Q1 2024 Stitch Fix Inc Earnings Call

Good afternoon, and thank you for standing by and welcome to the first quarter of fiscal year 'twenty 'twenty four stitch fix earnings call. At this time, all participants will be in a listen only mode. After the speaker's presentation, you will be invited to participate in a question answer session to ask a question during this session.

The star one on your telephone.

An automated message, indicating your hand is race 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 Hayden Blair.

Good afternoon, and thank you for joining us today for <unk> first quarter fiscal 2024 earnings call.

With me on the call are Matt There, Chief Executive Officer, and David <unk>, Chief Financial Officer.

We have posted complete first quarter 2024 financial results and a 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.

In particular, our press release issued and filed today as well as the risk factors section of our annual report on Form 10-K for our fourth quarter and full year 2023 previously filed with the SEC.

And the quarterly report on Form 10-Q for our first quarter 2024, which we expect to be filed later this week.

Also note that the forward looking statements on this call are based on information.

Available to us as of today's date.

Blame 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.

In the first quarter of fiscal 2024, we met the requirement to report our U K business as a discontinued operation Accordingly, all metrics discussed on today's call represent our continuing operations.

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.

And now let me turn the call over to our CEO, Matt there.

Thanks, Kate and good afternoon, I'm pleased to share that Q1 revenue came in at the high end of our guidance and we outpaced our guidance on adjusted EBITDA as a result of the work we're doing to manage the business to profitability.

While these results are encouraging there is much more work to be done to change the trajectory of our business.

We began the fiscal year carefully assessing all areas of our company to identify impactful opportunities to transform our operations and improve our performance and that work is ongoing.

Although I have learned and observed in my first five months as well as my experience in retail over many years has reinforced my conviction in our company's ability to deliver sustainable profitable growth.

The original vision of stitch fix is as powerful as relevant and as compelling today as it was when it launched.

Over the last 12 years, we have serve millions of clients with a more innovative and more convenient way to shop for apparel and accessories and new technology is making it possible for us to take personalization to any level.

Okay.

To ensure that we continue to fully realize our vision into the future. We must think differently work differently and approach our business differently.

And we have already begun to do that with three significant bodies of work.

First we are strengthening our foundation and embedding retail best practices throughout the organization.

Second.

We are building a healthier client base by more precisely targeting high lifetime value clients that we expect will help us expand our client base overtime.

And third.

We are developing our long term strategy to better serve the clients we have today and those we intend to attract in the future.

We have begun to embed retail best practices that are already changing the way certain choices and decisions are being made.

We will make operational excellence the standard for everything we do.

And we will ruthlessly prioritize how our teams are spending their time.

This approach is intended to be comprehensive.

Our merchandising and pricing science to transportation and warehouse operations.

And to ensure a high degree of rigor and accountability.

We have a dedicated team in place to drive efficiency across the organization and transform the way we operate.

This may not be headline grabbing.

It is exactly the work that we need to be doing right now and we believe it will fuel our ability to deliver sustainable profitable growth.

We saw encouraging results in Q1, as we continued to strengthen our foundation and apply those retail best practices across a number of functions.

Let me share a few examples.

In merchandising, we began to establish best in class buying assortment planning and inventory allocation strategies.

And we increased our focus on private brands.

We expect it to improve operational efficiencies grow margin and ensure we have the right product in the right location at the right time to best serve our clients.

Our private brands play an outsized role in improving both client outcomes and profitability.

Over the last few years, we have increased our private brands from approximately one third to nearly 50% of total sales.

Because these brands performed well generating higher cap rates and margins, we plan to emphasize them in our Assortments moving forward.

We also continued to refine our brand portfolio in order to better serve our clients.

Unlock greater operational efficiencies and build deeper relationships with national brand partners.

Over the last few quarters, we have reduced the number of brands and we will continue to assess brand and optimized categories to deliver newness and trend while also driving growth.

In technology, we continue to advance a broader set of generative AI initiatives.

As one example, we launched a generative AI enabled tool that makes it easier and more efficient for stylists to personalize the nodes clients receive within their fixes.

Through the use of this tool notes are informed by our clients prior purchase history and reflect items specific descriptions and selling points.

This led to deliver a more robust experience to clients at a lower cost to serve.

An led stylus redirect their time to conduct deeper analysis of client profiles curate the best possible fixes and spend more time building relationships with clients.

We also continue to scale the use of our AI buying tool, which helps to drive more informed decisions and fresher assortment.

We already see improved keep rates in the initial phase and we expect this tool to be utilized in more than 50% of all units ordered by the end of fiscal year 2024.

And our product and technology organizations, we welcomed seasoned leaders with experience at Amazon fashion, ebay, Airbnb and Nike to solidify and advance these teams heads.

Headlining. The addition is Tony backers, who joined the company a few weeks ago, as chief product and Technology Officer.

He brings tremendous subject matter expertise sharp business acumen and exceptional product instincts.

As well as an impressive track record of delivering results.

We will assess opportunities to advance all of our teams across the organization.

Carefully evaluating structure and capabilities to ensure that our workforce is aligned to our strategic objectives.

We have strong talent in the company and our teams have been stepping up nicely in response to new leadership, new objectives and new expectations.

Speaking to the long term development of this strategy is progressing well and we are already transforming our ways of thinking and working with.

We can and plan to seize the opportunity to methodically widened the aperture a target client segments.

And introduced many more people to the convenience and benefits of personalized styling.

And we plan to radically re imagine the client experience to firmly position and differentiate stitch fix within the retail landscape.

As the best practices and operational efficiencies I described take hold.

I believe we will have a much stronger foundation to build upon.

I look forward to sharing more about our strategy in the future and the specific ways, we plan to innovate for our clients.

<unk> growth for our business.

And create value for our shareholders.

The past five months have given me a solid grounding in where our business is today a clear understanding of the current obstacles and increased conviction about the path to return to profitable growth.

I am confident that the work we are doing now is essential to setting stitch fix up for future success.

I want to thank our teams for their ongoing commitment to our clients their openness and enthusiasm around new ways of working.

And their belief in the bright future of our company.

With that I will turn the call over to David who will speak to our Q1 financial results and future outlook.

Thanks, Matt.

In Q1, we continued to focus on near term profitability and cash flow throughout our organization.

While also doing the work to strengthen our foundation and set ourselves up for sustainable profitable growth.

We successfully ceased operations of our Bethlehem, Pennsylvania warehouse.

And are on track to do the same in Dallas by the end of Q3.

We expect this new three fulfillment center strategy will have immediate cost savings and be cash flow neutral throughout the transition.

Once complete the reduced warehouse footprint will allow us to have inventory in fewer warehouses and make it easier for stylists to build more personalized assortments for clients.

We also expect to realize the benefit of inventory efficiencies as we scale.

Additionally, we completed the wind down of our business operations in the UK in the first quarter.

On behalf of the leadership team, Matt and I want to thank the teams in Bethlehem, Dallas and the UK for their professionalism and hard work during these transitions.

Because of the work our teams have done to improve gross margin and variable cost leverage we continue to have enviable unit in order economics.

Our contribution profit remains at the high end of its historical 25% to 30% range.

We will continue to identify further opportunities to improve fixed and variable costs in order to increase both contribution margin and fixed cost leverage over time.

Now, let me get into the Q1 results.

Q1, net revenue was $365 million flat quarter over quarter and at the high end of our guidance range driven by higher than expected volume and stronger sequential <unk> heading into the fall winter season.

Net active clients ended the quarter down 4% sequentially at approximately 3 million clients.

Revenue per active client declined 6% year over year to $506.

<unk> improved year over year, but we continue to see the lower fixed frequencies, we have seen in the last few quarters.

Gross margin for the quarter was 43, 6%.

140 basis points year over year, driven by continued improvement in inventory health and transportation leverage.

Net inventory increased 23% quarter over quarter as expected due to buying ahead of the fall winter season.

But was down 24% year over year to $161 million.

We expect inventory balances to decrease in Q2 and remain at lower levels for the remainder of FY 'twenty four as we align our inventory position with demand and to increase the assortment composition of our successful private brands.

Advertising was 8% of revenue in the quarter down $11 million or 27% year over year, but up sequentially due to an investment in our fall brand campaign and the scaling of reactivation initiatives.

Q1, adjusted EBITDA came in at $8 $6 million.

Up $10 million year over year and exceeding the high end of our guidance range. As a result of continued successful cost controls.

We generated $17 million of cash flow in the quarter and ended the quarter with over $260 million in cash cash equivalents and investments and no bank debt.

Turning to our outlook.

We continue to focus on what is within our control.

As Matt highlighted our first priority is to strengthen the foundation of our business and embed retail best practices throughout the organization.

This means continuing to focus on improving the client experience retaining and attracting clients maximizing the effectiveness of our marketing increasing leverage in our cost structure and driving positive free cash flow.

For Q2, we expect total net revenue to be between $325 million and $335 million.

We expect Q2, adjusted EBITDA will be between $2 million and $7 million.

We expect both Q2 and full year gross margin to be approximately 43% to 44% as we continue to drive improvement in our inventory position with a higher percentage of private brands and ongoing efficiencies in our transportation costs.

We expect both Q2 and full year advertising to be between 7% 8% of revenue.

But we will be opportunistic and may increase that if we see the right return on our investment.

For the full year, we are reaffirming our expectations for net revenue to be between $1 3 billion and $1 $37 billion.

We are now expecting adjusted EBITDA to be between $10 million and $30 million.

This guidance still assumes will be free cash flow positive for the full year, though we do expect Q2 to be negative due to the timing of working capital requirements related to inventory purchases.

As we strengthen our foundation stay focused on leverage and profitability, along with acquisition and engagement of high lifetime value of clients.

Confident in our ability to maintain profitability today and provide a solid foundation for the future.

Now, let me turn the call back to Matt.

Thanks, David This is an important time for our company. We are encouraged by all that has been accomplished.

And we are focused on what is still to come.

We're organizing orienting and galvanizing around transformational work on the foundation and operations of our business.

We are making better decisions and marked progress after taking a step back performing a holistic assessment.

And challenging prior assumptions.

Our teams are energized by new ways of working and motivated by early indicators of what we can achieve.

I am confident that our best days are ahead of us.

And we are working to accelerate the pace with which we will reach them.

I said at the beginning of this call. It over the past 12 years ditch VIX has served millions of clients with a more innovative more personalized and more convenient way to shop for apparel and accessories.

Let me quantify that.

We recently shipped our 100 million VIX.

That is an extraordinary achievement and it is both a testament to a great idea and a credit to the incredible people, who bring their knowledge skills and determination every day.

We celebrated this milestone internally.

And now I want to take this opportunity to publicly recognize everyone at stitch fix for this accomplishment.

Thank you all for joining today's call and I'll turn it over to the operator, so we can take your questions.

Thank you and as a reminder to ask a question. Please press star one on your telephone and wait for it needs to be announced.

We ask that you limit yourself to one question one follow up answer refrain from multi part questions and so everyone. In the queue has had a chance to participate if time allows we will come back to answer any remaining questions.

Once again Thats Star 101 for questions one moment, while we compile the Q&A roster.

And our first question comes from the line of use of Squali from <unk>. Your line is open.

Great. Thank you very much hey, guys. So just.

Two quick questions for me.

<unk>.

When you step back a little bit and you look at kind of the future.

Drivers of positive growth can you maybe talk about the two or three key initiatives. You believe should help reverse D active client decline and kind of when do you believe that that could happen when do we reach the inflection point is it possible that happens.

Happens in the next 12 to 18 months and then on the Q2 guide in particular, the revenue guide implies for your <unk>.

Further deterioration in the top line growth maybe can you just help us can you help parse out maybe the.

Macro versus kind of thanks Derek.

Duane.

Company specific.

Thanks, Amit.

Thanks.

Back before starting to grow again, thank you.

Hey, I appreciate the question you've got Matt here.

<unk> to the first part of your question in terms of the future drivers of positive growth.

I'll, let David add any additional context to that as well as the answer to your question around the Q2 guide and implications for the balance of the year.

In terms of the future drivers of positive growth I think important just to reframe and reinforce that where our focus remains is just to ensure that at the moment to ensure that we have a healthy foundation for our business.

Theres healthy foundation that includes a seamless client experience at.

It includes a compelling assortment and it includes well planned inventory at.

It includes the emphasis that we're putting on efficient and scalable operations and a best in class customer service that we offer our clients.

It also includes the continued advancements that we're making in the technology that deeply rooted and embedded within our company and throughout the stitch fix ecosystem.

As part of that we also remain committed to building a healthy client franchise and that's through a judicious marketing strategy that rationalize is every dollar spend we do that to ensure our investment acquired high lifetime value clients.

We're also as we've discussed on prior calls equally committed to engaging our current clients in an effort to reduce any future dormancy as well as building on our successes to reengage those clients that may have lapsed.

And as I mentioned on the call a lot of the ways that we're building. This foundation is to focus our efforts on retail operation best practices.

A couple of things that we're doing there that have already proven positive results for us.

First is our focus of the team to improve that foundational client experience and thats across all of our touch points in order to drive conversion through the Onboarding as well as all of our shopping funnel and as that experience improves we'll see conversion through the funnel improve that will also unlock greater efficiencies than for all of our media.

Estimates.

Another example is our continued investments within our CRM capabilities and within those we have an outsize emphasis on continuing to evolve and improve our SMS and push notification communications.

This is a critical tool for us as we focus on that engagement and reengagement of our clients as well as to introduce more content into the experience and capitalize on promotional opportunities to drive the topline.

And all of this work that the team has been doing has begun to show some early and positive results. We've seen our 90 day revenue per active client or keep rates and are.

All moving in the right direction.

Now we've also seen some softness in our client conversion and some opportunity is to drive a more efficient client acquisition cost and going forward, we'll continue to balance those bright spots with our opportunities and remain judicious across all of our investments and importantly, we just continue to have this very strong perspective that our continued focus on the healthy five.

Asian, and healthy client franchise that will unlock sustainable profitable growth in the future and ensure that when that inflection point occurs we will be set up for long term profitable growth.

And then just some some ads on on the guide from a revenue perspective, Just reminder, I think we touched on this last time that the negative active clients from prior periods. So from what we saw in FY2023 and in Q1.

That is a contributor to the revenue headwinds I think we also talked about.

<unk> lower fixed frequency.

Within our existing client base and so that's another factor in the revenue guide to what Matt called out earlier, we did see higher <unk> this quarter and Thats certainly an encouraging sign and then also for Q2, we are expecting active clients to be negative for the quarter and we expect that to be pre.

Much similar or slightly higher sequentially from a percentage standpoint than what we saw in Q1.

And.

For that we we don't provide a full year guide, but as we've said in the past we will continue to focus on driving healthy engaged active clients I think Matt touched on this as well and what he just said, but we are seeing from a near term perspective. The clients that are converting are healthier were seeing a higher <unk>.

Month's Act of <unk>, we've seen that this quarter and last quarter and part of that we're also seeing increased fixed frequency and some of those newer client cohorts.

Great. Thanks for the color.

Thank you one moment for our next question.

Our next question comes from the line of unleash Sherman from Bernstein. Your line is open.

Thank you so much so I just wanted to continue that that same discussion topic around the client.

Once youre tracking so Matt it sounds like Youre, saying youre, improving is that client experience assortment et cetera, and it sounds like you are focusing on retention and reengagement. So how do you square that with the expectation of continued negative net adds.

Is there still some adverse selection from freestyle first clients that youre now seeing churning out before your base is healthy or why do you expect the net adds number to continue to be negative.

While you are seeing all of these retention metrics start to improve and then I have a follow up as well.

Yes, I appreciate the question and happy to provide a little bit more context, and what I would do is I would reference back to what I mentioned in this conversation as well as on our last earnings call and Thats, just how judicious we're being in terms of where we're spending our marketing dollars. So that the customers of the clients that we.

Do acquire are those that are delivering going to deliver a high lifetime value.

And I have been.

And it's the organization to our practices were chasing short term revenue growth our short term client acquisition.

And if youre doing that without a really firm conviction that those clients are going to deliver high lifetime value for you that becomes a losing proposition and as David just mentioned, we are seeing some promising signs in terms of those newer clients that we have acquired but its also early innings, there and we want to continue to be judicious and be methodical in terms of.

That spend as I've onboard it into stitch fix I have also learned more and more about the uniqueness of our business model and it's one that's different from traditional ecommerce in many ways as you know and in this particular instance, I think the relevant context is that when youre going out and traditional ecommerce to acquire new clients, you're often thinking about it at a transaction.

Level, even some of the largest retailers out there are acquiring every single visit in every single per test from even their most loyal clients for us we have that really unique competitive advantage in the differentiation of our business model is such that when we acquire the right client we get organic re engagement over the long term.

From them you see that in terms of where our immediate where our media or marketing investment has been relative to that client.

The client results that we just spoke to and other retailers you're normally going to see that from a one to one degradation standpoint in terms of your reduction in median reduction in client count for US we have that benefit where once we get the right client on board and they get a fixed and they are happy with that a subsequent fix another fix we get that organic reengage.

That organic recurring revenue stream, but it also takes time to ensure that investment is fully optimized as that occurs over a period of several months as opposed to something that you are able and other E. Commerce business is able to assess and much closer to real time, So we're going to make sure and to continue to be judicious continue to be methodical.

And we are encouraged by these early results and we'll continue to build on those and invest into those into the future as we see appropriate.

And in Asia, just add one more data point on sort of a dormancy side of active clients we expect.

<unk> levels of dormancy from.

From a client perspective, and I think I touched on this earlier, but as we said on some of the prior calls we saw a dip in first fix engagement last year and Thats impacted dormancy results over the last few quarters again early results, but were seeing progress here, where recent client cohorts. We saw improved first fix outcomes in Q1 with higher retention.

Quarter over quarter and year over year, but.

But the challenge with that is dormancy its a lagging metric. So it's one of those things that's going to take a little bit for us to see that come through in the overall metrics.

Okay that makes sense and then a quick follow up please.

What what is inherently different about the new clients that is making them higher quality is it a demographic difference our behavioral difference can you give a little bit more color about why you are seeing with much higher quality in your new new client base.

Yes happy to speak to that at a high level, David feel free to add any additional context. So in terms of the new clients that we've been acquiring I think it starts with again a conversation we started on the last call is just in terms of how we're going to market. We have our marketing team that really working hard.

To find the right balance between upper funnel brand driven messaging that creates the right awareness and consideration for potential clients that we onboard into the system such that they have an understanding of the service they demonstrate interest and when we get them into the onboarding funnel and and they become a claim.

Of ours, they have a high intent and a high knowledge and level of interest in the service and are more likely to become not just a client that has a first fix shipped to them, but has a subsequent and then a third fix and so forth. So I think we've done a really good job in terms of finding that balance in our media and marketing spend such that we can.

Build awareness build consideration in the upper funnel as well as have a really optimized lower funnel programmatic marketing campaign in order to acquire all of those clients towards the bottom of the funnel.

And I think where we're seeing that in the metrics is the our Pac callout that we talked about earlier that we are seeing encouraging signs in three months or pack and that's both sides of it.

We're seeing positive signs from new clients, who are receiving more fixes in their first few months compared to new clients last year and I think we also mentioned that fixed <unk> was a strong point for total our pack as well and Thats.

That was driven by hitting a multiyear high in Q1 that helped to boost up the three month our pack.

Got it thank you.

Yes.

Yes.

Thank you and as a reminder, that's for 100 ones for a question Star one one.

One moment for our next question.

Our next question comes from the line of Kunal Mt Hood car from UBS. Your line is open.

Alright, Thanks for taking my question, so continuing along the same lines in terms of our back end given that.

Second quarter.

<unk> reshaped with much higher.

Okay.

Should we think that the guide that you've given the top line guide flat Q over Q.

Should be the case why should come.

Come in much higher.

Because the trends are improving and the year, we would be much higher than the first and second.

Second quarter. Thank you.

Yes.

Sorry, I just had a little bit difficulty hearing the question, but if I understood correctly.

One of the things that we are seeing though is new clients versus the total client base and I think one of the things that we had highlighted earlier as our package. The reason it declined from a quarter over quarter standpoint is because we continue to see the challenges from a fixed frequency perspective that we've seen in the last few quarters and thats more of the drag on clients and then we also have the.

Active client loss as well and that plays into the revenue guide and so those are probably the two factors.

That would be that would be impacting that.

Okay.

Got it and then as far as one time and restructuring expenses, it's important how we've done with everything.

We still anticipate.

Some more restructuring expenses of the second quarter.

We may have some small charges related to it just because we are still closing out the R word.

The houses that we had identified before but but nothing very material to call out.

And also call on the active client just one more point on the active clients.

Just just to clarify that.

Quarter over quarter in Q2, we expect we expect the decline.

To be similar from a percentage standpoint, slightly higher negative from a percentage standpoint than what we saw this quarter.

Got it thank you so much.

Yes.

Thank you.

And with that I see no further questions in the queue. Thank you for your participation in today's conference. This does conclude the program.

Disconnect.

Have a great day.

Okay.

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