward in the promotional calendars of other players in the space that we were impacted by some of those promotional offers that happened August September just far earlier than we typically would have seen and then I think Dan mentioned the.
Cohort to cohort spending.
Consumers are telling us that in this macro environment that theyre, just being more judicious with our spending and so while our keep rates and our average order values are holding steady we are seeing some stretching out of frequency.
And stretching out of those freestyle purchases. So we still believe we are very unique in our core value proposition, we compete on things like discovery and fit in human relationships that I think freestyle in particular is probably more impacted by really really promotional environment, which we saw in particular in that.
August September October timeframe.
Got it. Thanks, that's very helpful. And then just maybe just follow up on that comment you made about the quarter over quarter asps year over year Asps this quarter.
Yes, I think quarter over quarter, we saw a.
<unk> percentage points increase on.
Similarly on an ASP basis in part.
F P was over 10% up quarter on quarter part of that is seasonal we do see it leaning into outerwear and goods that are slightly higher priced.
But overall I mean, we saw health I would say in general within our <unk> and average unit retails I think it's more maybe a frequency of spending that we saw more of a pull back.
Great. Thanks, So much guys best of luck for the rest of it.
Thanks, Jeremy.
Thank you and our next question comes from the line of Mark All swagger with RW Baird.
Good afternoon, Thanks for taking my question.
With respect to the shift in marketing strategy is this a temporary shift amid the current macro or what are the proof points that you wanted to see in the transformation to give you confidence to more aggressively go after that Tam of consumers, who haven't engaged with the platform before.
Yeah. Thanks Mark.
I would say it is in part a response to the environment, but also a really strong belief that really happy clients and reactivating clients or some of our best channels for marketing and believing theres opportunity to further expand those in addition to the areas of Tam expansion into some of these new marketing channels that we've just historically been Underpenetrated one thing I think we are.
We're very deliberate about and I think Dan mentioned this in his remarks as did I, it's just being very focused on near term.
Positive ROI and so I think what we are.
<unk> worked through it's just being more deliberate and really raising the bar of our payback thresholds, which we're always very disciplined we just essentially made the decision given the ambition on free cash flow positivity EBITDA positivity and just what we're seeing in the macro backdrop to be even more even more disciplined in terms of those payback periods. We're also using it.
It is an opportunity to go even faster at really doubling down on opportunities to reactivate clients that have left us in the past that pool and that opportunity has obviously grown over time as we become a more mature business and so.
Dan mentioned, the 5% to 6% that's our best view for the full year, but we'll learn over the next few quarters and based on the paybacks we're seeing.
We may opt to spend more as we go forward, but it's not a permanent shift its more or less let's learn into there can be even more disciplined on paybacks in the near term.
Thank you and then a follow up on freestyle is it makes sense.
Heavily promotional backdrop would impact engagement. There. So what are you doing or what can you do to kind of manage your competitive position in such a dynamic price environment.
Yeah. It's a great question I mean, I think we're very focused on first of all just continuing to invest in our biggest differentiator is things like outfitting things like focusing on new arrivals that are most relevant to each of our clients part of what we're hearing from consumers is making more value out of the wardrobe that they are.
Already have and we know that our outfit based feed showing new arrivals in the context of outfit is highly converting one example recently is.
We do a new output E Mail every week, we added dynamic content, that's one to one for each consumer that shows them how to wear items for our new arrivals that spoke to each client and we saw a 30% increase in conversion rate on those E. Mails. So part of our strategy I think is just being more relevant and differentiated on the things that make us special and.
Relevant week to week in moment I think the other is we never really had any sort of.
Limited time offer clearance valve pre freestyle. So over the course of this year, we have been experimenting with episodic events that we feel like meet the moment within the promotional calendar roughly I would say around once a quarter.
But.
Our goal is not to become a promotional retailer, but you really don't deliver value on these differentiators of discovery fit.
<unk> relationship and really focus there first and foremost while also recognizing freestyle creates an opportunity to map more fully to the retail calendar and be relevant with what consumers are saying.
Thank you and happy holidays.
Thanks Mark.
Thank you.
Our next question comes from the line of Edward <unk> with Piper Sandler.
Hey, good evening guys. Thanks for taking the questions. I guess first is the bigger picture question and making sure. We are framing. This correctly are you effectively saying that until the environment becomes less promotional that youre going to kind of trade off net add for profitability and are we fair to assume that until that changes that net adds will remain negative and then as a follow up.
Do you think about the promotional environment thing, particularly prolonged.
Know that Youre, obviously, not in the percent off game or coupon game, but are there other ways you can drive.
Stronger price value relationship if that's what the consumer and the pivoting towards thank you.
Yes, Thank you Ed.
On the first point in terms of where we're focused I think both Dan and I emphasize that that first and foremost.
Return to free cash flow positivity in EBITDA profitability is our main focus. So we are very much emphasizing that and I would say given the current macro environment and then that's deliberate and intentional decision to pull back on marketing spend for the focus of being very near term ROI positive.
We're not predicting a return to inflicting that sequential sequential net active client base this year.
That said all of the things that we're working on that I talked about it in the background, both the client experience to improve retention.
<unk>, our focus on marketing to do more with the clients that already know us.
We believe really sets us up for healthy client growth in the future, particularly as the economy.
So I would say, we're very focused on profitability together with the most critical places of our customer experience.
And then on the promo environment.
We have always had or by five discount within the fix offering which we know delivers value to clients. We have our style pass offering for our customers that are capped over 10 items, where we offer them.
Essentially unlimited fixes those are places that we see as a jumping off point.
For the expansion of our loyalty program over time, nothing to announce there yet but that is on our roadmap to deliver value to our customers really across what we now know is such a compelling ecosystem between fixed and freestyle and to some extent an untapped opportunity to really bring all of those elements together in a more systematic program.
So we definitely see something there down the road nothing specific to announce just yet in terms of timing.
Thank you.
Yes.
Thank you and our next question comes from the line of David Bellinger with MKS partners.
Hey, Thanks for taking the questions. So first one on the revenue guidance for the year. So Q1 fell within your range, albeit towards the lower end. So did you see trends slow materially towards the end of Q1, and so far into Q2 and have you subsequently adjusted each quarter of the year down further since then.
Just how should we think about the change in the pace of what you took shape in terms of the revenue guidance for the year.
Yes, I'll take that one.
We did see as we mentioned some impact.
The deep discounting in the retail industry, which impacted our October sales.
Choose the last month quarter end.
On a go forward basis, how we're looking at the revenue guide is a function of what we saw what we saw in the holiday period, and the deep discounting and expecting the macro environment to continue as is but also taking into account some of the marketing initiatives that we've talked to them early on earlier in the call. So the way the way I would think.
That guide going forward.
It's more.
A similar change on a year on year basis for the rest of the quarters as it is with Q1 just.
Just given that the guide that we gave of the negative one point the one six to $1 7 billion for full year revenue.
Got it and then my follow up just bigger picture, if we step back.
Thank your inventory position is holding back revenue growth and client growth in some ways is there some type of larger inventory issue at play for stitch fix and do you need sort of a reset or refresh in order to.
Order to again connect with your core customer base.
I mean, I can start and Dan feel free to chime in I mean, I think we feel like over the course of the last year, plus we introduced a really healthy mix of national brands together with our strong exclusive and stitch fix only brands, which the latter make up the majority of our inventory we onboard at north of 80 brands in FY <unk>.
Two.
We've been able to grow our different product categories with freestyle in particular like footwear and outerwear in dresses.
And we have a refresh rebuy approach to our exclusive brands that makes us reasonably adaptable that will keep leaning into so I think we actually have a lot of the right product now of course for true category expansion.
Getting into the the layers of growth, we see possible as we really go after expanding our Tam.
That I think is setting ourselves up as we work towards this fiscal year on some of the client experience. Some of the other work that we're focused on in the background are things like a unified data platform, which I think Ive mentioned some of this on prior calls that our infrastructure was built very rapidly to scale, our fixed business into multiple lines of business like women's.
Men's kids and the U K.
It didn't have the foresight to know we launched freestyle or the foresight to say, let's get into a lot of different product categories. So we're essentially slowing down a bit to speed up in the future by preparing our infrastructure. So that we can add on more of these new categories as we get into fiscal year 'twenty four.
But that all said.
We feel like we have the right assortment for our consumer we're very focused on.
The combination of what we call our supermom within women's as well as leaning into a fashionista and we know we've actually grown the penetration of that fashion needs to client over the last 12 months.
Thank you and our next question comes from the line of Ike Bora Chow.
With.
Hi, everyone. This is Jesse so Wilson on for Ike I was just.
Curious with the freestyle offering.
The challenge with the promotional environment today do you guys ever plan on evolving the offering to be maybe more in line with general retail business practices.
The general retail landscape with.
The calendar promotions.
Thank you.
Hey, Jesse Thanks for the question can you just clarify when you say more like.
Traditionally.
A lot of traditional retailers typically exhibit.
Promotions on typical calendar such as steeper discounts during the holiday period or summer sales, depending on whether they are selling whereas I kind of understand freestyle it'd be a little bit more full priced. So I was curious if there was any interest in potentially adopting the offering to be more in line with the cadence of <unk>.
Some other apparel distributors in the industry.
Okay got it yeah.
So I mentioned this a little bit earlier, I guess, a few things I would offer.
First in terms of some of our highest converting areas within freestyle I think we've shared this in the past between.
40% to 50% of our conversions happen an outfit based shopping which is a big differentiator you know, we're helping clients see what items could go with something that they've already purchased as well as outfit based shopping based on what we think is trending for them as well as in any of our product detail pages being able to see items in that context.
Algorithmic regenerated outfits as well as outfits that are been curated by our stylists. So those characteristics. One thing that's interesting is we have done.
<unk> limited time offers now that we can flex that muscle similar to traditional retail is that we see a halo effect to full price items. During those same time periods as people come into the site experience. So I think we absolutely will continue to experiment and likely lean forward, we had our first black Friday, cyber Monday event, which we.
Good lift in terms of what we were able to offer our clients in that window.
But I think we really want to strike a good balance of being relevant in those seasonal time period, but ultimately do what we do best which is differentiating based on style discovery fit and as I mentioned to one of the prior questions I got on the notion of loyalty. We've always had the style pass program, but we see down the road.
Timeline, yet to share here being able to offer just rewards back to our clients. The same way they're rewarded if they buy five items and FX. So I think rather than trying to just replicate the retail calendar, we would like to be really focused on what's unique to us.
Great. Thank you.
Thank you.
Question comes from the line of Tom Nikki with Wedbush Securities.
Sure.
Hey, everybody. Thanks for taking my question.
Is it safe to assume.
Cut to the revenue guidance is predominantly because.
A more conservative assumption for luxury.
Okay.
When the business seems like could you start growing again would be predominantly driven by a recovery in the industry.
Thanks.
Hey, Tom you cut out a little here I think I'll, let Dan answer, but just to play back I think your question was is the reduced guide largely driven by freestyle was that the question or can you just clarify that.
Yes, that's right and then would you expect the recovery to be driven by freestyle as well.
Yes, I can take that.
It wasn't driven entirely by freestyle, we talked a little bit about the reduction in advertising talked a lot about the reduction in advertising certainly that's some of the reduction in revenue that we guided to.
We also.
Part of that is just a net actives and where we are today.
And so while I do think freestyle will.
The economy improves freestyle will improve and that will help with growth certainly.
Fix is critical and important to our business as well and Elizabeth talked earlier about a variety of areas that we're focusing on to drive a re engagement engagement in clients, who is filled out their style profile, but never purchased with us et cetera. So that is also going to be the catalyst to grow going forward.
The macro environment as we talked about will be a catalyst when that does improve as well.
Alright, thanks, very much and happy holidays.
Thanks, Tom.
Thank you.
And our next question comes from the line of Kunal <unk> with UBS.
Alright, Thanks for taking my question a few if I could one is on the inventory side. So I go back to Q3 'twenty two earnings call that you talked about the supply chain and the improvements that you had made.
<unk>.
I am literally reading of the transcript one of the big benefits of our business.
We can make adjustments pretty rapidly, especially given the nature of how many goods we are actually control directly.
And.
Compare that to what you said earlier in this call today.
Is the inventory was higher because of long lead time. So can you help us understand exactly what's happening with inventory are you in control of the supply chain are you not getting your rapidly flex up and down.
That'll be that'll be the first.
So let me let me just explain first of all.
From order placement to receipt of inventory for a lot of our product, especially of course, our exclusive brand product, which is made to order.
About a six months lead time so.
There are other areas, specifically within national brands and other areas that we can flex up or down and but we have a fairly sizeable exclusive.
Product and those are pretty long lead times actually they are probably even longer than six months. So.
What I was referring to in Y. Our inventory was is higher now is because we had placed those orders when we had a different demand trajectory six to nine months ago. We have since adjusted which is why we expect inventory to go down in Q2, and then continue to go down throughout the rest of the fiscal year that said.
There are pockets of opportunity, we absolutely can chase.
Chase into that demand, depending on where it is and we do that fairly well.
But we do have these slightly longer lead times for exclusive and R. R.
Our exclusive product.
Got it thanks.
Second one would be you guided to 5% 6% of advertising.
Advertising cost of like 5% to 6% that is significantly below anything that you did pre COVID-19.
We're extremely disciplined about it then but.
It means is this quarter youre at.
Advertising spend was down 19% year over year, when sales were down 22% year over year.
For the rest of the year youre guiding to sales being down 20%.
In each of the following quarters.
For Deicing spend will be down about 50% in each of the quarters. So what gives us the confidence that.
Sales should not be even lower.
Then.
Right right now.
Yeah, Kunal I can I can start on that and Dan feel free to add on I mean first of all I think we've always been very disciplined about how we manage our marketing spend and I think we both touched on that to some extent on the call. We are opting to be even more rigorous and the time period of payback than we typically are just in the spirit of the macro.
Rob this uncertain time, and really ensuring that we have very near term ROI on our marketing spend.
A certain portion of our revenue to be clearer comes from subsequent sales of existing clients that we're marketing to thrift channels like CRM and engaging them to come back in but it's not as much of the result of our paid spend so our growth rate is in part due by new customer acquisitions, but it's also in part based on the installed base of our <unk>.
Customers that are on auto ship and subsequent sales. So I don't think you should expect to see a perfectly one to one correlation with that down shift in marketing spend relative to our our revenue rate.
I'd say overall in terms of is that a permanent shift or not I think we got that question earlier.
We're going to measure as we always do day to day week to week and make adjustments accordingly.
And some of the new areas that we've been leaning into that are underpenetrated for stitch fix SCO SCM Influencer affiliate as we start to.
See goodness, there will begin to scale those of course that number may change over time, but I'd say net net the delta between those two rates with that part of the growth rate has an installed base and part of the growth rate is new customer acquisition.
Got it thanks, and one last one if I could and this is with regard to the <unk>.
Amit.
Ben I'll keep right, then you'll be up flat, but we see stretching frequencies. So.
Is that can you give us a sense of like how the frequency of stretching and could that stretch it too.
Once every six months or once every 12 months in order to further push.
The fixes into maybe next year.
Yes, I can start on that.
Our clients are all University universally like every three months, we have a mix of cohorts. Some of what you get fixes every six weeks some of which are every three months some of which are biannual. It's more of that and then a certain amount of our clients are what we call manual there episodically or ordering fixes and they tend to occur at a certain frequency.
I'd say a few things are probably driving that stretching out one is in a little bit of stretching across all of those cohorts. So it's not like everyone's going from three to six somebody might've been six weeks and maybe they are skipping a shipment and then going back to that six week cadence.
It also as.
As we've slowed down the new add cohorts they tend to have some of the higher frequencies and so some of the structuring is also a result of the mix shift of our client base in terms of the cohort age.
But I think our goal is really overall on just continuing to be meeting the moment for our clients, helping their dollars dollars go further with things like what I was describing with outfits.
Incredibly effective with how we're listening and frankly, just having the right assortment one thing we've seen is that.
We have sort of a sweet spot of where we've seen very strong velocity with price points under $100 Blazers sort of contemporary apparel and women's up $150 price point, So just really making sure we're meeting them with what Theyre looking for regardless, if they are extending a little bit or at the same frequency that they've been with us over time.
Got it. Thank you so much thanks.
Thanks Kunal.
Thank you.
Our next question comes from the line of Trevor Young with Barclays.
Great. Thanks, just first on the increase in the cost reduction target to $1 35, do you expect to realize all of that in 'twenty three since most of that is advertising and then within that how much is really advertising and durable versus just more kind of near term pulling back given the <unk>.
Current environment.
Yeah. Thanks, Trevor I can start, but I definitely would love to enter to chime in here as we said in prior quarters, we had that $40 million to $60 million. We shared that we were tracking to that and likely to go beyond that now this increased to $1 35.
A meaningful chunk of that is in fact advertising dollars together with fixed and variable productivity in terms of when we will see a realize Dan do you want to just share more on that yes.
That will be realized in our fiscal year.
That's why we are quoting it the way we do because a lot of it is advertising and when you model out that 5% to 6% of revenue Youll see that.
And then of course, the remainder is a combination of fixed and variable efficiencies and leverage.
On the to answer your second part on a go forward basis, as we mentioned on the advertising.
We will look at that very closely we look at the ROI on that we'll spend into where we have near term positive ROI.
And we're not we're going to pull back where we don't and so we'll manage that very closely for the rest of the year and of course into our fiscal 'twenty four and then all of the on the variable and fixed obviously that is indefinite that won't continue going forward as we see those efficiencies and take advantage of them.
Great. Thanks.
Thank you and our next.
Question comes from the line of Dana Telsey with Telsey Advisory group.
Good afternoon, everyone.
As you're talking about the customers delaying spending is there any particular cohorts that youre seeing it from.
More or less and then can you talk about product trends in terms of what you saw and in terms of pricing both on freestyle and what youre seeing requested and fixes and lastly, with the advertising spend moving from 9% this year to 5% to 6%.
What made 5% to 6% the right number and what are you looking for to see if you need to increase advertising given what the revenue impact may be.
<unk>.
Yeah, I'll start with that and I'll ask Elizabeth can take the second part of that question. When we looked at it. It's a good question on the cohorts and we looked at this in many different ways across our cohorts.
I mentioned in my prepared remarks, we didn't see a broad spending reduction across all our cohorts. So clearly the macro environment is impacting spend.
It's a client who has 50 plus fixes or a client in their first 215 fixes and.
Regardless of tenure, we looked at it every which way and while we had seen increasing spend quarter on quarter in these cohorts for many quarters back.
And even a couple of quarters back we saw an increase we clearly saw the spending go down across the broad set of cohorts and this latest fiscal quarter and we do expect that to continue just given the high inflationary environment, the competitive landscape and the overall macroeconomic factors.
And Dana I can touch on the trends question on the marketing question. So.
Maybe I'll start with some of what we saw in the quarter and some of the trends. We're seeing and then we're about to release our style forecast our annual software cost will come out next week. So I can give a preview of some of what we're hearing there from our $3 7 million clients from our stylists from consumer surveys and industry data, which are sort of are.
Some of our predictions for the coming calendar year, but in terms of what we saw this quarter I would say in particular for women's back to work clients shifting into work wear over more of that casual and use that we saw a year ago. So structured Blazers was an area, where we saw particular growth a real sweet spot and the <unk>.
<unk> hundred dollar blazer price point, those are up north of 120% year on year. We also saw a shift to dressier outerwear with a variety of kind of world styles and silhouettes. We also saw strength within booties and heels against last year up over 25% year on year. So <unk>.
Nearly a.
Our female consumer who who's going out again night out and work wear styles that can transition into the evening.
We also saw with men some similar I would say trends in terms of going back to work very strong velocity within our workwear segment and with our outerwear seeing strength in things like shirt jackets.
And then kids have stayed more casual I would say with graphics and cozy a tire.
Within our forecast some of the things that we're seeing now and coming forward is.
We'll focus on getting back to holiday parties and holiday trends.
Brighter and bolder colors is something we're expecting in the future.
And then a tendency towards wide leg bottoms, which started several seasons ago, but we're beginning to really see that shift occur in a more meaningful way.
And then on the marketing spend of 5% to 6%.
I would say it was kind of a combination of assessment of really being very focused on our free cash flow and.
And EBITDA ambition for the year and really holding ourselves to this very strong threshold.
Timeframe of payback.
Together with the belief that there is opportunity for us to be doing more in areas that I mentioned on the prepared remarks like reactivation of clients, who have not shopped with us as recently and being more productive going after those segments as well as that group of clients, who often call or signed up prospects.
And so together.
That was our our estimate of what we could do to still create momentum with with clients, but be able to really be more efficient in the back half of the year.
Thank you.
Thank you.
And our next question comes from the line of Mark Mahaney with Evercore ISI.
Well. Thanks, I think most of my questions have been answered. So I'll just ask one just on free cash flow and the ability to sustained positive free cash flow going forward outside of the macro recovery what would be the key factors that will cause that to happen or not happen like what are the what are the variables that you can most control.
Outside of macro.
That will allow you to sustained positive free cash flow over the next several years. Thank you.
Yes, I can take that I mentioned towards the end of the prepared remarks, just our overall contribution margin, which is very healthy at 25% to 30% ex marketing and so really it is that inflection on on revenue of course.
Getting.
Growing again at some point, we do feel like our order and unit economics are very strong we are right sizing our cost structure, we do have a lot of opportunity for variable productivity.
All of these work streams are in process and part of it.
The cost savings.
<unk> initiatives of $135 million that we stated on the call. So we.
So we feel good about the second half in terms of and obviously, our EBITDA guide our adjusted EBITA guidance shows that but we feel good about the second half and going forward. We do think there's leverage on top of that so it's a combination of continuing on these areas that we're that we've embarked upon to streamline our cost structure and of course.
We will we need to get the revenue growing again at some point, whether that's through category expansion and all the initiatives that we're working on right now.
<unk> of the new marketing the new advertising models that we've talked about Mark I would just I think that that really sums it up in terms of where we see that long term return to free cash flow I guess, a couple of other things I would add on that gross margin side of things you know the majority of our goods are exclusive brands districts only and those have very meaningful.
Gross margin.
Kind of a delta between those are national brands, not just continuing to be a strength for US you know theres a several hundred basis point difference. We're just continuing to make sure that we're investing in the right brands the right price point that we're building exclusively for our clients.
And then.
That marketing piece that were making the shift on we really do believe that we can get stronger over time with a combination of these newer channels were less penetrated in but also doing more with keeping our clients happier longer better conversion better retention better reactivation that should drive more productivity in the P&L as well.
Thank you Dan Thank you Elizabeth.
Thank you.
And our next question comes from the line of of Nisha Sherman with Bernstein.
Hi, Thank you.
My question is around inventory.
So it looks like you you talked about national brands being slightly lower margin I'm curious if youre seeing more interest from vendors, particularly national national brands as they try to clear their own inventories this quarter and probably going into next quarter as well is there an opportunity there in terms of gross margin from a better buying environment.
But you may be seeing right now and then a follow up also on inventory you mentioned a six month lead time as your typical lead time, so I guess I would assume that the goods that you have now our spring summer 'twenty three goods, what how do you think about the risk of sell through for that product, especially if you see Mac.
<unk> continuing to be weak into the next quarter or two thanks.
I can I can take that question no. We're not we're not seeing that and it's not something we've considered in terms of national brands.
Of course, we have been selective on bringing in the right national brands that we think our customers are going to love that do well within fix or within freestyle.
But we haven't seen anything change beyond that in terms of being approached.
For national brands to offload inventory and really with our focus on exclusive brands in our stitch fix only brands, which is not only higher margin, but it's what our clients love.
Just feel there is an opportunity to continue to invest in those areas with respect to the question on inventory, we talked a little bit about.
Some are spring in Q4, we took we took some inventory reserves to account for that we feel that we're in a very good spot in terms of what we have reserved for it and we've also as Elizabeth mentioned, we also have.
Different avenues to focus on overstock inventory.
Mainly limited time offers and or clearance events, whether they're at the end of the season, which we often do to help us clear out some of the inventory excess inventory that we do have so well we do have a high inventory we watch it pretty closely I'm not concerned about the health of the inventory at this point again, we looked at this in our Q4.
And took the appropriate level of reserves and have since cleared inside a lot of that inventory out very focus on fall winter right now, which we're just getting going into that season, and so we're watching how that how that does and again as we expect inventory to come down sequentially over the next three quarters and we feel we're in a good spot going forward.
Okay. Thank you.
Thank you.
And our final question comes from the line of Lamont Williams with Stifel.
Alright, Thank you for taking the question just.
Pardon me if this was already answered but on the freestyle penetration.
I believe you've talked about that being pretty consistent at around 30% for women is that still the case.
Today.
Hey, Matt. Thanks for the question, Yes, I think overall, we look at it across our base, but yes, it's kind of in that 25% range and it stayed pretty steady I would say.
In terms of new client adoption, and then holding steady there.
We do have things on the horizon that will be launching in the back half of the year like SMS, encouraging where app downloads. Those things. We believe we still believe there's opportunity for that to get higher but it stayed pretty stable I would say over the last several quarters.
Okay. Thank you.
Thank you.
And that does conclude today's conference call, ladies and gentlemen, thank you for participating and you may now disconnect.
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