Q2 2023 Stitch Fix Inc Earnings Call

March 7, 2023

The comp.

[music].

Yeah.

Good day and thank you for standing by welcome to the second quarter fiscal year 2023 Stitch fix earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during.

This session you will need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.

Blair.

Good afternoon, and thank you for joining us today to discuss the results for stitch fix at second quarter of fiscal year 2023.

Joining me on the call today are Katrina Lake interim CEO of stitch fix and Dan Jeddah CFO .

Also joining us on today's call is David <unk>.

We have posted complete second quarter 2023 financial results.

This 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 in particular, our press release issued and filed today as well as the risk factors sections of our annual report on Form 10-K for our fiscal year 2022 previously filed with the SEC.

And the quarterly report on Form 10-Q for our second 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.

Reconciliations 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 a replay of this call will be available on the website shortly.

With that I will turn the call over to Katrina.

Thanks, Hayden 12 years ago I was inspired by a very simple human problem to help people look and feel their best.

Now as I find myself back as interim CEO .

This simple mission feels more resident than ever.

I'm proud of the ways that we've made our mission a reality, but also motivated by the opportunity ahead.

We're still in the early days of transforming the industry of apparel and I feel optimistic that <unk> can continue to lead the way and personalization and achieve greater impact in the years to come.

While many companies may be starting to define an AI strategy. Our company was built on data science from day, one we have built technology and systems that leverage the best elements of human stylist combined with machine learning and the billions of proprietary data points that we have around client and product interactions are rich.

Meaningful dataset that predict outcomes and help us to understand what clients need.

At the same time I realize we haven't met recent expectations.

Driving towards an ambitious vision has resulted in a loss of focus we.

We must now more than ever deliver on the client experience bring focus and our marketing efforts and drive results for our shareholders.

We have clarity on our path long term and short term.

Long term I continue to have great conviction that the market opportunity for a more personalized way to buy apparel is large and growing and that we have a significant advantage rooted in our decade of experience and leveraging data to deliver personalization at scale.

Third our term we also have clarity, we need to get back to a position of execution and profitability.

We have a history of achieving both in the past and I'm confident we will get there again.

There were two major events in fiscal second quarter intended to help reposition and refocus the company to set ourselves up to optimize for liquidity and profitability in the short term and maximize our long term growth potential.

First we restructured our operating model and made the difficult decision to reduce our head count by 20%, a salaried position and to shutter operations at our Salt Lake City warehouse.

Late last year, we began analyzing the team and determined to restructure the organization in an effort to create a leaner operating model.

It also allows us an opportunity to reorganize and refocus to more nimbly execute.

These decisions are never easy, but we know it was the right decision to achieve our goal of liquidity and profitability and for the overall health of the business.

And second we are conducting a search for a permanent CEO .

The board and I realize that the macroeconomic environment competitive landscape and even our own business has changed meaningfully over the past few years and we are excited to find the right leader for the present and future of such things.

I am encouraged by the process, thus far and I'm confident that we can find an inspiring person to lead <unk> and help reestablish the track record of results were once known for.

In addition, we shared in our press release this afternoon that Dan that I will be stepping down as CFO to pursue a new opportunity.

The board and I want to thank Dan for his service to <unk> and wish him well for the future.

David After Hart, our SVP of finance will succeed him as CFO David.

David joined US four years ago, with an eye towards CFO succession and working together. These many years I have been impressed and inspired by his depth of partnership with our functional leaders at stitch fix his deep commitment to and understanding of our business and our team.

He is a thoughtful and trusted leader and I'm excited for him to step into the CFO role.

Now onto the financials in the quarter.

Fiscal second quarter revenue came in at $412 1 million, which was at the lower end of the provided range. Despite this we delivered adjusted EBITDA of $3 8 million, which was at the high end of our guidance range due to effective cost controls and our corporate restructuring.

Dan will dive more into the financials later on but before handing it over I want to touch on topics and marketing and our product that demonstrate how the company is rallying around bringing focus and clarity to better deliver results for our clients and shareholders.

Consistent with the broader company, our marketing strategy aimed to preserve liquidity and achieve profitability, while simultaneously attracting long term customers to fuel a return to growth.

This will be the case as we continue to refine our traditional paid channels.

As well as diversify into Underpenetrated channels, we have yet to scale we.

We are also continuing to lean into client retention and reengagement strategies in an effort to continue to increase engagement and optimize our CPA.

It's worth highlighting that our Cta were down over 40% from a year ago, which shows despite a significant reduction in overall budget, we are gaining traction and more effectively deploying our marketing dollars.

Overall, we know these are the right things to focus on and when combined with our efforts to maximize the client experience and improve retention should maximize ROI in the short term and set the stage for a return to growth.

Moving on to the client experience.

<unk> macroeconomic environment and tighter client wallets, they get more critical than ever to reexamine and bring focus to our client experience.

The ambitious vision, we embraced for the past many months has resulted in a client experience that is less focused on our core areas of differentiation and we believe that there is opportunity to drive long term value by being really deliberate and targeted about the role of features and functionality in the stitch fix ecosystem.

As an example, we recently refined our point of view on fixed preview.

Although at the highest level of fixed preview has demonstrated a positive impact on <unk>.

Digging into the data we see a more nuanced story there absolutely are clients, who significantly benefit from fixed preview, but there are also clients for whom showing a preview actually increases cancellations.

Acting on this data, we found an opportunity to drive better outcomes and LTV by experimenting with eliminating the preview for some clients, allowing those clients to enjoy the surprise and delight that we know those clients value, while allowing other clients to benefit from the agency fixed preview.

I share. This example of letting data drive our decision and providing more intention and focused in the client experience.

I anticipate there are many similar opportunities as we dig into the data and the experience and we believe these strategies will drive LTV, enabling us to optimize cash flow and profitability in the short term, while positioning ourselves for an eventual return to growth.

Before I turn it over to Dan I want to thank the entire team at the effects, we talk internally about celebrating stitch fix grip is one of our core operating tenant and I've been inspired by the great experience day in and day out from the team. These past few months.

<unk> to be inspired by the passion I see to deliver value for our clients and our business and to make our company a fantastic place to work.

Our continued focus and data driven decision, making are paving the way for a bright future for <unk> I believe we are on the right track to get there and I look forward to continuing the journey with you all.

With that I'll turn it over to Dan.

Thank you Katrina and Hello to everyone on the call.

Before jumping in I want to thank Katrina and the stitch fix board for this opportunity and congratulate David on his new role.

David and I have enjoyed a positive and productive working relationship during my tenure and I'm confident he's the right person to lead the team.

David and I will be working together over the next several weeks to ensure an orderly transition.

Onto our Q2 results.

Q2, net revenue declined 20% year over year to $412 1 million due to lower net active clients and higher promotional activity in the quarter.

Net active clients in the quarter declined 11% year over year to approximately $3 6 million.

As Katrina mentioned earlier, we have continued to diversify our marketing channel, while ensuring we realized positive near term ROI on advertising spend.

Total advertising spend in the quarter was 5% of net revenue and down 46% year over year.

We like the trends we are seeing an overall CPA.

Even with the lower spend in advertising, we did see positive year over year and gross client adds in mens in Q2.

And while women's and kid's gross adds were down year over year, our rates are improving in both lines of business.

We do continue to see elevated levels of inactive clients and continue to focus on improving this with the right client experience.

We expect advertising to be 6% to 7% of net revenue for the rest of the year, but we will continue to be opportunistic if we experienced the right ROI and lean in where appropriate.

Revenue per active clients declined 6% year over year to $516.

While our overall average order value is holding relatively steady year over year.

Similar to Q1, our analysis continues to show that all client cohorts are spending less than in prior years.

We expect this trend to continue through the rest of FY2023.

Q2 gross margin came in at 41% down 400 basis points year over year, driven primarily by lower product margin due to increased promotional activity and higher product cost.

Total transportation costs were also up year over year due to increased carrier rates.

Sequentially gross margin was down approximately 100 basis points from Q1, due mostly to increased promotional activity.

We expect gross margins to be around 42% for the remainder of the fiscal year and are actively focused on improving gross margin as we see opportunities to improve product margin transportation efficiency and inventory efficiencies overtime.

Q2, adjusted EBITDA came in at $3 $8 million, reflecting our ongoing cost control efforts, including a reduction in force and the closure of our Salt Lake City warehouse.

The adjusted EBITDA excludes $34 7 million of restructuring and onetime costs.

Net inventory ended the quarter at $159 million down, 20% quarter over quarter and down 13% year over year.

Free cash flow for the quarter was positive $15 4 million, our first quarter of positive free cash flow since Q1 of FY 'twenty, two and we ended the quarter with $224 million in cash cash equivalents and highly rated securities.

In summary that our cost structure with the execution of our restructuring actions and a reduced advertising levels. We have now executed against all the actions needed to realize $135 million cost reduction targets for FY2023.

Additionally, we shipped our last fixed from the Salt Lake City distribution center at the end of January and we have distributed the inventory across the remaining fulfillment centers in our network.

We will begin to see cost savings from the closure in Q4.

Our goal remains to achieve positive adjusted EBITDA and free cash flow in the short term, while continuing to position ourselves for profitable growth in the future and we believe we are well on our way to achieving these goals.

Now on to our outlook.

For the remainder of the fiscal year, we expect to continue to face a challenge and highly promotional operating environments.

With that said, we are leaning into our areas of differentiation and focusing on managing the things within our control.

We will continue to responsibly manage our cost structure with the goal of staying adjusted EBITDA and free cash flow positive for the remainder of the year.

For our fiscal Q3, we anticipate revenue to be between $385 and $395 million.

We expect adjusted EBITDA for the quarter to be between negative $5 million and positive $5 million, largely reflecting increased seasonal advertising spend as we continue into the spring summer season, where our CPA are generally more efficient.

For the full year FY2023 we now expect revenue to be between $1 65 billion and $1 $64 5 billion.

We expect adjusted EBITDA for the year to be between breakeven to positive $10 million.

Going forward, we remain relentlessly focused on liquidity and profitability.

The improvements we have made in our cost structure will allow us to invest in growth as we continue to focus on improving our client experience and over time, we expect the improved client experience will enable us to grow our net active revenue and free cash flow.

With that I'll turn the call over to the operator for Q&A.

Thank you.

To ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

Our first question comes from Youssef Squali with choice you May proceed.

Okay.

Great. Thank you very much.

Couple of questions. Good to hear from you Katrina again, so the first question maybe for Katrina can you just speak at a high level about.

How you see I mean.

You talked earlier about you on one hand, you've had a lot of focus on the other you have.

Clarity on the path forward on maybe can you just expand a little more about.

Pinpoint the two or three areas, where you felt.

The 606 had lawsuits its focus and then maybe kind of what gives you the confidence that you are back on.

Pass that should ultimately gets you to to growth and then.

Maybe can you double click a little bit on your EBITDA margin guide of negative $5 to positive five and just help us.

How you get there obviously I think you said gross margin should be around 42%.

Which really only leaves advertising sales and marketing and G&A as the other components. So maybe just provide a little more color on where you see those for the second half of the year that'd be very helpful. Thank you both.

Great. Thanks Youssef.

Good to be back.

I'll answer your first question and then I will have Dan weigh in on the second around EBITDA margin.

On kind of the focus and clarity I think there is a.

Numerable examples that I could bring I think.

At a very high level as we thought about expanding the business and very ambitious way.

<unk> took a marketing approach that that probably tried to bring people in through a variety of different customer segments and very notably we spent marketing dollars trying to bring people into a freestyle <unk> experience. As an example, so that's a place where not only did we find that that marketing of freestyle first wasn't as effective.

What we have done historically and fix it but it also actually made it harder for us to be able to be acquiring people into the channel and so that's I think one example of how that comes to life. Another one is around inventory.

Lee buildup in inventory in anticipation of a freestyle customer that.

With a different set of inventory then fixes and also more unknown. It was a customer we haven't served before it was a channel. We haven't served before and so there is more risk in the inventory and going forward. We can use our 10 plus years of historical data to really be able to buy with confidence on the inventory side and that's another. Good example is okay.

And the customer experience as well I mentioned.

And to US looking at preview as an example, and I think there are still other places where we can really kind of clean up the customer experience. So that we're really maximizing value for the client and value for the shareholder at the same time.

In terms of confidence back to growth I think you know theres a lot of places where I think all of those places are areas, where you know on the inventory Brian I think we can feel confident looking at what we're doing going ahead from now and on the marketing front. You know I think we have near term results that show that things are working when I'm, Dan referenced that we saw customer acquisition cost down.

By 40% compared to last year and to me that you know that's a great example of how focuses.

Is kind of creating value in the business today and I think we feel really confident that it is creating value in the business long term.

Dan you want talk about EBITDA, Yes, hi, Youssef.

EBITDA guide.

The negative 5% to positive five again I think we provided obviously revenue and gross and gross margin and we also provided that 6% to 7% advertising number for Q3, we're going to be on the higher end of that 6% to 7% simply because as we enter our spring summer season, it's a very efficient quarter for us.

Talk to Katrina talked about it and we're very focused on.

The efficiencies within our marketing channel and we just feel as we exited Q2 and go into Q3, we like what we're seeing.

So think of the Q3 is the higher end of that 6% to 7% that leaves us of course with SG&A, excluding advertising on a run rate basis.

After a restructuring that gets you to that negative five to positive $5 million.

Of course, if we're not seeing the efficiencies we won't spend the advertising dollars. So we feel pretty good about the guidance and of course the level of spend that we're now targeting.

Targeting for advertising.

And just to be clear that $34 million that I think you mentioned in one time restructuring costs and other that hit the <unk>.

The SG&A expense.

Expense line of 187 in Q2.

It did.

Okay, Alright that makes sense now thank you very much.

Thank you.

Our next question comes from Simeon Siegel with BMO capital markets. You May proceed.

Hi, This is Derek <unk> on for Simeon Thanks for taking our question today.

Just sort of thing in the press release, you guys notice.

Going back to more of a stylus focused approach is that kind of a D emphasis may be a little bit for kind of freestyle because you just mentioned.

Inventories right from within the freestyle versus the fixed business understanding how those are different I'm. Just curious how you guys are thinking about that business going forward and how you're planning to.

Kind of how to work around some of some response from the charges, maybe you've had there.

Yeah. Thanks, Eric It's a good question.

What were there is no question that freestyle add value in ways that fixes didn't and so I think the most clear way that we think about that looking at the assortment data I believe Sheraton calls historically that we're seeing a different assortment being bought and freestyle and fixes, we're seeing more outerwear shoes accessories, and so that says to us that this is <unk>.

<unk> to fill a different need for our clients that being said as I mentioned in the last question I think.

Using <unk> the customer acquisition vehicle as an example that was less effective and so what we're really trying to do is to say where are areas of differentiation and personalization styling are really at the core of that especially as you think about our kind of competitive positioning relative to other those are spaces that we really uniquely own.

And so as we think about what is the customer experience that best delivers against personalization again styling I think brookdale can be a component of that but we're probably thinking of it more as one ecosystem that has a more clear customer journey, rather than thinking of it as kind of separate business unit.

Great appreciate that and just as a quick follow up.

Looking at the 42% guidance for gross margins for the remainder of the year.

And then your comments on how.

The difference from <unk> to <unk> was about 100 bps of markdown pressure are you guys seeing kind of a return to markdown levels, where you were going back a few quarters I'm. Just curious how you are planning about markdown pressure for kind of the back half of the year and kind of what youre seeing more broadly within your customers and their ability.

And their willingness to sign off on kind of more of a full price level compared to kind of a discounted one.

Yes, the way we approach we've talked about this in the past and thanks for the question. The way. We've approached markdown is really focused on where we think we have excess or the wrong inventory and using our freestyle channel to move that inventory and we've seen success in that as opposed to the option.

Selling it out too.

Third party liquidator and so we've seen success in that and we will continue to utilize that although as you can see from our inventory levels now we've come down considerably and we feel we've right sized our inventory we feel very good about the inventory position that we're in now in terms of total dollars, we still have some buckets to work.

Through and so we are we are using the freestyle channel for that in the fixed channel.

We are not we're not discounting a lot we simply arent doing that clients love with the styling service that we give them.

We have not seen the need to discount in the fixed business and we don't anticipate doing that going forward.

Great. Thank you perfect.

Thank you.

Our next question comes from Mark <unk> with Baird You May proceed.

Hi, This is Amy husky on for Mark Thanks for taking our question.

On the inventory point as you work down inventory and pulled back on your seats. What is your level of comfort that you now have the right type of inventory. So how do you think about the composition of your inventory between.

I will address the styles and product categories. Thank you.

Yes, I'll take that one that's a great question Amy.

Amy and thanks for asking it.

First of all we had talked about inventory in our Q4 again in our Q1 results and how we had a lot of inventory and.

And we simply needed to work it down and we've done that and a lot of that of course was with getting rid of the excess inventory and or the wrong styles.

Or or brands of inventory, we're in a much better position now as I mentioned, we still have a little bit of work to do on on the inventory that is going to be short term and that's included in our guidance going forward, but we feel really good about the brands that we're targeting and with it.

A big focus on our on our exclusive brands, which are trending very well for us and in fact I'll just share that we did notice in January where we were.

Soft on some of our exclusive brands on our customers told us. They wanted that in we quickly pivoted and where we were short on inventory, we chased back into it and that's a great sign for us that our customers love our exclusive.

And since our stitch fix only brands that were selling and so we're going to continue to focus on that in the very near term as we get into spring Summer and then as we get back into fall winter a year from now.

Thank you.

Our next question comes from Ed <unk> with Piper Sandler you May proceed.

Hey, Thanks, very much for taking my question I wasn't that Pat I guess, just a bigger picture question you guys were really no.

Personalization, you've talked about this a lot today.

Can you talk about competitive gap do you think that your competitors have gotten better.

Yes, absolutely.

And maybe Ken if you have any observations on things that have changed adversely since the last time I've come back there must be rectified quickly we'd appreciate that thank you.

Thank you and I think I got your question here. So in terms of just more of the competitive gap.

You know honestly I I feel really strong about our capabilities and we've been able to be in this business for 10 plus years with a history of profitability with a history of being able to deliver cash flows and.

Theres not a lot in the competitive set that are able to claim the same thing and so.

Focus that we've had around data science the focus that we've had around personalization I strongly believe that we continue to lead on that Brian and I and I feel just as good if not better about that coming back into the law.

In terms of things that I think your question was more of just like what has adversely change I think I spoke to you on the call, but I really do think it focus I do think hindsight is 2020 and I think we had some really ambitious vision that we were chasing after and.

And with kind of chasing an ambitious big vision came.

Kind of reduction is focused on what I would consider our core differentiators, which are really around personalization and the styling and so you know I think a lot of what we've been talking about internally is how can we make sure that everything that we are doing with our valuable resources and time are really focusing against delivering that for our clients and ulta.

In Italy, our shareholders and being able to deliver an experience that feels personalized for all of our clients and making sure that everything that we invest in achieve backhaul.

Thank you.

Thanks, Ed.

Thank you.

Our next question comes from Trevor Young with Barclays. You May proceed.

Great. Thanks <unk>.

First one Katrina just on the testing of discontinuing the fixed preview are you getting any sort of signal that keep rates are eroding in those circumstances and then more.

Broadly Big picture do you feel like the cost basis is in a good place now.

To set the stage for a recovery in some future quarter. After we go through kind of the reset.

Encore fixes here or is there some work to be done and maybe even some reinvestment to be done on the tech side to get that into a better place just any thoughts on that would be appreciated.

Great. Thanks, Thanks for the question Trevor I'll I'll take the first one and have Dan talk more about the cost basis.

On fixed preview I mean, one way to really think about it is to try to maximize the ROI and LTV of a given cohort and so.

As we do some segmentation we can see at a high level that overall, we saw <unk> go up with the ability to have access to fixed preview, but once you dig and theres going to be some cohorts, where we see people more likely to cancel when they see epic preview into what we're really trying to optimize for are those ltvs.

And so I think what we're able to do is to fine tune I guess, a little bit more in a more personalized level of where we're going to be deploying thank preview to be able to maintain that benefit that you mentioned too.

<unk> for the population for whom we know that that will occur while at the same time, reducing cancellations and making sure that we are retaining and engaging clients that in all of our cohorts by by eliminating the preview from from those who we don't think we'll benefit from it.

Also from a customer survey perspective like one of the things that we hear is that one of the real benefits of <unk> to surprise and delight and so to be able to for some clients. You can think of it as a lack of agency, but you can also think of it is actually allowing people to have that surprise and delight.

And he said to me with I Love this quote of like.

As an adult you just don't get a whole lot of good surprises in your life and such that it can be one of those and so we know their clients, who really really value that and actually being able to continue and maintain that for those clients is valuable in LCD positive for those clients.

Dan do you want to answer the question on the cost basis, yes.

On the total cost when you look at where we ended Q2 in adjusted for restructuring were back to fiscal 2019.

SG&A, excluding SBC and we feel very good about that and going forward and there is still more efficiencies to have in my prepared remarks, you heard us talk about gross margin and the opportunities that we see there.

There is also there is further opportunity on our footprint.

To better monetize that as we as we reduce our corporate office space.

Variable efficiency projects that are ongoing so yes, so I feel the cost structures and very good space in a very good place and I think there is tremendous opportunity to improve it going forward. So we're in a good place from a cost standpoint, and a liquidity standpoint.

Great. Thank you both and best of luck Dan.

Thank you.

Yeah.

Thank you.

Our next question comes from David Bellinger with Raso Kim you May proceed.

Hey, everyone. Thanks for the question.

On the cost per acquisition being down 40% in a quarter.

How much of that is internally driven through some type of channel mix shift and the ROI youre, where that's getting better versus some of the external factors that play within the broader apparel category.

Yeah. Thanks for the question, David I can start and might benefit from some of Dan's wing in here.

But I think honestly a lot of that is really more from her.

Protecting with focus and so if you think about where we were last year, we were doing more on freestyle for marketing we are driving people to an immediate purchase experience instead of driving people into <unk>.

Eylea experienced through and through Texas, and the and just very simply put that freestyle first marketing was not as efficient as our core fixed experience and so I think Jeff.

To be able to have the marketing messages be more clear around the benefits of personalization and styling and to be really focused on driving people through one channel and conversion.

<unk> been driving that efficiency.

No. We definitely are always looking at diversifying our channels and so we have our tried and true channels that we know perform and those have performed well as you've kind of heard in the numbers and at the same time, we're always experimenting to make sure that we're getting.

All of the emerging channels and to make sure that we're kind of exercising that muscle is acquiring and converting clients.

And all of the New places that we see our clients kind of spending time.

I don't know Dan if you have anything to add to that is yes, the only I presume one.

100% agree with.

Trina said and I think I would simply add that.

Part of the experiences where we really harden the funnel really helped with conversion of traffic and therefore, the efficiency of the marketing spend in addition to just being very focused on the next dollar spent within the channels and is that inefficient spend and.

Think the marketing team has done a tremendously good job.

Diversifying the channels, but then focusing on the efficiency and making sure we're bringing in the right clients, which we feel very good about it and I think we've talked about that in the earlier remarks.

Great. Thanks, Thanks for that and just one other follow up I think you mentioned some type of chasing inventory it sounds like youre more comfortable with the assortment. So what's the next step if we think bigger picture here and getting your core customer back in spending again is there some type of refresh needed on top of that on the inventory.

Or is there more of a.

Technology connectivity issue you need with your core customer to get them back again.

Yeah, I mean, I can take that and I think to be clear like we we are seeing we're seeing that customer performing a pretty healthy way I mean, we're seeing our <unk> be pretty consistent on the inventory side of course been gradual over the last few months are kind of evolving into the inventory mix that we want but we feel really good about where we are in the inventory.

Perspective.

Sounds like there is definitely opportunity I think we see a Dan mentioned, we're seeing some cohort weakness and there is no question. There are some macro headwind, but I'm not willing to accept that it's all macro I think there are still opportunities for us to improve the customer journey for us to improve the ways that we're serving our clients. So that they can have the best possible experience that then leads to LTV.

It leads to shareholder value and so I definitely still think that theres a lot of opportunity, but you know as we kind of dig in and look at how our fixed is doing how are people feeling in their actual transactions were actually seeing goodness, there and I think it's on us now to be able to deliver more goodness to the rest of the customer experience.

Great. Thank you.

Thank you.

Our next question comes from Ike <unk> with Wells Fargo. You May proceed.

Hi, everyone. This is Jesse so Wilson on for Ike.

It looks like you're taking down inventory was a major source of cash this quarter. So on the liquidity front I'm just curious how much cash do you guys need to run the business and what should investors expect regarding cash flow generation throughout the rest of the year.

Yes, thanks for the question.

So yes, we did have a source of cash come from.

Our inventory position, which.

Which we implied that's going to happen last quarter is as we brought our inventory down and on a go forward how much cash do we need to run a position from a liquidity standpoint, we're in a very good position with $323 million $223 million of cash cash equivalents and we have a credit facility, which we don't plan to you.

And so.

Going forward as we guided to a positive <unk> adjusted EBITDA.

We talk we talked about EBITDA is a great proxy for cash flow for us.

Simply because we do not have a lot of Capex and we do not anticipate a lot of capex spend over the next several quarters.

So we feel that both our EBITDA.

And cash flow are trending positive for <unk>.

We'll give more guidance on FY 'twenty four at a later date, but overall, we feel very good about the <unk>.

Quiddity position that we're in and the cash flow that we've generated in both Q2 and for <unk> two.

As we go forward.

Great. Thank you.

Thank you.

Our next question comes from Blake Anderson with Jefferies. You May proceed.

Hi, Thanks for taking our question I wanted to revisit the freestyle topic and how the tone is similar maybe changed a little bit on that this is more of a philosophical one but should.

Should we expect any strategic changes to that business before a new CEO is announced just wondering Katrina.

How much influence we could have on that business in the short term. Thank you.

Hum.

Yeah. Thanks, Thanks for the question.

We're always evolving the experience and so at a very high level like I really don't see a big foundational shift in this strategy I think the strategy of focusing on personalization and focusing on styling and focusing on the areas that we know are valuable areas of differentiation for our client and I think.

It's hard to imagine that we would deviate from that.

Sounds like we are always doing experiments, we're always doing AB tests to better understand what are we doing that to what can we be doing differently or better in order to optimize that client journey to drive LTV to drive value for our clients to drive profitability and long term growth and so we're always making changes and so hopefully what I can say, it's like you.

Can probably expect to see some small changes in terms of the way of that.

That the customer journey evolves over time, but I honestly I wouldn't see them as like fundamental big changes I think we know that freestyle add value.

We know that there, which ways in which should add value and so really it's about how do we make sure to tailor and target the right customer experience. So that clients are getting the most value out of their experience with <unk> and thus we are getting the most value out of clients that we acquire.

That's helpful. Thank you.

And maybe I missed it but did you talk about.

Kind of trends by month throughout the quarter and then any commentary you guys can provide on the quarter to date.

Especially how that.

Called the budget shoppers holding up thanks, so much.

Yes, I can take that so.

We did not provide trends by quarter for our Q2.

I will say that.

February has largely been as expected for us.

We are again the guidance that we gave of course takes into account by weak February .

And we're not seeing anything that is out of the ordinary where we've seen a change in trajectory to the negative.

So we continue to see our keep rates trending.

It positively.

There might be some frequency with the cohorts analysis that we talked about for Q2 to see that trend continue we haven't looked at that yet for Q3, but we will but no real trend update.

Beyond what we've provided in the.

The guidance for Q3, and the commentary we gave on Q2.

Great. Thank you best of luck.

Thank you.

Our next question comes from Tom Nicolas with.

Wedbush Securities You May proceed.

Hi, Thanks for taking my question, Dan quick quick one for you.

Sorry, if I missed this did you actually say what the marketing expense was.

Q2.

As either in dollars or as a percentage of revenue.

We did 5%.

Got it okay, Thanks and cats.

Welcome back to the CEO role.

Current basis, but.

When we think about.

The permanent.

CEO role or.

The successor.

What are you looking for like what skill sets are you looking for like what.

Optimally.

What attributes would your ideal candidate have.

For the permanent CEO .

Yeah. Thanks, Tom.

Yes, so we've kicked officers we've engaged a search firm and we've been having conversations with candidates quite a few conversations candidate then overall I feel excited and optimistic about kind of the quality of people that were meeting.

And at the highest level like are very simply like I really do think it's.

Having a history of delivering results of executing our business that are about our business is fairly complex and so you know I think somebody who's had experience in our business.

And that has similar complexity to hours and habit kind of history of delivering results is of course first and foremost important and then relatedly. We have a large we have a large company that has a lot of people in different types of rules and so that leadership and someone who has a natural leadership and somebody who is going to be able to be.

<unk>.

Successful in leading a diverse organization is really important and so at the highest level I think those are two things that that were really looking for but.

We've kind of talked in it as we've had a lot of conversations we have had a lot of candidates who have firsthand experience with such facts, who know the business well and feel really connected to the business and the customer end.

And I think we're excited about the people we're meeting so.

So optimistic.

Yeah.

Okay. Thanks best of luck in the CEO search engine.

The business the rest of the fiscal year.

Thank you.

Our next question comes from Kunal <unk> with UBS you May proceed.

Alright, thanks for taking the question one.

One more housekeeping and then one more longer term. So on the housekeeping side can you help us understand the LTM active clients has been done has been declining for the past five quarters or so how should we kind of think of the trend for NPM active clients.

Going forward.

And then.

Katrina you talked about the eventual return to growth.

You also talked about having a lot of lock forward visibility.

Yes.

On the business. So can you help us understand.

In your mind, how are you thinking of growth.

Going into into 2024, and maybe into 2025 when are we going to get to growth.

Part of the reason is in fiscal <unk> of this year that is going to be a 14 week period.

Rather than a 13 so.

The guide does not to try a lot of confidence.

Thank you.

So I'll take the.

Our packet question.

Our package a trailing metric it's a trailing 12 month metric on active and so there is a lot of <unk>.

Math that goes into the mix of our pack into and I know your models take into account our pack, but I think the best way. We can say that is while we are seeing some cohort degradation in terms of spend which will impact our pack mix has a bigger impact of our pack mix of the tenure of our clients.

We've mentioned in the past that our older clients spend less or new clients spend more as their closets gets get filled up and so we'll continue to talk about our pack from an actuals basis, but we're not guiding to future. Our pack that being said I think it's safe to say that where we might see some cohort.

<unk> on spend and some mix, we're not expecting big reductions.

In our pack.

On a go forward basis that we will probably see some of that because of the spend in cohort on a year over year, but we don't think it's going to be material our.

Our clients do continue to spend with us they do continue to stay with us the newer clients that we're bringing in as.

As we look at them are cash flow positive clients that we talked about the near term ROI all that will have the effect eventually of stabilizing that our pack and it ultimately bringing it up.

But that's going to happen over time.

Thank you.

Sorry, I think we want to get their parts of the part two is more around like how am I thinking about the eventual return to growth is that.

Okay.

I think I mean, Dan I think I totally agree with everything that Dan mentioned and I would just I would just add also that.

Our business so much of our business is serving clients that are returning and that's a great part of our business, we generate a lot of revenue from our existing customer base and so all of the benefits that we all the things that we are able to do to be able to make that client more valuable until all of the ways in which we can reengage that client all the ways in which we can.

And offer those clients reasons to come back also add in so we're always thinking about new clients. We're also thinking about how do we make sure that our existing base is healthy.

And I think we've seen some positive signals that we've been excited about and.

And feel really confident that we're doing the right things and the things we need to be doing right now.

Thank you. Our next question comes from Janet Joseph Kloppenburg with J J K Research Associates you May proceed.

Hi to China.

I just wanted to follow up on that question is it seems to me that and please correct me, where I'm wrong that you are going to be.

Spending your investment spending.

Spending will shift to a higher degree of investing in fixed.

<unk> would agree.

Bringing style and that should drive up your.

Customer participation and and your sales, but I think thats, what youre, saying.

No use free so as this.

To some extent.

Liquidation channel or fixed but that investment spending more back towards the personalization fixed business.

That should help to improve the EBIT performance of the company as well and does it mean that maybe the advertising rates can stay below seven 8% as we as we go forward or.

Is that something that needs to be tested and we can't thank.

You.

Sure I think I can answer at a high level and then Dan can kind of weigh in on more of the specifics.

But I mean, I think at a high level the way to think about it is that debt.

That we are really focusing the business around personalization and styling and yet <unk> is a very big part of that and having a more focused messaging from a marketing perspective helps us to drive marketing efficiency, having a more focused point of view around who the client is I think one of the challenges with the acquired trying to acquire freestyle first clients was that.

We were definitely deviating from our historical client and trying to kind of.

Trying to have many different messages and to actually have an assortment that back that and so simplifying on the inventory side also.

It delivers efficiency.

And freestyle definitely still has a role to play in order to be able to help our clients building their closet to be able to engage in between fixes and and so we definitely are going to continue to have to be thinking about hottest retail add value to that client experience.

But I would say that the investing is more around thinking more holistically around what is the what does the stitch fix ecosystem and how all these pieces bill and together in order to drive the best LTV and experience for our clients. But then also of course delivering results for our shareholders.

So maybe ill and Daniel talk a little bit about the marketing side, yes.

Marketing side again.

Gina mentioned, we're not marketing a freestyle first experience, which we had done in the past.

That along with a lot of the product.

The client experience improvements we have made it just has allowed us to focus on that fixed first client in a very efficient way and so well the advertising drop year over year seems large when you look at.

The clients that we're bringing in we're seeing very efficient spend and that was the point when we talked about men's actually being up on a gross ads basis in women's and kids, improving while still down year over year, improving from current trends, that's with that 46% reduction.

In marketing and advertising. So we do anticipate to stay on this trend of lower advertising spend but focusing on the right clients. The fixed first client and then having freestyle will be a very important.

Incremental opportunity once the client is in the door and engaged in the fixed business. It still is a material part of our business and we will continue to be freestyle those.

Thank you both so much.

Thank you.

Our next question comes from Dana Telsey with Telsey Advisory Group you May proceed.

Hi, Good afternoon, everyone welcome back for the interim period as you think about the near term and the long term on the near term how are you thinking about the core customer what they're spending on pricing, how you're thinking of brands and how do you think about the differentiation between the free style in the fixed in terms of whether it's.

You are captivating the customer and then on the long term.

Obviously, new processes. It sounds like are being put in place right now what do you see as the most incremental driver to return to growth under the hood in terms of operations or logistics or processes. Thank you.

Thanks Dana.

Let's see so on the first part as we think about like kind of what are we seeing on the customer side.

We actually are seeing it we're seeing <unk> hold pretty strong we're seeing AUR hold pretty strong.

I think in terms of what the customer is looking for I think what is really differentiated about our channel relative to others.

Not necessarily price, it's not necessarily.

Finding the brand that you love it is actually around that it's about it's about fit its about style. It's about finding things that you love and in some cases, finding things that you love that are surprising to you.

And that's something that really only our channel can deliver on and so on.

That's kind of how we're thinking about who the core customer is and the good news is I think theres a lot of that core customer.

On the data that we had that like.

Most men and even half of women would characterize themselves is not loving to shop, and there's not a lot of other retailers that are focusing on that customer and stitch fix is one that really makes shopping more accountable and makes it easier. It helps people to look their best without spending a lot of effort to do it.

And those are really differentiate differentiating qualities and our customer that that we can build the right assortment to be able to deliver on.

In terms of what's most influential under the Hood I mean thats a good question, but I mean really for me I think the broad umbrella of it really is focused and it really is around focusing.

Focusing those marketing messages focusing that conversion funnel focusing on the inventory side I think just really being able to just focus on the things that we already know that we are able to deliver on that we have a business. That's 10 plus years old that has a history of profitability delivering on this business to be able to focus back.

On the things that we know and know that we can deliver is.

As kind of the core thesis and I would say.

Rather than having one big thing, it's probably a lot of little things like the ones that I mentioned around marketing and inventory and I shouldn't call them Little thing. They are really meaningful and I think you can see that in the marketing numbers that we shared but I feel optimistic by kind of what we've been able to see as we dig into the business and.

Excited to be able to deliver more in the quarters to come.

Thank you.

Our next question comes from Mark Mahaney with Evercore ISI you May proceed.

Okay. Thanks, two questions. Please continue you talked about marketing diversification into newer channels that have yet to scale can.

Can you provide more color on what those newer channels could be and then secondly, I was wondering if I could just get you to comment on sort of macro trends and I realize there's a lot of other factors going.

Hey, here, you've got year over year revenue declines pretty consistent in Q2, Q3, Q2, Q1, Q2, Q3 and Q4. So my sense is that maybe overall macro trends are soft, but kind of consistently softer kind of riding along at the bottom, but could you just comment on whether you think macro trends in the consumer macro consumer.

Demand trends are at the margin.

Further softening stabilizing or possibly recovering and I know, there's a lot of the other factors going on but I'm wondering if you could just address that question. Thank you.

Great. Thanks, Mark.

So first on marketing diversification I think.

It's probably some of the obvious but we've done some experimenting with tic Toc that I think has been promised we've done some experimenting in Youtube and trying to think about how does the Youtube fit into.

Our overall conversion funnel and then actually returned to organic is definitely a big place too I think.

We've seen.

Being able to use Influencer is both I think well known influence or is that also more of what you would call like micro influencers.

<unk> then that's definitely been a part of the history of <unk>.

Some of the very early years of growth of stitch fix we're driven by that by that kind of at the time was more bloggers that more of those micro influencer categories and so that's another place that we're making sure we rebuild the muscle in.

<unk>.

And in terms of the macro I mean I.

Wish I had a crystal ball that I could tell you what's happening.

What's happening in our business.

See AUR and <unk> actually be pretty stable.

And so I think the places where we would expect to see macro headwinds would be would be probably around more conversion and customer acquisition.

We have seen some success there as we shared in this last quarter, but I think that's a place that you know you could anticipate that there could be some headwind.

And then I think any other places probably around just longer term like fixed frequency or purchase frequency and.

Thank Dan shared that we had we seen some software cohorts and.

I think we do believe that some of that is macro but as I said I do I'm not willing to accept that it's all macro I do think that there are things that we can be doing better or to be able to deliver on a better client experience that delivers more LTV.

So I.

I don't know Dan if you want if you have any quantification to add but.

I wish I could give you a solid answer on what to expect.

I don't have anything that I completely agree with all of that specifically.

On on.

Some of the macro we talked about how we like the trends we're seeing on gross adds on the improvement I think that's a positive.

But we are still seeing some elevated inactive and that's something that we're very focused on fixing with improvements in the client experience and we do believe a lot of that of course is macro related.

Okay. Thanks Katrina Thanks, Dan.

Thanks Mark.

Thank you.

Our next question comes from a niche Sherman with.

Bernstein you May proceed.

Yes. Thank you for taking my question so continuing on the theme of the macro and the consumer demand behavior trends last quarter, you talked about the consumer being more judicious with their spending and frequency declines it sounds like you've seen that again.

Is the mix shift or higher demand for owned brands over National brands. Do you think that is part of it do you think that are you seeing the consumer sort of trade down a little bit to lower price points, rather than the national brands.

And if so does that.

How does that or does that change your national brand strategy that you've been talking about for the last few quarters on.

Increasing your mix of national brands and.

And can you also talk about how that impacts gross margins because I understand that your own brands are more profitable does that change your margin mix kind of looking into next year. Thanks.

Great. Thanks, that's a great question Anita I'll answer the first part and I know Dennis chomping at the bit to answer the gross margin part.

But yeah I mean, it's I don't know if I would say that its necessarily mixed mixed shift that's driven by macro but I would say like historically, it's very interesting in our channel historically national brands do not perform very well and fix it.

And I do think fixes are a place where you.

Apparel is kind of the most stripped down version of itself and people are really looking at those fixes to say does is this my style does this fit me well and brand is like a very tertiary.

Kind of consideration beyond those and so historically, we've actually not be national brands performed very well and fixes and so a lot of the intention around bringing national brands into the portfolio recently has been to support a better freestyle experience.

And so you know as we've.

And I think candidly like those brands haven't performed as well.

In the freestyle experience, although better than in the fixed experience, but I think longer term.

The national brands will probably be a smaller part of our portfolio going forward is the way that they were historically with Texas and I would actually really position that as a positive of being really a testament to our personalization and at the end of the day like even if it's not a brand that somebody recognizes if a breath.

If youre delivering jeans that fit someone someone's going to buy them.

So Dan can speak more to that on the gross margin side, yes.

Just to follow on to to your second point on that question.

With cat is saying this idea that when we gave you focus more on our exclusive brands.

Be tighter.

With national brands, having having less of that that will of course.

We think it's the right client experience and also what that does is of course lead to higher margins simply because the private label and exclusive brands have higher product margins. When I mentioned earlier in the call that we see opportunity in gross margin. The first comment I made is was in product margins that is the <unk>.

Driver of product margins, so as we get tighter with that we do expect margins.

Positively impact margins, we do have some national brands that were still inventory that we're still working through although it's not a huge number and we'll get through that and we feel very good of the impact.

Thank you.

Our next question comes from Noah <unk> with Keybanc capital markets. You May proceed.

Hi, Thanks for taking my question.

Along the lines of the macro questions and maybe I'll ask it slightly differently.

With stitch fix traditionally being a full priced business, how would you kind of frame or how do you kind of think about parsing out the impact of the broader promotional environment in apparel and what that citrix over the last couple of quarters.

And with others in the space talking about inventory beginning to be right sized or at least having line of sight.

To more right size inventory positions, how are you thinking about potential upside in the model should the promotional environment begins to normalize over the next couple of quarters. Thanks.

Thanks.

Yeah. It's a good question I mean <unk> has been.

I would say kind of oddly resilient to.

Two promotional periods and.

We see some marginal impact, but not really as much as you would expect and.

What we see is like in the fixed experience like first of all I don't think people are coming to stitch fix in order to find a deal that's not the primary intention of corp. We needed to right price. All the time. There is no question about that but I would say that like people aren't coming to our channel in order to get a deal and so what that means is people are actually coming to our channel because.

They want clothes that fit them because they want to refresh their wardrobe because they want things that are their style and so as a result, I would say that we see like our <unk> and our AUR as a kind of held held pretty strong and so I would say that we see maybe less of what you would expect in terms of like the highly promotional environment right.

Now, but I would say my hypothesis hypothesis is that it probably impacts conversion more aware that they are probably going to be fewer people that as theyre looking at their budgets and as theyre looking at where are they going to spend fewer dollars that they might have in a bank account that like refreshing a wardrobe might not be as high a priority as it might have been 10 months ago.

And so I would say our hypothesis is that you know our existing clients that are in the ecosystem are relatively stable like you know I think there probably is a headwind a little bit on the customer acquisition side that hopefully as things, let up and as we see things turn up the other way that will alleviate and make things easier for us.

But you know I would say that it's.

It's a little bit of a unique proposition within stitch fix that's not a perfect analogy to the promotional environment that you see outside of our ecosystem.

I'll take the second part of that question, which I believe was the question on inventory and I hope I'm answering I'm hope I'm interpreting that correctly, but from the standpoint of where we see inventory going forward related to the macro and what we're seeing in our our focus on our exclusive brands as we do.

Do expect our inventory to be more efficient.

When you look at our the way we report turns externally.

We've been as high as six turns in the past and while that was pre freestyle.

We do believe that we are going to see improved efficiency in the back half of this year simply because we've taken our inventory down as we entered Q2 and we do not expect significant changes.

For it to increase it may ebb and flow a little bit quarter to quarter, but we feel very good about the inventory efficiency and we expect.

On a net inventory basis to be back above four in each two.

Thank you.

Thank you and this concludes today's conference call. Thank you for participating you may now disconnect.

Yes.

The conference will begin shortly to raise and lower <unk>.

During Q&A you can dial star one one.

[music].

Yes.

[music].

Okay.

[music].

Yes.

Mhm.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Okay.

[music].

Yes.

[music].

Okay.

[music].

Okay.

<unk>.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Sure.

Okay.

Yes.

Okay.

Sure.

[music].

Okay.

<unk>.

[music].

Sure.

Yes.

Okay.

[music].

Yes.

[music].

Thanks.

[music].

Thanks.

Okay.

[music].

Yes.

Sure.

Okay.

[music].

Good morning.

Sure.

Yes.

Thanks.

Yes.

Okay.

Sure.

Yes.

Okay.

[music].

Okay.

[music].

Sure.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

Okay.

[music].

Okay.

Yes.

Sure.

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Sure.

Yes.

Okay.

Yes.

Okay.

Uh-huh.

[music].

Okay.

Sure.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Thanks.

Yes.

Okay.

Yes.

Okay.

[music].

Sure.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Sure.

Yes.

Thank you.

Okay.

Yes.

[music].

Okay.

Thanks.

Okay.

[music].

Sure.

Yes.

Okay.

[music].

Yes.

[music].

Sure.

[music].

Okay.

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Thanks.

Okay.

[music].

Thank you.

[music].

Okay.

Yes.

Okay.

Sure.

[music].

Yes.

Okay.

[music].

Okay.

[music].

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Yeah.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Okay.

Thanks.

[music].

Okay.

Sure.

Yes.

Okay.

Sure.

Okay.

Yes.

[music].

Yes.

Okay.

[music].

Okay.

Sure.

Yes.

Yeah.

Yes.

Okay.

Thanks.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.

Hayden Blair.

Good afternoon, and thank you for joining us today to discuss the results for stitch fix is second quarter of fiscal year 2023.

Joining me on the call today are Katrina Lake interim CEO of stitch fix and Dan Jeddah CFO .

Also joining us on today's call is David alcohol.

We have posted complete second quarter 2023 financial results in a press release on the quarterly results section of our web site investors, thus stitch fix dot com.