Q3 2024 Stitch Fix Inc Earnings Call

Yeah.

Operator: Good afternoon, and thank you for standing by. Welcome to the third quarter fiscal year 2024 Stitch Fix earnings call. At this time, all participants are in listen-only mode.

Speaker Change: Good afternoon, and thank you for standing by welcome to the third quarter fiscal year 2020 for Stitch fix earnings call. At this time all participants are in listen only mode. After the speaker's presentation, you will be invited to participate in a question and answer session to ask a question. During this session you will need to press star one on your <unk>.

Operator: After the speaker's presentation, you will be invited to participate in a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will hear an automated message indicating that your hand is raised. To withdraw your question, simply press star 11 again.

Speaker Change: The phone you'll hear an automated message, indicating your hand is raised to withdraw your question simply press Star. One again, please be advised that today's conference is being recorded and now I'd like to hand, the call over to Hayden Blair Senior director of Investor Relations and Treasurer. Please go ahead Sir.

Operator: Please be advised that today's conference is being recorded. And now, I'd like to hand the call over to Hayden Blair, Senior Director, Investor Relations, and Treasurer. Please go ahead, sir.

Hayden Blair: Good afternoon.

Hayden Blair: Good afternoon. And thank you for joining us today for the Stitch Fix third quarter fiscal 2024 earnings call. With me on the call are Matt Baer, Chief Executive Officer, and David Aufderhaar, Chief Financial Officer. We have posted complete third quarter 2024 financial results and a press release on the quarterly results section of our website, investors.stitchfix.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 uncertainty. The 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.

Hayden Blair: And thank you for joining us today for <unk> third quarter fiscal 2024 earnings call.

Speaker Change: With me on the call are Matt Bear Chief Executive Officer, and David <unk>, Chief Financial Officer.

Speaker Change: We have posted complete third quarter 2024 financial results and a press release on the quarterly results section of our web site investors that stitch fix dot com.

Speaker Change: A link to the webcast of today's conference call can also be found on our site.

Speaker Change: We would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties.

Speaker Change: Actual results could differ materially from those contemplated by our forward looking statements.

Speaker Change: Reported results should not be considered as an indication of future performance.

Hayden Blair: Please review our filings with the SEC for 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 Fiscal 2023, previously filed with the SEC, and the quarterly report on Form 10-Q for our third quarter of Fiscal 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, and we disclaim any obligation to update any forward-looking statements except as required by law.

Speaker Change: Please review our filings with the SEC for a discussion of the factors that could cause the results to differ.

Speaker Change: In particular, our press release issued and filed today as.

Speaker Change: As well as the risk factors section of our annual report on Form 10-K for fiscal 2023 previously filed with the SEC and the quarterly report on Form 10-Q for our third quarter fiscal 2024, which we expect to be filed later this week.

Speaker Change: Also note that the forward looking statements on this call are based on information available to us as of today's date we.

Speaker Change: We disclaim any obligation to update any forward looking statements, except as required by law.

Hayden Blair: 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.

Speaker Change: During this call we will discuss certain non-GAAP financial measures.

Speaker Change: Conciliation 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.

Hayden Blair: In the first quarter of fiscal 2024, we began to report our UK business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operation. 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. Now, let me turn the call over to our CEO, Matt Baer. Thanks, Hayden, and good afternoon, everyone.

Speaker Change: In the first quarter of fiscal 2024, we began to report our UK business as a discontinued operation.

Speaker Change: Accordingly, all metrics discussed on today's call represent our continuing operations.

Speaker Change: 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.

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

Matt Baer: Thanks, Hayden and good afternoon, everyone.

Matt Baer: At Stitch Fix, we are on a journey to transform our business, and our efforts remain focused on two areas. First, we are working to strengthen the foundation of our business across all disciplines. This includes embedding retail best practices across the enterprise, identifying operational efficiencies, and ensuring we have the right organizational structure in place to enable our future success.

Matt: At <unk>, we are on a journey to transform our business and our efforts remain focused on two areas.

Matt: First we are working to strengthen the foundation of our business across all disciplines.

Matt: This includes embedding retail best practices across the enterprise.

Matt: Identifying operational efficiencies.

Matt: And ensuring we have the right organizational structure in place to enable our future success.

Matt: Second we are re imagining the client experience and taking a holistic approach to rethink how our clients engage with stitch fix.

Matt Baer: We are reimagining the client experience and taking a holistic approach to rethink how our clients engage with Stitch Fix. I am particularly encouraged by the progress we've made on our foundational work, which outperformed our expectations and delivered results earlier than anticipated, resulting in our revenue and adjusted EBITDA coming in ahead of our guidance for the quarter. In Q3, we achieved net revenue of $322.7 million and Adjusted EBITDA of $6.7 million.

Matt: I am, particularly encouraged by the progress we've made on our foundational work, which outperformed our expectations as well as delivered results earlier than anticipated.

Matt: Resulting in our revenue and adjusted EBITDA coming in ahead of our guidance for the quarter.

Matt: In Q3, we achieved net revenue of $322 7 million.

Matt: And adjusted EBITDA of $6 $7 million.

Matt: We also achieved gross margin of 45, 5%.

Matt: Our strongest quarterly result in more than two years.

Matt: While we are still in the early days of our transformation efforts. Our Q3 results reaffirm my confidence that we have the right strategy in place.

Matt Baer: We also achieved gross margin of 45.5%, our strongest quarterly result in more than two years, while we are still in the early days of our transformation effort. Our Q3 results reaffirm my confidence that we have the right strategy in place. In addition, our financial position continues to be solid. We have a healthy balance sheet and no debt.

Matt: In addition, our.

Our financial position continues to be solid.

Matt: We have a healthy balance sheet and no debt.

Matt Baer: This, in combination with our enviable order economics, will enable us to invest in the areas of the business that we believe will drive sustainable, profitable growth in the future. Now, I'd like to talk through some of the specific foundational efforts that contributed to our results this quarter. Stitch Fix's unique business model allows us to know more about our clients on day one than many retailers could aspire to know over the course of their entire relationship.

Matt: This in combination with our enviable order economics will enable us to invest in the areas of the business that we believe will drive sustainable profitable growth in the future.

Matt: Now I'd like to talk through some of the specific foundational efforts that contributed to our results this quarter.

Matt: Stitch fix is a unique business model allows us to know more about our clients on day, one and many retailers could aspire to know over the course of their entire relationship.

Matt Baer: This advantage, combined with the AI and data science that have been fundamental to our DNA since day one, enables us to create better client experiences, as well as improve business efficiency. In Q3, we leveraged our analytics capabilities to improve the profitability of fixed transactions while strengthening client satisfaction. Following a robust analysis of client interaction, we found opportunities to reduce underperforming shipments. As an example, we currently offer quick fixes, which provide clients with the option to schedule an additional fix immediately following checkout, utilizing our proprietary demand algorithm. We improve the performance of quick fixes by only offering them to clients when we know the new fixes have a high likelihood of success.

Matt: This advantage combined with the AI and data science that had been fundamental to our DNA since day, one enables us to create better client experiences as well as identify business efficiencies.

Matt: In Q3, we leveraged our analytics capabilities to improve the profitability of fixed transactions, while strengthening client satisfaction.

Matt: Following a robust analysis of client interactions.

Matt: We found opportunities to reduce underperforming shipments.

Matt: As an example, we currently offer quick fixes, which provide clients the option to schedule an additional fix immediately following checkout.

Matt: Utilizing our proprietary demand algorithms, we improved the performance of quick fixes by only offering them to clients. When we know the new pyxis have a high likelihood of success.

Matt Baer: Within three weeks of this change, Quick Fix's average order value improved by 25%. Another example of work to improve profitability is we recently completed a comprehensive review of our pricing architecture, to ensure price points within each of our lines of business are aligned with the value we offer within each category. We tested the elasticity of price to ensure we are priced appropriately while still serving our clients' needs. The results of these tests indicated more than $20 million of annualized contribution profit opportunity.

Matt: Within three weeks of this change quick fix average order value improved by 25%.

Matt: Another example of work to improve profitability is we recently completed a comprehensive review of our pricing architecture to ensure price points within each of our lines of business are aligned with the value we offer.

Matt: Within each category, we tested the elasticity of price to ensure we are priced appropriately while still serving our clients' needs.

The results of these tests indicated more than $20 million of annualized contribution profit opportunity.

Matt Baer: Building upon our effort to increase client engagement, we're utilizing improved CRM to drive more frequent freestyle transactions and engage our current clients outside of their fixed schedule. As part of this, we are testing new promotional capabilities to drive incremental sales and manage our inventory more efficiently. Looking ahead, we will take a more data-driven approach through the use of targeted offers and promotional events. In addition, as part of our broader approach to embed AI across our business, we continue to scale our AI inventory buying tool to inform a larger set of buying decisions.

Matt: Building upon our effort to increase client engagement.

Matt: We're utilizing improved CRM to drive more frequent freestyle transactions and engage our current clients outside of their fixed schedule.

Matt: As part of this we are testing new promotional capabilities to drive incremental sales and manage our inventory more efficiently.

Looking ahead, we will take a more data driven approach through the use of targeted offers and promotional events.

Matt: In addition, as part of our broader approach to embed AI across our business. We continue to scale, our AI inventory buying tool to inform a larger set of buying decisions.

Matt Baer: This tool sifts through our proprietary transactional and client data to predict demand at the individual style and client level, empowering our merchandising team to make buying decisions that are more effective and efficient. This enables our merchants to spend more time on the art of merchandising, including trend identification, vendor partnership, and private brand development. In Q3, the tool informed nearly half of all inventory receipts, and the merchandise outperformed the items selected without the use of the tool.

Matt: This tool ships do our proprietary transactional and client data to predict demand at the individual style and client level.

Matt: Empowering our merchandising team to make buying decisions that are more effective and efficient.

Matt: This enables our merchants to spend more time on the art of merchandising, including trend identification vendor partnership and private brand development.

Matt: In Q3, the tool inform nearly half of all inventory receipts and that merchandise outperformed the items selected without the use of the tool.

Matt Baer: Moving forward, we will further leverage this capability and expect it to increase the productivity of our inventory while delivering our clients the styles they will love. These examples demonstrate the recent progress we've made to strengthen the foundation of our business. As we advance our foundational work, we believe these efforts will continue to increase wallet share and improve profitability. Now, despite this progress, new client acquisition remains a challenge.

Matt: Moving forward, we will further leverage this capability and expect it to increase the productivity of our inventory while delivering our clients the styles they will love.

Matt: These examples demonstrate the recent progress we've made to strengthen the foundation of our business.

Matt: As we advance our foundational work. We believe these efforts will continue to increase wallet share and improved profitability.

Matt: Now despite this progress new client acquisition remains a headwind and.

Matt Baer: And we are addressing the challenge of reaching the right client acquisition targets in order to build a healthier and growing client base. In the immediate term, we are making sure we have the right media mix and improving the effectiveness of each marketing channel. Our opportunity remains to improve our conversion metrics as we further optimize our marketing and reimagine our client experience, which together will help us acquire, retain, and reactivate a growing number of highly engaged clients over time.

Matt: And we are addressing the challenge of reaching the right client acquisition targets in order to build a healthier and growing client base.

In the immediate term, we are making sure we have the right media mix and improving the effectiveness of each marketing channel.

Matt: Our opportunity remains to improve our conversion metrics as we further optimize our marketing and re imagine our client experience.

Matt: Which together will help us acquire retain and reactivate a growing number of highly engaged clients over time.

Matt Baer: Next, I'll speak to our work to reimagine the client experience, which we believe is critical to ensuring we can better serve the clients we have today as well as those we plan to acquire in the future. This work continues to progress on schedule. As we have shared before, one of our key differentiators is how well we know our clients. And our success has always been tied to our ability to deliver a convenient and personalized experience that helps clients discover the styles they will love. As we work to reimagine the client experience, we're rethinking every interaction.

Matt: Next I'll speak to our work to re imagine the client experience.

Matt: Which we believe is critical to ensuring we can better serve the clients we have today as well as those we plan to acquire in the future.

Matt: This work continues to progress on schedule.

Matt: As we have shared before one of our key Differentiators is how well we know our clients.

Matt: Our success has always been tied to our ability to deliver a convenient and personalized experience that helps clients discover the styles They will love.

Matt: As we work to re imagine the client experience, we're rethinking every interaction.

Matt Baer: This includes how we serve clients through the number of items in their fix, how we approach fixed discounting, and the more dynamic and visual onboarding we discussed last quarter. We have a number of tests in the market tied to these areas, and we are encouraged by the results we are seeing so far. We expect the first of a series of experience updates to launch this summer.

Matt: This includes how we serve clients through the number of items in their fix.

Matt: How we approach fixed discounting and a more dynamic and visual Onboarding, we discussed last quarter.

Matt: We have a number of tests in the market tied to these areas.

Matt: We are encouraged by the results we're seeing so far.

Matt: We expect the first of a series of experience updates to launch this summer.

Matt Baer: The end result will be a more modern and dynamic situation. I'm excited by our progress this quarter. We are seeing the impact of our efforts to strengthen our foundation and are advancing our work to reimagine the client experience. We are on a mission to help people discover the styles they will love that fit perfectly so they always look and feel their best.

Matt: The end result will be a more modern and dynamic stitch fix.

Matt: I'm excited by our progress this quarter, we are seeing the impact of our efforts to strengthen our foundation and are advancing our work to re imagine the client experience.

Matt: We are on a mission to help people discover the styles. They will love that fit perfectly so they always look and feel their best.

David Aufderhaar: When we do that, when we nail our client's style and fit, we win, and that's what our transformation is grounded in. With that, I'll turn the call over to David to talk about our Q3 financial results and future outlook. Thanks, Matt.

Matt: When we do that when we nail our clients' style and fit.

Matt: Win and that's what our transformation is grounded in.

Matt: With that I'll turn the call over to David to talk about our Q3 financial results and future outlook.

David: Thanks, Matt.

David Aufderhaar: As Matt indicated earlier, we're seeing signs of progress on our transformational work, driven by detailed analytics that help us identify opportunities to improve multiple facets of our business. These efforts drove successful client outcomes, strong AOV and product margins, and improved freestyle performance in the quarter. Additionally, within our operation, our ongoing focus on carrier diversification further supports our expanding gross margins and cash. As a result of these efforts, we expect FY24 transportation costs as a percentage of net sales will be lower than any year since FY20.

David: As Matt indicated earlier, we're seeing signs of progress on our transformational work driven by detailed analytics that helped us identify opportunities to improve multiple facets of our business.

David: These efforts drove successful client outcomes strong <unk> in product margins and improved freestyle performance in the quarter.

David: Additionally, within our operations our ongoing focus on carrier diversification further supports our expanding gross margins and cash flow.

David: As a result of these efforts, we expect FY 'twenty for transportation costs as a percentage of net sales will be lower than any year since FY 'twenty.

David Aufderhaar: We also completed the closure of our Dallas Distribution Center in the third quarter, and expect to continue to optimize our warehouse and transportation costs. Because of the work all of our teams have done to drive gross margin and variable labor efficiency, our unit and order economics continue to improve. This quarter marked our highest contribution margin since Q1 of FY22.

David: We also completed the closure of our Dallas distribution center in the third quarter.

David: And expect to continue to optimize our warehouse and transportation costs.

David: Because of the work all of our teams have done to drive gross margin and variable labor efficiencies, our unit and order economics continue to improve.

David: This quarter marked our highest contribution margin since Q1 of FY 'twenty two.

David Aufderhaar: We are now above our historical 25% to 30% range in contribution. We believe all of the work we are doing across merchandising, pricing, client analytics, transportation, and operations will provide opportunities to further invest in areas that will drive sustainable, profitable growth. Now, let me get into the Q3 results. Q3 net revenue was $322.7 million, down 16% year over year and down 2% quarter over quarter.

David: We are now above our historical 25% to 30% range and contribution margin.

David: We believe all of the work we are doing across merchandising pricing client analytics transportation and operations will provide opportunities to further invest in areas that will drive sustainable profitable growth in the future.

David Aufderhaar: Revenue per active client for the third quarter was $525, up 2% year over year and up 2% quarter over quarter. We saw stronger AOVs both in terms of AUR and keep rate due to the cumulative impact of the ongoing work to improve our inventory health, our pricing science, and our focus on improving the profitability of our transactions. Net active clients ended the quarter at approximately 2.6 million clients, down 20% year over year and down 6% quarter over quarter.

David: Now, let me get into the Q3 results.

David: Q3, net revenue was $322 7 million.

David: Down, 16% year over year, and down 2% quarter over quarter.

David: Revenue per active client for the third quarter was $525.

David: Up 2% year over year, and up 2% quarter over quarter.

David: We saw stronger <unk>, both in terms of AUR and keep rate due to the cumulative impact of the ongoing work to improve our inventory health, our pricing science and our focus on improving the profitability of our transactions.

David: Net active clients ended the quarter at approximately $2 6 million clients.

David: Down, 20% year over year, and down 6% quarter over quarter.

David Aufderhaar: Gross margin for the quarter was 45.5%, up 280 basis points year over year and up 210 basis points quarter over quarter, driven by strong product margins and the transportation leverage discussed earlier. Q3 advertising was 9% of revenue, up 7% year-over-year and up 18% quarter-over-quarter, due to our typically stronger seasonal spend versus the second quarter. U3 Adjusted EBITDA came in at $6.7 million, or 2% of the margin, down 140 basis points year over year and up 80 basis points quarter over quarter. This result was above the guidance range we provided due to top-line leverage, improved gross margins, as well as our ongoing cost management decisions. Net inventory decreased 20% year-over-year and 9% quarter-over-quarter.

David: Gross margin for the quarter was 45, 5%.

David: Up 280 basis points year over year, and up 210 basis points quarter over quarter.

David: Driven by strong product margins and the transportation leverage discussed earlier.

David: Q3 advertising was 9% of revenue.

David: Up 7% year over year, and up 18% quarter over quarter.

David: Due to our typically stronger seasonal spend versus the second quarter.

David: Q3, adjusted EBITDA came in at $6 $7 million or 2% margin.

David: 140 basis points year over year, and up 80 basis points quarter over quarter.

David: This result was above the guidance range, we provided due to topline leverage improved gross margins as well as our ongoing cost management discipline.

David: Net inventory decreased 20% year over year, and 9% quarter over quarter.

David Aufderhaar: We continue to expect inventory balances to remain at these lower levels for the remainder of FY24 as we align our inventory position with demand and further utilize our AI Inventory Buying Tool to drive efficient operations. Free cash flow was $18.9 million in the quarter. And we ended Q3 with $245 million in cash, cash equivalents, and investments, and no debt. Turning to our, For Q4, we expect total net revenue to be between $312 million and $322 million, which increases our full year revenue range to between $1.33 billion and $1.34 billion.

David: We continue to expect inventory balances to remain at these lower levels for the remainder of FY 'twenty four as we align our inventory position with demand and further utilize our AI inventory buying tool to drive efficiencies.

David: Free cash flow was $18 $9 million in the quarter.

David: And we ended Q3 with $245 million in.

David: <unk> cash cash equivalents and investments and no debt.

David: Turning to our outlook.

David: For Q4, we expect total net revenue to be between $312 million and $322 million, which increases our full year revenue range to between $1 33 billion and $1 $34 billion.

David Aufderhaar: This reflects continued strength in AOV with expected year-over-year improvements in both keep rates and AUR. We expect Q4 adjusted EBITDA will be between $5 million and $10 million, which increases our full year adjusted EBITDA range to between $25 million and $30 million.

David: This reflects continued strength in <unk> with expected year over year improvements in both keep rate and AUR.

David: We expect Q4, adjusted EBITDA will be between $5 million and $10 million, which increases our full year adjusted EBITDA range to between $25 million and $30 million.

David Aufderhaar: We expect gross margins for Q4 to be between 45% and 46%, and we expect Q4 advertising to be between 9% and 10% of revenue. We also continue to expect to be cash flow positive for both Q4 and the full year. As our transformation progresses, our team is galvanized by the significant opportunity ahead to address a large retail market. We have a healthy balance sheet, and we continue to actively manage our expenses. Because of this, we are well positioned to transform our business and invest in the areas that will drive sustainable, profitable growth in the future. With that, I'll turn the call back to Matt.

David: We expect gross margins for Q4 to be between 45% and 46% and we expect Q4 advertising to be between 9% and 10% of revenue.

David: We also continue to expect to be cash flow positive for both Q4 and the full year.

David: As our transformation progresses, our team is galvanized by the significant opportunity ahead to address a large retail market.

David: We have a healthy balance sheet and we continue to actively manage our expense base.

David: Because of this we are well positioned to transform our business and invest in the areas that will drive sustainable profitable growth in the future.

Speaker Change: With that I'll turn the call back to Matt.

Matt: Thanks, David.

Matt Baer: Thanks, David, and Stitch Fix. We have a powerful value proposition that combines a strong team of stylists, a carefully curated merchandise assortment, and advanced AI and data science capabilities, which together create an experience that only we can deliver. I am encouraged by how we are advancing our efforts to strengthen our foundation and reimagine the client experience in support of our transformation. While we still have work to do, I'm confident that the strategy we have in place will enable us to deliver sustainable, profitable growth in the future.

Speaker Change: At stitch fix we have a powerful value proposition that combines a strong team of stylists carefully curated merchandise assortment and advanced AI and data science capabilities, which together create an experience that only we can deliver.

Matt: I am encouraged by how we are advancing our efforts to strengthen our foundation and re imagine the client experience in support of our transformation.

Matt: While we still have work to do I'm confident that the strategy. We have in place will enable us to deliver sustainable profitable growth in the future.

Matt Baer: We look forward to continuing to share our progress with you along the way. With that, I will turn it over to the operator for Q&A. Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. We ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows.

Matt: We look forward to continuing to share our progress with you along the way.

Speaker Change: With that I will turn it over to the operator for Q&A.

Matt: Okay.

Speaker Change: Thank you as a reminder.

Speaker Change: To ask a question. Please press star one on your telephone and wait for your name to be announced.

Speaker Change: Ask that you please limit yourself to one question and one follow up you may get back in the queue as time allows one moment for our first question.

Operator: One moment for our first question. Our first question comes from the line of Youssef Squali from Truce Securities. Your question, please. Great, thank you very much.

Speaker Change: Okay.

Speaker Change: Our first question comes from the line of Youssef Squali from Truth Securities. Your question. Please.

Youssef Houssaini Squali: Great. Thank you very much hi, guys two questions for me first Matt you talked a little bit about re imagining the client experience and how that's on schedule you teased a little bit.

Youssef Houssaini Squali: First, Matt, you talked a little bit about reimagining the client experience and how that's on schedule. You teased a little bit about something coming up. I think you talked about the first experience update coming up this summer. Could you maybe unpack that a little bit for us? And just how different is the new experience going to be from what we're used to? And then David.

Speaker Change: Something coming up I think you talked about a purse experienced something coming up this summer could you maybe unpack that a little bit for us and just how.

Youssef Houssaini Squali: <unk>.

Youssef Houssaini Squali: Just how different is the new experience is going to be from what we're used to.

Speaker Change: And then David.

Youssef Houssaini Squali: <unk>.

David Aufderhaar: Based on all the things that you guys are doing to drive user growth and reactivation, etc., how should we be thinking about the declining active clients for Q4? I guess what's baked into that guide? Thank you. Hey, Youssef. It's Matt.

Speaker Change: Based on all the things that you guys are doing to drive user growth and reactivation et cetera, how should we be thinking about the decline in active clients.

Speaker Change: For Q4, I guess, what's baked into that guide. Thank you.

Matt Baer: I appreciate the question. So in terms of the reimagination of the client experience that we spoke about, I think it's really important to take a step back and just remind ourselves of this really strong competitive differentiation that we have at Stitch Fix, where before a client makes their first transaction, we know more about them than most retailers aspire to over the course of their entire relationship. We know their style preferences, we know their value orientation, and we have the data that we need in order to nail their fit.

Matt: Hey, Youssef it's Matt.

Matt: I appreciate the question.

Speaker Change: In terms of the re imagination of the client experience that we spoke to I think really important to take a step back and just remind in terms of there's really strong competitive differentiation that we have at Citrix, where before our client makes their first transaction, we know more about them than most retailers.

Speaker Change: Higher to over the course of their entire relationship we know their style preferences, we know their value orientation, and we have the data that we need in order to nail their fit the work that we're doing to re imagine the client experience is how do we take that information and make sure that we're delivering the absolute best holistic end to end client experience to capital.

Speaker Change: Lies on that differentiation.

Matt Baer: The work that we're doing to reimagine the client experience is how do we take that information and make sure that we're delivering the absolute best holistic end-to-end client experience to capitalize on that differentiation. The work is going to be critical in terms of how we better serve the clients, both that we have today but also in terms of those clients that we acquire into the future. So, you know, as noted previously, some of the work or some of the areas that we're focused on include creating a more modern and dynamic interface, bringing more flexibility to that fix experience. And one example of the latter is sending more than the traditional five items so that we can continue to improve our outfitting capabilities and better serve our client needs.

Speaker Change: The word it's going to be critical in terms of how we better serve the clients. Both that we have today, but also in terms of those clients that we acquire into the future. So as noted previously some of the work or some of the areas that we're focused on it does include creating a more modern and dynamic interface, bringing more flexibility to that fixed.

Speaker Change: Experience.

Speaker Change: And one example of the latter is sending more than the traditional five items. So that we can continue to improve our outfitting capabilities and better serve our client needs and keeping in mind that our stylists continue to play a critical part in our value proposition and something that our clients have told us is that they want to get to know the stylus behind their fixes.

Matt Baer: And keeping in mind that our stylists continue to play a critical part in our value proposition, and something that our clients have told us is that they want to get to know the stylist behind their fixes. So part of the reimagination of the client experience will also be working to make our stylists a more central part of that experience, offering new touch points for clients to interact with stylists and vice versa. And as you noted, we do expect a series of these experiences or these updates to launch this summer.

Speaker Change: So part of the re imagination of the client experience will also be working to make our stylists more central part of that experience offering new touch points for clients to interact with stylists and vice versa and as you noted we do expect a series of these experiences are these updates to launch this summer.

David Aufderhaar: So we've been piloting and testing various aspects of the Reimagine client experience along the way, really encouraged by the positive early results that we've seen from those tests. And everything that we do is rooted in better serving our clients, both in terms of the feedback that we've received from them and to capitalize on what we have as a unique competitive advantage here. And then, Youssef, on the second part of your question about the Q4 guide, there are a couple components to that.

Speaker Change: So we've been piloting and testing various aspects of the re imagine client experience along the way really encouraged by the positive early results that we've seen from those tests and everything that we do is rooted in better serving our clients. Both in terms of the feedback that we've received to them and to capitalize on what we have is a unique competitive advantage here.

Speaker Change: David and then Josef on the second part of your question around the Q4 guide there are a couple of components to that first we do expect deposit trends and <unk> that we saw this quarter to continue into Q4 and that is included in our guide.

David Aufderhaar: First, we do expect the positive trends in AOV that we saw this quarter to continue into Q4, and that is included in our guide, but it also does include the continued negative trends that we've seen around active clients. And so we do expect active clients to be lower quarter over quarter in Q4, you know, rough size and shape down about 5% quarter over quarter.

Speaker Change: But it also does include the continued negative trends that we've seen around active clients and so we do expect active clients to be lower quarter over quarter in Q4, rough size and shape down about 5% quarter over quarter.

Youssef Houssaini Squali: And all of that is reflected in the revenue guide of 312 to 322 for the quarter. On the expense side as well, we specifically called out, you know, we expect gross margins to be between 45% and 46%, so we're continuing to see the benefits we've highlighted there. And then we continue to actively manage our expense base as well, and so that's all reflected in the adjusted EBITDA guide of 5 to 10 million for the quarter. Great, that's helpful. Thank you both. You're welcome.

Speaker Change: And all of that is reflected in the revenue guide of $3 12 to $3 22 for the quarter.

Speaker Change: On the expense side as well, we specifically called out.

Speaker Change: We expect gross margins to be between 45 and 46%. So we're continuing to see the benefits. We've highlighted there and then we are <unk>.

Speaker Change: To actively manage our expense base as well and so that's all reflected in the adjusted EBITDA guide of the $5 million to $10 million for the quarter.

Speaker Change: Great. That's helpful. Thank you both.

Speaker Change: Youre welcome.

Operator: Thank you. Please take a moment for our next question. And our next question comes from the line of Simeon Siegel from BMO Capital Markets. Your question, please. Thanks, everyone. Good afternoon. And I guess progress on the gross margins, could you quantify maybe the quarter's moving pieces a little bit more and how you're thinking about how those should look both within Q4 but then really, as you make these changes, how do you think about beyond what gross margin could look like? And then, just apologize if I missed it, did you give the 90-day RPAC?

Speaker Change: Thank you one moment for our next question.

Speaker Change: And our next question comes from the line of Simeon Siegel from BMO capital markets. Your question. Please.

Simeon Avram Siegel: Thanks, Hi, everyone. Good afternoon.

Simeon Avram Siegel: Hey, nice progress on the gross margins could you quantify maybe the quarters moving pieces, a little bit more on how you're thinking about how those should look both within Q4, but then really as you make these changes how you think about beyond what gross margin could look like and then just apologize if I missed it did you give the 90 day are back thank you.

Simeon Avram Siegel: Yes, Simeon, a couple of things there around gross margin. You know, some of the big components are really similar to what we've talked about in the past, that, you know, there was nothing structurally different about the organization that suggests that we couldn't get back to the 45% mark. And you can see that we're there.

Speaker Change: Yes, I mean, a couple of things there around gross margin.

Simeon Avram Siegel: <unk>.

Some of the big components are really similar to what we've talked about in the past that there was there was nothing structurally different about the organization that suggests that we couldnt get back to the 45% Mark and you can see that we're there and so a big part of that is the work that the merchant teams have been doing around driving inventory health.

David Aufderhaar: And so, you know, a big part of that is, you know, the work that the Merch teams have been doing around driving inventory health, and so that's been a big component to this. The other component is the transportation side of the business. And I think we've called this out, you know, before.

Simeon Avram Siegel: So that's been a big component to this the other component is the transportation side of the business and I think we called this out.

David Aufderhaar: And as you know, unlike other retailers, we have significant reverse logistics. You know, for a majority of our fixes that we send out, we have items sent back to us. You know, if someone keeps three items or four items out of a fix, they're able to return those and, you know, at no cost to them.

Simeon Avram Siegel: Before and as you know different than other retailers, we have significant reverse logistics for a majority of our fixes that we sent out we have items sent back to us.

Simeon Avram Siegel: Someone keeps three items or four items out of effects, they're able to return those and at no cost to them and so shipping is a big part of our expense base is something we focus on quite a bit and so.

David Aufderhaar: And so shipping is a big part of our expense base. It's something we focus on quite a bit. The teams have done a lot of work in really focusing on our existing carriers, diversifying into carriers, and even using last mile carriers to drive efficiency there. And even in some of those last mile carriers, it's also driving efficiency while having a better client experience, and so just a lot of great work there.

Simeon Avram Siegel: The last couple of quarters.

Simeon Avram Siegel: The teams have done a lot of work and really focusing on our existing carriers diversifying into carriers and even using last mile carriers to drive efficiency there.

Simeon Avram Siegel: And even in some of those last mile carriers, Thats also driving efficiency, while having a better client experience and so just a lot of great work there and so that's that's sort of the double click into gross margins and any of those of the benefits that we've seen and we expect them to continue going into into Q4.

David Aufderhaar: And so that's sort of the double click into gross margins, and those are the benefits that we see, and we expect them to continue going into Q4. That's great, thank you. And then just, did you guys give a 90-day RPAC?

Speaker Change: That's great. Thank you and then just did you guys give a 90 day perfect.

David Aufderhaar: Yeah, we didn't give a specific number, but we're seeing the same trends that we've seen historically that absolutely the new client cohorts are still very healthy. And we see that coming through the 90-day RPAC, where it continues to increase from a year-over-year perspective. So definitely happy with what we're seeing there. That's great.

Yes, we didn't give a specific number but we're seeing the same the same trends that.

Speaker Change: That we've seen historically that absolutely new client cohorts cohorts excuse me are still very healthy and we see that coming through the 90 day our pack.

Speaker Change: We're it's it continues to increase from a year over year perspective, so definitely happy with what we're seeing there.

Speaker Change: That's great. Thanks, a lot guys best of luck for the rest of year.

Simeon Avram Siegel: Thanks a lot, guys. Best of luck for the rest of the year. Thank you. Thank you and... Our next question comes from the line of Aneesha Sherman from Bernstein. Your question, please. Thank you.

Speaker Change: Thank you Simeon.

Speaker Change: Thank you and.

Speaker Change: Our next question comes from the line of Andy Sherman from Bernstein. Your question. Please.

Speaker Change: Okay.

Operator: So congrats on a nice quarter. So you've talked in the last few quarters about cycling through some lower LTV clients and retaining the kind of higher LTV fixed first, high quality clients. It looks like some of the metrics of quality in your P&L are improving, like RPAC risk margins. Do you feel like you're almost there?

Speaker Change: Thank you.

Aneesha Sherman: Congrats on a nice quarter, so you've talked in the last few quarters about cycling through some lower LTV clients and retaining the kind of higher LTV fix first higher quality clients. It looks like some of the metrics of quality in your P&L are improving like our pack gross margins.

Speaker Change: Do you feel like you're almost there I know youre guiding for another quarter of <unk>.

Aneesha Sherman: I know you're guiding for another quarter of active declines, but a lower number. Do you feel like you're at the point where you should start to see improvements in active client numbers in 2025 with a higher quality base of clients? Yeah, Aneesha, I'll take that.

Speaker Change: <unk> declines, but at a lower number do you feel like Youre there at the point, where you should start to see improvements in active client numbers in 2025 with a higher quality base of clients.

David Aufderhaar: You know, we're not guiding to FY25, but the way that I look at this from an active client standpoint is sort of both sides of active clients. If you think about our business and how we drive revenue, it's about engaging our existing clients, as well as adding new clients. And what you saw this quarter and what you're alluding to is absolutely that foundational work, and we're seeing that come through in engaging our existing clients with AOV up 6%, RPAC up, and from a year-over-year perspective, for the first time in a while, 2% up year- And so we're definitely seeing those trends with engaging our existing clients, and that's really a testament to the foundational work that we're doing.

Speaker Change: Yes, I'll take that.

Speaker Change: We're not guiding to FY 'twenty five but the way that I look at this from an active client standpoint is sort of both sides of active clients. If you think about our business and how we drive revenue, it's about engaging our existing clients as well as adding new clients.

Speaker Change: And what you saw this quarter and what you are alluding to absolutely as that foundational work and we're seeing that come through and engaging our existing clients with <unk> up 6% our pack up.

Speaker Change: From a year over year perspective for the first time in a while at 2% up year over year.

Speaker Change: And so definitely seeing those trends with engaging our existing clients and that's that's really a testament to the foundational work that we're doing and what we've called out. The last couple of quarters is we still see a lot of opportunity on adding active clients and driving conversion and so thats a lot of the focus that includes the foundational work.

David Aufderhaar: And what we've called out in the last couple of quarters is we still see a lot of opportunity for adding active clients and driving conversion. And so that's a lot of the focus that includes the foundational work, but it also includes the marketing framework that Matt had called out earlier, as well as the reimagining of the client experience. And those things together, we believe, will put us on a path to return to growth in the future. Okay, that's really helpful.

Speaker Change: But it also includes the marketing.

Speaker Change: The work that Matt had called out earlier as well as the re imagining our client experience.

Speaker Change: <unk> things together, we believe will put us on a path to return to growth in the future.

Speaker Change: Okay. That's really helpful. And then can I ask a quick follow up on gross margin and dig into some of the drivers David you talked about product margin strength, just putting aside the transport side, just kind of underlying product margin can you elaborate on the drivers of that is that primarily the private brands makes our lower markdowns or something else.

Aneesha Sherman: And then can I ask a quick follow-up on gross margin and dig into some of the drivers? David, you talked about product margin strength, just putting aside the transport side, just kind of underlying product margins. Can you elaborate on the drivers of that? Is that primarily the private brands mix or lower markdowns or something else? I think it's I think it's a couple of components. I think it's what you described.

David Aufderhaar: I think, you know, it's also us looking, you know, I think we talked a couple quarters back around sort of looking at our vendor base and making sure that we are rationalizing our vendor base and really making sure that we are partnering with, you know, strategic vendors and really combining some of those efforts. And so that's part of it is the work that we've done there where we can just drive better, better IMUs through that as well. And then there is composition.

Speaker Change: I think it's I think it's a couple of components I think it's what you described I think it's also US looking I think we talked a couple of quarters back around sort of looking at our vendor base and making sure that we are rationalizing our vendor base and really making sure that we are partnering with strategic vendors.

Speaker Change: And really combining some of those efforts and so thats part of it is the work that we've done there where we can just drive better.

Speaker Change: Better better IMU is through through that as well.

Speaker Change: And then it is composition.

David Aufderhaar: You know, it's the merchandise teams really driving towards a much better composition of our inventory and focusing, you know, on the fixed experience and what that means from an inventory perspective. And then also utilizing the AI buying tools that we've highlighted. I think that's a big component to it as well, leveraging our technologies to make sure that we're being as efficient as possible in the inventory that we're buying. Okay, really helpful. Thank you.

Speaker Change: It's the merchant teams really driving towards much better composition of our inventory and focusing on the fixed experience and what that means from an inventory perspective, and then also utilizing the AI buying tools that we've highlighted I think thats, a big component to it as well as leveraging our technologies to make sure that we're being as efficient.

Speaker Change: As possible in the inventory that we're buying.

Speaker Change: Okay really helpful. Thank you.

Speaker Change: Thanks.

Operator: Thank you. And our next question comes from the line of Maria Ripps from Canaccord. Your question, please. Good afternoon, and thanks for taking my questions. So you talked about some of the new or improved functionality like Quick Fix. Can you maybe dive a little bit deeper into some of the specifics behind the Q3 performance, especially what seems to be on the revenue per customer side? And maybe just talk about how sustainable some of those could be as we kind of look over the next – sort of towards the next couple of quarters. Hey, Maria, I appreciate the question. It's Matt here.

Speaker Change: Thank you.

Speaker Change: And our next question comes from the line of Maria Rips from Canaccord. Your question. Please.

Speaker Change: Good afternoon, and thanks for taking my questions.

Maria Ripps: So you talked about sort of some of the new or improved functionality like a quick fix can you maybe dive a little bit deeper into some of the specifics behind the Q3 or four months, especially with just a bit on the revenue per customer side, and maybe just talk about how sustainable some of those could be as we kind of look over the next.

Speaker Change: The next couple of quarters.

Maria Ripps: I'll provide some insights, and David, go ahead and follow up. But when we talked about quick fixes, I think one of the things to be really mindful of is just the way that we've been approaching our business, the way that we've been working to strengthen the foundation of our business, is that we're constantly reviewing our ongoing programs. We want to ensure that we're delivering the absolute best client experience in every single fix that we ship, and every single fix that our clients receive.

Matt: Hey, Maria I appreciate the question, it's Matt here I'll provide some insights and David go ahead and follow up.

Speaker Change: But when we talked about quick fixes I think one of the things to be really mindful of is just the way that we've been approaching our business. The way they have been that we've been working to strengthen the foundation of our business is that we're constantly reviewing our ongoing programs. We wanted to ensure that we're delivering the absolute best client experience in every single fix that we ship every single fix that are.

Maria Ripps: And as we shared, and what we're really excited about is that we were able to make very successful adjustments to existing programs, and they're paying immediate benefits. So some of those changes were made closer to the start of the year and are now beginning to have a compounding impact. Others were made within Q3 and had almost an immediate positive impact.

Speaker Change: Clients receive and as we shared and what we're really excited about is that we were able to make very successful adjustments to existing programs and theyre paying immediate benefits.

Speaker Change: Some of those changes were made closer to the start of the year and are now beginning to have a compounding impact others were made within Q3 and had almost an immediate positive impact as we've made these changes and as you noted we've seen the fixed <unk> hit some of the highest levels, we've ever seen as well as material improvement in the trend of client retention metrics.

Matt Baer: As we've made these changes, and as you noted, we've seen the fix AOB hit some of the highest levels we've ever seen, as well as a material improvement in the trend of client retention metrics. So we're able to retain the best aspects of these programs from both the client experience and a financial perspective, while reducing negative outcomes. You know, it's our fundamental belief that every client has the potential to be a healthy, high-value long-term client with us, and we're focused on delivering the right personalized experience to each client. That includes the right style of clothes, the right quantity, and the right cadence.

Speaker Change: We're able to retain the best aspects of these programs from what the client experience and a financial perspective, while reducing negative outcomes.

Speaker Change: It is our fundamental belief that every client has the potential to be a healthy high value long term client with us and we're focused on delivering the right personalized experience to each client that includes the right style of closed the right quantity the right cadence and the right thing to do for the business is getting that highest quality fit and the right cadence it.

Matt Baer: And the right thing to do for the business is get that highest quality fix and the right cadence that serves those clients' needs. That remains our focus. In terms of, you know, how much of this pulls forward, I'll let David get into the details.

Speaker Change: Services clients needs that remains our focus in terms of how much of this pulls forward.

Speaker Change: Let David click into the details, but as he noted.

David Aufderhaar: But you know, as he noted, our Q4 guide anticipates, you know, the positive traits that trends that we're seeing in AOB carrying forward into the quarter. Yeah, Maria, I'll just add a little bit about Q3, and then I'll talk about the future as well. Like, for Q3, I think the first thing to call out is, from a methodology standpoint, we definitely aim to establish guidance that's reasonable and achievable.

Speaker Change: Our Q4 guide anticipated.

Speaker Change: The positive trends that we're seeing in <unk> carrying forward into the quarter.

David Aufderhaar: And I think what we saw in Q3 was simply just better-than-expected performance across, you know, multiple initiatives that Matt had just highlighted. And so seeing that come through in both Fix AUR and KeepRate, where those benefited from those initiatives and were, you know, exceeded our expectations, the Quick Fix example is a great one that Matt talked about, where that was implemented in mid-March, and by early April, you know, we were seeing AOV increases of 25% on those shipments.

Speaker Change: Yes, maybe I'll just add a little bit about Q3, and then I'll talk about the go forward as well like for Q3 I think the first thing to call out is from a methodology standpoint, we definitely aim to establish guidance thats reasonable and achievable and I think what we saw in Q3 is simply just better than expected performance across.

Speaker Change: Multiple initiatives that Matt had just highlighted and so seeing that come through in both fix AUR in keep rate where that those benefited from those initiatives and were exceeded our expectations. The quick fix example is a great one that Matt talked about where that was implemented in mid March and by the by early April we were seeing.

Speaker Change: <unk> increases of 25% on those shipments and the pricing work. The merch work. So there's just quite a bit of things in the same quarter.

David Aufderhaar: And the pricing work, the merchandise work, so there's just quite a few things going on in the same quarter that really affected the performance. In addition to that, our promotional strategy that we continue to hone, you know, resulted in better-than-performance on the freestyle side. And so definitely... You know, quite a few components in the quarter.

Speaker Change: Is really what the performance was about in addition to that our promotional strategy that we continue to hone resulted in better than performance on the freestyle side and so definitely.

Speaker Change: Quite a few components in the quarter.

David Aufderhaar: When you're talking about playing those forward, you know, certainly, you know, to Matt's point, I think we've included, you know, what we expect to play forward in the Q4 guide. You know, if you're talking sort of longer term, you know, we're not providing any specific guidance around FY25 yet. We'll provide guidance next quarter, but there are a couple of big pieces to think about. First, as we highlighted, we expect Q4 active clients to be down sequentially in Q4, and we expect that to continue into FY25.

Speaker Change: When youre talking about playing those those forward.

Speaker Change: Certainly to Matt's point I think we have included what we expect to play forward into Q4 guide, if youre talking sort of sort of longer term.

Speaker Change: We're not providing any specific guidance around FY 'twenty five yet we'll provide guidance next quarter, but a couple of big pieces to think about.

Speaker Change: First as we highlighted we expect Q4 active clients be down sequentially in Q4, and we expect that to continue into FY 'twenty five that's why we remain focused on driving more clients into the into the experience and engaging them in a more dynamic way and thats all about that re imagining work and the marketing work that Matt had highlighted.

David Aufderhaar: That's why we remain focused on driving more clients into the experience and engaging them in a more dynamic way, and that's all about that reimagining work and the marketing work that Matt had highlighted. On the expense side, you know, we called out gross margins.

Speaker Change: On the expense side.

Speaker Change: We called out gross margins, we've done a lot of work across our business to drive leverage in the overall P&L and we've been able to get gross margins back to that 45% level and we expect the benefits of that to sort of continue into FY 'twenty five.

David Aufderhaar: We've done a lot of work across our business to drive leverage in the overall P&L, and, you know, we've been able to get gross margins back to that 45% level, and we expect the benefits of that to sort of continue into FY25. And then on sort of the rest of the expense base, I know we've talked about SG&A spend in the past. And, you know, if you look at where we are this quarter... From an annualized perspective, if you go back to Q3 FY22 and look at annualized spend there and where we are now, we've been able to remove over $400 million in SG&A spend.

Speaker Change: And then on sort of the rest of the expense base I know, we've talked about SG&A spend in the past and if you look about where we are this quarter.

Speaker Change: From an annualized perspective, if you go back to Q3, FY 'twenty, two and look at annualized spend there and where we are now we've been able to remove over $400 million in SG&A spend and so I think we're really comfortable with where we.

Maria Ripps: And so I think we're really comfortable with where we are from an expense management standpoint, and we'll continue to actively manage that. And so, as Matt and I both called out earlier, we've got a healthy balance sheet, no debt, and we'll continue to focus on adjusted EBITDA and free cash flow positivity to protect that position. And we'll do that while balancing the necessary investments to drive growth into the future. I got it.

Speaker Change: We are from an expense management standpoint, and we'll continue to actively manage that and so.

Speaker Change: As Matt and I, both called out earlier, we've got a healthy balance sheet no debt and we will continue to focus on adjusted EBITDA and free cash flow positivity to protect that position.

Speaker Change: We will do that while balancing the necessary investments to drive growth into the future.

Maria Ripps: That's very helpful. Thank you. And maybe just a quick follow-up, can you maybe share an update on the advertising spending environment? And is there anything to highlight sort of around the competitive intensity? Maria, could you please repeat the question?

Speaker Change: Got it that's very helpful. Thank you and maybe just a quick follow up can you may be sharing an update on the advertising spending environment and is there anything to highlight sort of around the competitive intensity.

Maryann could you please repeat the question.

Maria Ripps: Yeah, can you maybe share an update on kind of the broader advertising spend environment? And is there anything that you would highlight around the sort of intensity of the competitive dynamics of sort of competitive spending out there? Yeah, absolutely. Happy to answer that.

Speaker Change: Yes can you maybe share an update on kind of on the broader advertising spend environment.

Speaker Change: Is there anything that you would highlight around sort of the intensity of the competitive.

Speaker Change: Dynamic style.

Speaker Change: Relative to spending out there.

Matt Baer: So, you know, as you know, and as part of us strengthening the foundation of our business, we continue to be maniacally focused on a healthier client franchise. We're being extremely judicious with our marketing spend. We're being extremely methodical in terms of which client segments we're targeting. And that's so that when we bring a client into the experience, they're demonstrating all the characteristics of high lifetime value customers and ones that will have an enduring relationship with us over a longer period of time.

Speaker Change: Yes, absolutely happy to answer that so.

Speaker Change: As you know and as part of a.

Speaker Change: Strengthening the foundation of our business, we continue to be maniacally focused on a healthier client franchise.

Speaker Change: We're being extremely judicious with our marketing spend we're being extremely methodical in terms of which clients segments. We're targeting.

Speaker Change: And that's so that when we bring a client into the experience, they're demonstrating all the characteristics of high lifetime value customers and ones that will have an enduring relationship with us over a longer period of time.

Matt Baer: We do continue to see competitiveness in the media market. There are a lot of people aggressively spending, and we're working hard to manage through that so that we can make sure that we're attracting or speaking to the right prospective clients with the right message on the right tactic at the right time. You know, I think the team is doing a good job leaning in there, continuing to evolve our media mix, and continuing to optimize each of our media tactics so that we can make the most of our media budget while delivering against what I just shared as our objectives.

Speaker Change: Do continue to see competitiveness in the media market. There is a lot of people aggressively spending.

Speaker Change: And we're working hard to manage through that so that we can make sure that we're attracting are speaking to the right prospective clients with the right message on the right tactic at the right time.

Speaker Change: I think the team is doing a good job leaning and they're continuing to evolve our media mix continuing to optimize each of our media tactics. So that we can make the most of our media budget.

Speaker Change: Delivering against what I just shared is our objectives. So I think that we are encouraged by the positive signs in terms of the new client our pack in LTV for the clients that we are bringing in the clients that we are acquiring and that gives us confidence in our strategy going forward as well.

Matt Baer: So I think that, you know, we're encouraged by the positive signs in terms of the new client RPAC and LTV for the clients that we are bringing in, and the clients that we are acquiring. And that gives us confidence in our strategy going forward as well. Great, thank you both.

Speaker Change: Great. Thank you Bob.

Brian: Thanks, Brian.

Maria Ripps: Thank you. Thank you. And once again, as a reminder, if you have a question at this time, please press star one one on your telephone. And our next question comes from the line of David Bellinger from Mizzou. Your question, please. Good afternoon, thanks for the question. Maybe a follow-up on the last one.

Speaker Change: Thank you and once again as a reminder, if you have a question at this time. Please press star one on your telephone.

Speaker Change: Our next question comes from the line of David Bellinger from Mizuho. Your question. Please.

Operator: Just on the active customer number, down about 20% year over year, looks like you're guiding to a similar level for fiscal Q4. And those are both all ad spend that's sort of moving up and moving higher year over year. Maybe just walk us through that.

David Leonard Bellinger: Hey, good afternoon. Thanks for the question, let me just follow up on the last one.

David Leonard Bellinger: Just on the active customer number down about 20% year over year, it looks like youre guiding to.

Speaker Change: A similar level for for fiscal Q4 and that those are both will add spend it's sort of moving up and then moving higher year over year.

Speaker Change: Maybe just walk us through that.

David Leonard Bellinger: You talked about the headwinds on new customer acquisition. So is there potentially a rebase to find higher ad spend dollars in order to even maintain your customer base if not even grow further from here? Just how do we think about the level of ad spend required, you know, in 2025 and going forward? Hey, David, it's Matt.

Speaker Change: You talked about the headwinds on new customer acquisition.

Speaker Change: Is there potentially a rebase lining higher AD spend dollars in order to maintain your customer base, if not even grow further from here.

Speaker Change: How do we think about the the level of AD spend required in.

Speaker Change: 2025 and going forward.

Matt Baer: I appreciate the question. So I'll start at a higher level. And David, if you want to jump in with any additional details here,

Matt: Hey, David its Matt I appreciate the question.

Speaker Change: I'll start at a higher level and David if you want to jump in with any additional details here, but in terms of us attracting new client acquisition.

Matt Baer: But in terms of, you know, us attracting new client acquisition, the primary priority remains to drive sustainable growth over the long term. And, you know, we really believe that our focus on strengthening the foundation and reimagining the client experience will help us attract and retain high lifetime value customers. So we continue to evolve both program and channel strategies, as I just shared, to optimize that media mix for efficiency and to strengthen our brand affinity. Because we do know that when we reach the right client for whom our offering resonates, they have higher order values and purchase frequency.

Speaker Change: The primary priority remains to drive <unk>.

Speaker Change: Sustainable growth over the long term and we really believe that our focus on strengthening the foundation and re imagining the client experience will help us attract and retain high lifetime value customers.

Speaker Change: We continue to evolve both program and channel strategies as I, just shared to optimize that media mix for efficiency and to strengthen our brand affinity because we do know that when we reach the right client for whom our offering resonates they have a higher order value and purchase frequency and as I just shared and as we also shared in the prepared remarks, as we're seeing higher LTV and <unk>.

Matt Baer: And as I just shared, and as we also shared in the prepared remarks, as we're seeing higher LTV and RPAC from our new client acquisition, that gives us additional confidence to go out into the market and acquire these customers. So in terms of, you know, what our ad spend as a percentage of revenue is, that will continue to move as we optimize towards getting it at the right level, based on, you know, a pretty rigorous analysis of where that return on investment is.

Speaker Change: <unk> from our new client acquisition that gives us additional confidence to go out into the market and to acquire these customers. So in terms of what whereas our AD spend as a percentage of revenue that will continue to move as we optimize towards getting it at the right level based on a pretty rigorous analysis of where that return on.

Matt Baer: So when we see new client acquisitions, with higher fixed frequencies and higher AOVs, that gives us the confidence to go out and spend more to acquire them. And we're reviewing that, you know, every day, every week with the team so that we can get to the right place at the right time. So it's really something that's evolving over time. But again, as I shared previously, we're pretty confident in the strategy that we have at the moment and how our team is going out to market in order to execute against it. And I think that's the only thing I remember. Yeah, sorry, Dave.

Speaker Change: <unk>, so when we see new client acquisitions with higher fixed frequencies with higher <unk> that gives us the confidence to go out and spend more to acquire them and we're reviewing that every day every week with the team. So that we can get to the right place at the right time, So it's really something that.

Speaker Change: <unk> over time, but again as I shared previously we're pretty confident in the strategy that we have at the moment and how our team is going out to market in order to execute against it.

Speaker Change: The only thing I would add.

David Aufderhaar: The only thing I would add is that Matt just highlighted the methodical approach that we've talked about, you know, over the last few quarters that we're taking to managing marketing investments. And it is sort of about an LTV to CAC ratio. And I think, you know, the encouraging signs that we're seeing right now on the LTV side, allow us to feel more comfortable investing more in marketing.

Speaker Change: Yes, sorry, Dave the only thing I would add is I think I think what Matt just highlighted is the methodical approach that we've talked about over the last few quarters that were taking to managing marketing investments and it is sort of about an LTV to CAC ratio and I think the encouraging signs that we're seeing right now on the LTV side.

Speaker Change: Allow us to feel more comfortable investing.

David Aufderhaar: I think I would also call this back to, you know, what we had said earlier about the two different sides of our business and clients that, you know, the more we can engage our existing clients in dynamic ways, the more we can drive higher LTVs for those clients. That's why, you know, we've really been focused on a lot of that foundational work and how that will tie to our, you know, reimagining of the client experience because it creates a really healthy loop of really engaging our existing clients that drives higher LTV, and it provides confidence in sort of our marketing efforts as well.

Speaker Change: More in marketing I think I would also call. This back to what we have said earlier around sort of the two different sides of our business and clients that.

Speaker Change: More we can engage our existing clients and dynamic ways. The more we can drive higher ltvs of those clients. That's why we've really been focused on a lot of that foundational work and how that will tie to our re imagining of the client experience because it creates a really healthy loop of really engaging our existing clients that drives.

Speaker Change: Higher LTV and it provides confidence and sort of our marketing efforts as well.

David Aufderhaar: I understand that that's very helpful. Then my second question, maybe a more of a macro one, but you know, a lot of our companies have been talking about the split between the lower and the middle or upper income consumer. Have you seen that play out or widen even more as the quarter progressed? Just any update on what you're seeing in your customer base, any differences across the segmentation? Yeah, David, I'll jump in

Speaker Change: Understood that's very helpful.

Speaker Change: My second question, maybe more of a macro one but a lot of our companies have been talking about the.

Speaker Change: The splitting between the lower and the middle or upper income consumer.

Have you seen that play out or or widen even more as the quarter progressed.

Speaker Change: Any update on what Youre seeing in your customer base.

Speaker Change: Any differences across the segmentation.

David Leonard Bellinger: So, you know, I think in terms of what we're seeing from the impacts of the macro environment, we're not seeing any material impact at the moment, but I do think that in a discretionary category like ours, there is ample reason to take a cautious view of the U.S. consumer. They remain under pressure. I think that, you know, is being noted as particularly true in higher income households trading down at the moment.

David: Yes, David I'll jump in so I think in terms of what we're seeing from impacts of the macro environment.

David: We're not seeing any material impact at the moment, but I do think that in that discretionary category like ours. There does remain ample reason to take a cautious view of the U S. Consumer they remain under pressure I think that is being noted is particularly true in higher income households trading down.

David: At the moment.

David Leonard Bellinger: We have not seen any of that with our current, you know, client base at the moment. And also, as I've shared previously, where we are, regardless of the macro conditions, our teams remain focused on what is within our control. We work every day to serve our clients better. Our focus, regardless of the conditions, will be having the best assortment, the most intelligent pricing, judicious in terms of our client acquisition, and strengthening our experience to foster deep and enduring relationships with our clients. And we're seeing that in the results that we just shared.

David: We have not seen any of that with our current.

David: With our client base at the moment and also as I've shared previously we are regardless of the macro conditions. Our teams remain focused on what is within our control.

David: We work every day to serve our clients better our focus regardless of conditions will be having the best assortment in the most intelligent pricing judicious in terms of our client acquisition and strengthening our experience to foster deep and enduring relationships with our clients.

David: And we're seeing that in the results that we just shared and it manifests in the work we're doing to strengthen the foundation of our business so delivering for our clients in my mind is the best way to navigate a tough environment and Thats, what our team is focused on.

Matt Baer: And it manifests in the work we're doing to strengthen the foundation of our business. So delivering for our clients, in my mind, is the best way to navigate a tough environment. And that's what our team is focused on. We're good. Thank you both.

Speaker Change: Very good thank you both.

Speaker Change: Thanks, Dave.

Thank you.

Operator: Thank you. With that, I see no further questions in the queue. Thank you for your participation at today's conference. This does conclude the program. You may all disconnect. Have a great day. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Thanks for watching!

Speaker Change: With that I see no further questions in the queue. Thank you for your participation in today's conference. This does conclude the program you may all disconnect have a great day.

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Good afternoon, and thank you for standing by. Welcome to the third quarter fiscal year 2024 Stitch Fix earnings call. At this time, all participants are in listen-only mode.

Speaker Change: Good afternoon, and thank you for standing by welcome to the third quarter fiscal year 2020 for Stitch fix earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, you will be invited to participate in a question and answer session to ask a question. During this session you will need to press star one one on your telephone.

After the speaker's presentation, you will be invited to participate in a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. You will hear an automated message indicating that your hand is raised. To withdraw your question, simply press star 11 again.

Speaker Change: Youll hear an automated message, indicating your hand is raised to withdraw your question simply press Star. One again, please be advised that today's conference is being recorded and now I'd like to hand, the call over to Hayden Blair Senior Director Investor Relations and Treasurer. Please go ahead Sir.

Please be advised that today's conference is being recorded. And now, I'd like to hand the call over to Hayden Blair, Senior Director, Investor Relations, and Treasurer. Please go ahead, sir.

Good afternoon. And thank you for joining us today for the Stitch Fix 3rd quarter fiscal 2024 earnings call. With me on the call are Matt Baer, Chief Executive Officer, and David Aufderhaar, Chief Financial Officer. We have posted complete third quarter 2024 financial results and a press release on the quarterly results section of our website, investors.stitchfix.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 that involve risks and uncertainty. The 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.

Hayden Blair: Good afternoon.

Hayden Blair: And thank you for joining us today for the <unk> third quarter fiscal 2024 earnings call.

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

Speaker Change: We have posted complete third quarter 2024 financial results and a press release on the quarterly results section of our web site investors that stitch fix dot com.

Speaker Change: A link to the webcast of today's conference call can also be found on our site.

Please review our filings with the SEC for 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 Fiscal 2023, previously filed with the SEC, and the quarterly report on Form 10-Q for our third quarter of Fiscal 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, and we disclaim any obligation to update any forward-looking statements except as required by law.

Speaker Change: We would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties.

Speaker Change: Actual results could differ materially from those contemplated by our forward looking statements.

Speaker Change: Reported results should not be considered as an indication of future performance.

Speaker Change: Please review our filings with the SEC for a discussion of the factors that could cause the results to differ.

Speaker Change: In particular, our press release issued and filed today as.

Speaker Change: As well as the risk factors section of our annual report on Form 10-K for fiscal 2023 previously filed with the SEC and the quarterly report on Form 10-Q for our third quarter of fiscal 2024, which we expect to be filed later this week.

Speaker Change: Also note that the forward looking statements on this call are based on information available to us as of today's date we.

Speaker Change: 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.

Speaker Change: During this call we will discuss certain non-GAAP financial measures.

Speaker Change: Conciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

In the first quarter of fiscal 2024, we began to report our UK business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operation. 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. Now, let me turn the call over to our CEO, Matt Baer. Thanks, Hayden, and good afternoon, everyone.

Speaker Change: In the first quarter of fiscal 2024, we began to report our UK business as a discontinued operation.

Speaker Change: Accordingly, all metrics discussed on today's call represent our continuing operations.

Speaker Change: 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.

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

Matt: Thanks, Hayden and good afternoon, everyone.

At Stitch Fix, we are on a journey to transform our business, and our efforts remain focused on two areas. First, we are working to strengthen the foundation of our business across all disciplines. This includes embedding retail best practices across the enterprise, identifying operational efficiencies, and ensuring we have the right organizational structure in place to enable our future success.

Matt: At Stitch fix we are on a journey to transform our business and our efforts remain focused on two areas.

Matt: First we are working to strengthen the foundation of our business across all disciplines.

Matt: This includes embedding retail best practices across the enterprise.

Matt: Identifying operational efficiencies.

Matt: And ensuring we have the right organizational structure in place to enable our future success.

Matt: Second we are re imagining the client experience and taking a holistic approach to rethink how our clients engage with stitch fix.

We are reimagining the client experience and taking a holistic approach to rethink how our clients engage with Stitch Fix. I am particularly encouraged by the progress we've made on our foundational work, which outperformed our expectations and delivered results earlier than anticipated, resulting in our revenue and adjusted EBITDA coming in ahead of our guidance for the quarter. In Q3, we achieved net revenue of $322.7 million and Adjusted EBITDA of $6.7 million.

Matt: I am, particularly encouraged by the progress we've made on our foundational work, which outperformed our expectations as well as delivered results earlier than anticipated.

Matt: Resulting in our revenue and adjusted EBITDA coming in ahead of our guidance for the quarter.

Matt: In Q3, we achieved net revenue of $322 7 million.

Matt: Adjusted EBITDA of $6 $7 million.

Matt: We also achieved gross margin of 45, 5%.

Matt: Our strongest quarterly result in more than two years.

Matt: While we are still in the early days of our transformation efforts. Our Q3 results reaffirm my confidence that we have the right strategy in place.

We also achieved gross margin of 45.5%, our strongest quarterly result in more than two years, while we are still in the early days of our transformation effort. Our Q3 results reaffirm my confidence that we have the right strategy in place. In addition, our financial position continues to be solid. We have a healthy balance sheet and no debt.

Matt: In addition.

Matt: Our financial position continues to be solid.

We have a healthy balance sheet and no debt.

This, in combination with our enviable order economics, will enable us to invest in the areas of the business that we believe will drive sustainable, profitable growth in the future. Now, I'd like to talk through some of the specific foundational efforts that contributed to our results this quarter. Stitch Fix's unique business model allows us to know more about our clients on day one than many retailers could aspire to know over the course of their entire relationship. This advantage, combined with the AI and data science that have been fundamental to our DNA since day one, enables us to create better client experiences, as well as improve business efficiency.

Matt: In combination with our enviable order economics will enable us to invest in the areas of the business that we believe will drive sustainable profitable growth in the future.

Matt: Now I'd like to talk through some of the specific foundational efforts that contributed to our results this quarter.

Matt: Stitch fix is unique business model allows us to know more about our clients on day, one and many retailers could aspire to know over the course of their entire relationship.

Matt: This advantage combined with the AI and data science that had been fundamental to our DNA since day, one enables us to create better client experiences as well as identify business efficiencies.

In Q3, we leveraged our analytics capabilities to improve the profitability of fixed transactions while strengthening client satisfaction. Following a robust analysis of client interactions, we found opportunities to reduce underperforming shipments. As an example, we currently offer quick fixes, which provide clients with the option to schedule an additional fix immediately following checkout, utilizing our proprietary demand algorithm. We improve the performance of quick fixes by only offering them to clients when we know the new fixes have a high likelihood of success.

Matt: In Q3, we leveraged our analytics capabilities to improve the profitability of VIX transactions, while strengthening client satisfaction.

Matt: Following a robust analysis of client interactions.

Matt: We found opportunities to reduce underperforming shipments.

Matt: As an example, we currently offer quick fixes, which provide clients the option to schedule an additional fixed immediately following checkout.

Matt: Utilizing our proprietary demand algorithms, we improved the performance of quick fixes by only offering them to clients. When we know the new pyxis have a high likelihood of success.

Within three weeks of this change, Quick Fix average order value improved by 25 percent. Another example of work to improve profitability is we recently completed a comprehensive review of our pricing architecture to ensure price points within each of our lines of business are aligned with the value we offer within each category. We tested the elasticity of price to ensure we are priced appropriately while still serving our clients' needs. The results of these tests indicated more than $20 million of annualized contribution profit opportunity.

Matt: Within three weeks of this change quick fix average order value improved by 25%.

Matt: Another example of work to improve profitability is we recently completed a comprehensive review of our pricing architecture to ensure price points within each of our lines of business are aligned with the value we offer.

Matt: Within each category, we tested the elasticity of price to ensure we are priced appropriately while still serving our clients' needs.

Matt: The results of these tests indicated more than $20 million of annualized contribution profit opportunity.

Building upon our effort to increase client engagement, we're utilizing improved CRM to drive more frequent freestyle transactions and engage our current clients outside of their fixed schedule. As part of this, we are testing new promotional capabilities to drive incremental sales and manage our inventory more efficiently. Looking ahead, we will take a more data-driven approach through the use of targeted offers and promotional events. In addition, as part of our broader approach to embed AI across our business, we continue to scale our AI inventory buying tool to inform a larger set of buying decisions.

Matt: Building upon our effort to increase client engagement.

Matt: We're utilizing improved CRM to drive more frequent freestyle transactions and engage our current clients outside of their fixed schedule.

As part of this we are testing new promotional capabilities to drive incremental sales and manage our inventory more efficiently.

Matt: Looking ahead, we will take a more data driven approach through the use of targeted offers and promotional events.

Matt: In addition, as part of our broader approach to embed AI across our business. We continue to scale, our AI inventory buying tool to inform a larger set of buying decisions.

This tool sifts through our proprietary transactional and client data to predict demand at the individual style and client level, empowering our merchandising team to make buying decisions that are more effective and efficient. This enables our merchants to spend more time on the art of merchandising, including trend identification, vendor partnership, and private brand development. In Q3, the tool informed nearly half of all inventory receipts, and the merchandise outperformed the items selected without the use of the tool.

Matt: This tool ships do our proprietary transactional and client data to predict demand at the individual style and client level.

Matt: Empowering our merchandising team to make buying decisions that are more effective and efficient.

Matt: This enables our merchants to spend more time on the art of merchandising, including trend identification vendor partnership and private brand development.

Matt: In Q3, the tool informed nearly half of all inventory receipts and that merchandise outperformed the items selected without the use of the tool.

Moving forward, we will further leverage this capability and expect it to increase the productivity of our inventory while delivering our clients the styles they will love. These examples demonstrate the recent progress we've made to strengthen the foundation of our business. As we advance our foundational work, we believe these efforts will continue to increase wallet share and improve profitability. Now, despite this progress, new client acquisition remains ahead.

Matt: Moving forward, we will further leverage this capability and expect it to increase the productivity of our inventory while delivering our clients. This styles they will love.

Matt: These examples demonstrate the recent progress we've made to strengthen the foundation of our business.

Matt: As we advance our foundational work. We believe these efforts will continue to increase wallet share and improved profitability.

Matt: Now despite this progress new client acquisition remains a headwind and.

And we are addressing the challenge of reaching the right client acquisition targets in order to build a healthier and growing client base. In the immediate term, we are making sure we have the right media mix and improving the effectiveness of each marketing channel. Our opportunity remains to improve our conversion metrics as we further optimize our marketing and reimagine our client experience, which together will help us acquire, retain, and reactivate a growing number of highly engaged clients over time.

Matt: And we are addressing the challenge of reaching the right client acquisition targets in order to build a healthier and growing client base.

Matt: In the immediate term, we are making sure we have the right media mix and improving the effectiveness of each marketing channel.

Matt: Our opportunity remains to improve our conversion metrics as we further optimize our marketing and re imagine our client experience.

Matt: Which together will help us acquire retain and reactivate a growing number of highly engaged clients over time.

Next, I'll speak to our work to reimagine the client experience, which we believe is critical to ensuring we can better serve the clients we have today as well as those we plan to acquire in the future. This work continues to progress on schedule. As we have shared before, one of our key differentiators is how well we know our clients. And our success has always been tied to our ability to deliver a convenient and personalized experience that helps clients discover the styles they will love. As we work to reimagine the client experience, we're rethinking every interaction.

Matt: Next I'll speak to our work to re imagine the client experience.

Matt: Which we believe is critical to ensuring we can better serve the clients we have today as well as those we plan to acquire in the future.

This work continues to progress on schedule.

As we have shared before one of our key Differentiators is how well we know our clients.

Matt: And our success has always been tied to our ability to deliver a convenient and personalized experience that helps clients discover the styles They will love.

Matt: As we work to re imagine the client experience, we're rethinking every interaction.

This includes how we serve clients through the number of items in their fix, how we approach fixed discounting, and the more dynamic and visual onboarding we discussed last quarter. We have a number of tests in the market tied to these areas, and we are encouraged by the results we are seeing so far. We expect the first of a series of experience updates to launch this summer, and the end result will be a more modern and dynamic Stitch Fix.

This includes how we serve clients through the number of items in there how.

Matt: How we approach fixed discounting and a more dynamic and visual Onboarding, we discussed last quarter.

Matt: We have a number of tests in the market tied to these areas and we are encouraged by the results we're seeing so far.

Matt: We expect the birth of a series of experience updates to launch this summer.

The end result will be a more modern and dynamic stitch fix.

I'm excited by our progress this quarter. We are seeing the impact of our efforts to strengthen our foundation and are advancing our work to reimagine the client experience. We are on a mission to help people discover the styles they will love that fit perfectly, so they always look and feel their best.

Matt: I'm excited by our progress this quarter, we are seeing the impact of our efforts to strengthen our foundation and are advancing our work to re imagine the client experience.

Matt: We are on a mission to help people discover the styles. They will love that fit perfectly so they always look and feel their best.

When we do that, when we nail our client's style and fit, we win, and that's what our transformation is grounded in. With that, I'll turn the call over to David to talk about our Q3 financial results and future outlook. Thanks, Matt.

Matt: When we do that when we nail our clients' style and fit.

Matt: And that's what our transformation is grounded in.

Matt: With that I'll turn the call over to David to talk about our Q3 financial results and future outlook.

David: Thanks, Matt.

As Matt indicated earlier, we're seeing signs of progress on our transformational work, driven by detailed analytics that helped us identify opportunities to improve multiple facets of our business. These efforts drove successful client outcomes, strong AOV and product margins, and improved freestyle performance in the quarter. Additionally, within our operation, our ongoing focus on carrier diversification further supports our expanding gross margins and cash. As a result of these efforts, we expect FY24 transportation costs as a percentage of net sales will be lower than any year since FY24.

As Matt indicated earlier, we're seeing signs of progress on our transformational work driven by detailed analytics that helped us identify opportunities to improve multiple facets of our business.

David: These efforts drove successful client outcomes strong <unk> in product margins and improved freestyle performance in the quarter.

David: Additionally, within our operations our ongoing focus on carrier diversification further supports our expanding gross margins and cash flow.

David: As a result of these efforts, we expect FY 'twenty for transportation costs as a percentage of net sales will be lower than any year since FY 'twenty.

We also completed the closure of our Dallas Distribution Center in the third quarter, and expect to continue to optimize our warehouse and transportation costs. Because of the work all of our teams have done to drive gross margin and variable labor efficiency, our unit and order economics continue to improve. This quarter marked our highest contribution margin since Q1 of FY22.

David: We also completed the closure of our Dallas distribution center in the third quarter.

David: And expect to continue to optimize our warehouse and transportation costs.

David: Because of the work all of our teams have done to drive gross margin and variable labor efficiencies, our unit and order economics continue to improve.

David: This quarter marked our highest contribution margin since Q1 of FY 'twenty two.

We are now above our historical 25% to 30% range in contribution. We believe all of the work we are doing across merchandising, pricing, client analytics, transportation, and operations will provide opportunities to further invest in areas that will drive sustainable, profitable growth. Now, let me get into the Q3 results. Q3 net revenue was $322.7 million, down 16% year over year and down 2% quarter over quarter.

We are now above our historical 25% to 30% range and contribution margin.

David: We believe all of the work we are doing across merchandising pricing client analytics transportation and operations will provide opportunities to further invest in areas that will drive sustainable profitable growth in the future.

Revenue per active client for the third quarter was $525, up 2% year over year and up 2% quarter over quarter. We saw stronger AOVs, both in terms of AUR and keep rate, due to the cumulative impact of the ongoing work to improve our inventory health, our pricing science, and our focus on improving the profitability of our transactions. Net active clients ended the quarter at approximately 2.6 million clients, down 20% year over year and down 6% quarter over quarter. Gross margin for the quarter was 45.5%, up 280 basis points year-over-year and up 210 basis points quarter-over-quarter, driven by strong product margins and the transportation leverage discussed earlier.

David: Now, let me get into the Q3 results.

David: Q3, net revenue was $322 7 million.

David: Down, 16% year over year, and down 2% quarter over quarter.

David: Revenue per active client for the third quarter was $525.

Up 2% year over year, and up 2% quarter over quarter.

We saw stronger <unk>, both in terms of AUR and keep rate due to the cumulative impact of the ongoing work to improve our inventory health, our pricing science and our focus on improving the profitability of our transactions.

Net active clients ended the quarter at approximately $2 6 million clients.

David: Down, 20% year over year, and down 6% quarter over quarter.

David: Gross margin for the quarter was 45, 5%.

David: Up 280 basis points year over year, and up 210 basis points quarter over quarter.

David: Driven by strong product margins and the transportation leverage discussed earlier.

Q3 advertising was 9% of revenue, up 7% year-over-year and up 18% quarter-over-quarter due to our typically stronger seasonal spend versus the second quarter. U3 Adjusted EBITDA came in at $6.7 million, or 2% margin, down 140 basis points year over year and up 80 basis points quarter over quarter. This result was above the guidance range we provided due to top-line leverage, improved gross margins, as well as our ongoing cost management disadvantages. Net inventory decreased 20% year-over-year and 9% quarter-over-quarter.

David: Q3 advertising was 9% of revenue.

David: Up 7% year over year, and up 18% quarter over quarter.

David: Due to our typically stronger seasonal spend versus the second quarter.

David: Q3, adjusted EBITDA came in at $6 $7 million or 2% margin.

David: 140 basis points year over year, and up 80 basis points quarter over quarter.

This result was above the guidance range, we provided due to topline leverage improved gross margins as well as our ongoing cost management discipline.

David: Net inventory decreased 20% year over year, and 9% quarter over quarter.

David: We continue to expect inventory balances to remain at these lower levels for the remainder of FY 'twenty four as we align our inventory position with demand and further utilize our AI inventory buying tool to drive efficiencies.

David: Free cash flow was $18 $9 million in the quarter.

We continue to expect inventory balances to remain at these lower levels for the remainder of FY24 as we align our inventory position with demand and further utilize our AI Inventory Buying Tool to drive efficiency. Free cash flow was $18.9 million in the quarter. And we ended Q3 with $245 million in cash, cash equivalents, and investments, and no debt. Turning to our. For Q4, we expect total net revenue to be between $312 million and $322 million, which increases our full-year revenue range to between $1.33 billion and $1.34 billion.

David: And we ended Q3 with $245 million in.

David: <unk> cash cash equivalents and investments and no debt.

David: Turning to our outlook.

David: For Q4, we expect total net revenue to be between $312 million and $322 million, which increases our full year revenue range to between $1 33 billion and $1 34 billion.

This reflects continued strength in AOV with expected year-over-year improvements in both keep rates and AUR. We expect Q4 adjusted EBITDA will be between $5 million and $10 million, which increases our full year adjusted EBITDA range to between $25 million and $30 million.

David: This reflects continued strength in <unk> with expected year over year improvements in both keep rate and AUR.

David: We expect Q4, adjusted EBITDA will be between $5 million and $10 million, which increases our full year adjusted EBITDA range to between $25 million and $30 million.

We expect gross margins for Q4 to be between 45% and 46%, and we expect Q4 advertising to be between 9% and 10% of revenue. We also continue to expect to be cash flow positive for both Q4 and the full year. As our transformation progresses, our team is galvanized by the significant opportunity ahead to address a large retail market. We have a healthy balance sheet, and we continue to actively manage our expenses. Because of this, we are well positioned to transform our business and invest in the areas that will drive sustainable, profitable growth in the future. With that, I'll turn the call back to Matt.

David: We expect gross margins for Q4 to be between 45% and 46% and we expect Q4 advertising to be between 9% and 10% of revenue.

David: We also continue to expect to be cash flow positive for both Q4 and the full year.

David: As our transformation progresses, our team is galvanized by the significant opportunity ahead to address a large retail market.

David: We have a healthy balance sheet and we continue to actively manage our expense base.

David: Because of this we are well positioned to transform our business and invest in the areas that will drive sustainable profitable growth in the future.

Speaker Change: With that I'll turn the call back to Matt.

Matt: Thanks, David.

Thanks, David, and Stitch Fix. We have a powerful value proposition that combines a strong team of stylists, a carefully curated merchandise assortment, and advanced AI and data science capabilities, which together create an experience that only we can deliver. I am encouraged by how we are advancing our efforts to strengthen our foundation and reimagine the client experience in support of our transformation. While we still have work to do, I'm confident that the strategy we have in place will enable us to deliver sustainable, profitable growth in the future.

Speaker Change: At stitch fix we have a powerful value proposition that combines a strong team of stylists carefully curated merchandise assortment and advanced AI and data science capabilities, which together create an experience that only we can deliver.

Matt: I am encouraged by how we are advancing our efforts to strengthen our foundation and Reimagining the client experience in support of our transformation.

Matt: While we still have work to do I'm confident that the strategy. We have in place will enable us to deliver sustainable profitable growth in the future.

We look forward to continuing to share our progress with you along the way. With that, I will turn it over to the operator for Q&A. Thank you. As a reminder, to ask a question, please press star one on your telephone and wait for your name to be announced. We ask that you please limit yourself to one question and one follow-up. You may get back in the queue as time allows.

We look forward to continuing to share our progress with you along the way.

Speaker Change: With that I will turn it over to the operator for Q&A.

Matt: Okay.

Speaker Change: Thank you as a reminder.

Speaker Change: To ask a question. Please press star one on your telephone and wait for your name to be announced.

One moment for our first question. Our first question comes from the line of Youssef Squali from Truce Securities. Your question, please. Great, thank you very much.

Speaker Change: Ask that you please limit yourself to one question and one follow up you may get back in the queue as time allows one moment for our first question.

Speaker Change: Okay.

Speaker Change: Our first question comes from the line of Youssef Squali from Truth Securities. Your question. Please.

Youssef Houssaini Squali: Great. Thank you very much hi, guys two questions for me first Matt you talked a little bit about re imagine and the client experience and how that's on schedule you teased a little bit.

First, Matt, you talked a little bit about reimagining the client experience and how that's on schedule. You teased a little bit about something coming up. I think you talked about the first experience of the coming summer. Could you maybe unpack that a little bit for us?

Speaker Change: Something coming up I think you talked about a person's experience something coming up this summer could you maybe unpack that a little bit for us and just how.

And just how different is the new experience going to be from what we're used to? And then David, based on all the things that you guys are doing to drive user growth and reactivation, etc., how should we be thinking about the declining active clients for Q4? I guess what's baked into that guide? Thank you. Hey, Youssef, it's Matt.

Youssef Houssaini Squali: <unk>.

Youssef Houssaini Squali: Just how different is the new experience is going to be from what we're used to.

Speaker Change: And then David.

Speaker Change: <unk>.

Based on all the things that you guys are doing to drive user growth and reactivation et cetera, how should we be thinking about the decline in active clients.

For Q4, I guess, what's baked into that guide. Thank you.

I appreciate the question. So in terms of the reimagination of the client experience that we spoke about, I think it's really important to take a step back and just remind ourselves of this really strong competitive differentiation that we have at Stitch Fix, where before a client makes their first transaction, we know more about them than most retailers aspire to over the course of their entire relationship. We know their style preferences, we know their value orientation, and we have the data that we need in order to nail their fit.

Matt: Hey, Youssef it's Matt.

Matt: I appreciate the question.

Speaker Change: In terms of the re imagination of their client experience that we spoke to I think really important to take a step back and just remind in terms of there's really strong competitive differentiation that we have at Citrix, where before our client makes their first transaction, we know more about them than most retailers.

Speaker Change: Higher to over the course of their entire relationship we know their style preferences, we know their value orientation, and we have the data that we need in order to nail their fit the work that we're doing to re imagine the client experience is how do we take that information and make sure that we're delivering the absolute best holistic end to end client experience to capital.

The work that we're doing to reimagine the client experience is how do we take that information and make sure that we're delivering the absolute best holistic end-to-end client experience to capitalize on that differentiation. The work is going to be critical in terms of how we better serve the clients, both that we have today but also in terms of those clients that we acquire into the future. So, you know, as noted previously, some of the work or some of the areas that we're focused on include creating a more modern and dynamic interface, bringing more flexibility to that fix experience. And one example of the latter is sending more than the traditional five items so that we can continue to improve our outfitting capabilities and better serve our client needs.

Speaker Change: Our eyes on that differentiation.

Speaker Change: The word it's going to be critical in terms of how we better serve the clients. Both that we have today, but also in terms of those clients that we acquire into the future. So as noted previously some of the work or some of the areas that we're focused on it does include creating a more modern and dynamic interface, bringing more flexibility to that fixed.

Speaker Change: Experience.

Speaker Change: And one example of the latter is sending more than the traditional five items. So that we can continue to improve our outfitting capabilities and better serve our client needs and keeping in mind that our stylists continue to play a critical part in our value proposition and something that our clients have told us is that they want to get to know the stylus behind their fixes.

And keeping in mind that our stylists continue to play a critical part in our value proposition, and something that our clients have told us is that they want to get to know the stylists behind their fixes. So part of the reimagination of the client experience will also be working to make our stylists a more central part of that experience, offering new touch points for clients to interact with stylists and vice versa. And as you noted, we do expect a series of these experiences or these updates to launch this summer.

Speaker Change: So part of the re imagination of the client experience will also be working to make our stylists more central part of that experience offering new touch points for clients to interact with stylists and vice versa and as you noted we do expect a series of these experiences are these updates to launch this summer.

So we've been piloting and testing various aspects of the Reimagine client experience along the way, really encouraged by the positive early results that we've seen from those tests. And everything that we do is rooted in better serving our clients, both in terms of the feedback that we've received from them and to capitalize on what we have as a unique competitive advantage here. And then, Youssef, on the second part of your question about the Q4 guide, there are a couple components to that.

Speaker Change: So we've been piloting and testing various aspects of the re imagine client experience along the way really encouraged by the positive early results that we've seen from those tasks and everything that we do is rooted in better serving our clients. Both in terms of the feedback that we've received to them and to capitalize on what we have is a unique competitive advantage here.

Speaker Change: David and then Josef on the second part of your question around the Q4 guide there are a couple of components to that first we do expect deposit trends and <unk> that we saw this quarter to continue into Q4 and that is included in our guide.

First, we do expect the positive trends in AOV that we saw this quarter to continue into Q4, and that is included in our guide, but it also does include the continued negative trends that we've seen around active clients, and so we do expect active clients to be lower quarter over quarter in Q4, you know, rough size and shape down about 5% quarter over quarter, and all of that is reflected in the revenue guide of 312 to 322 for the quarter. On the expense side as well, we specifically called out, you know, we expect gross margins to be between 45 and 46%, so we're continuing to see the benefits we've highlighted there, and then we are..., will continue to actively manage our expense base as well. And so that's all reflected in the adjusted EBITDA guide of five to 10 million for the core. Great, that's very helpful. Thank you both. You're welcome.

Speaker Change: But it also does include the continued negative trends that we've seen around active clients and so we do expect active clients to be lower quarter over quarter in Q4.

Speaker Change: Rough size and shape down about 5% quarter over quarter.

Speaker Change: And all of that is reflected in the revenue guide of $3 12 to $3 22 for the quarter.

Speaker Change: On the expense side as well, we specifically called out.

Speaker Change: We expect gross margins to be between 45% and 46%. So we're continuing to see the benefits. We've highlighted there and then we are.

Speaker Change: To actively manage our expense base as well and so that's all reflected in the adjusted EBITDA guide of the $5 million to $10 million for the quarter.

Speaker Change: Great. That's helpful. Thank you both.

Speaker Change: Youre welcome.

Thank you. Please take a moment for our next question. Our next question comes from the line of Simeon Siegel from BMO Capital Markets. Your question, please. Thanks everyone, good afternoon. Can I ask progress on the gross margins? Could you quantify maybe the quarters moving pieces a little bit more and how you're thinking about how those should look both within Q4 but then really, as you make these changes, how you think about beyond what gross margin could look like? And then just apologize if I missed it; did you give the 90-day RPAC?

Speaker Change #100: Thank you one moment for our next question.

Yes, Simeon, a couple of things on gross margin. Some of the big components are really similar to what we've talked about in the past, that, you know, there was nothing structurally different about the organization that suggests that we couldn't get back to the 45% mark, and you can see that we are there. And so, you know, a big part of that is the work that the merchandise teams have been doing around, you know, driving inventory health, and so that's been a big component to this.

Speaker Change #101: And our next question comes from the line of Simeon Siegel from BMO capital markets. Your question. Please.

Simeon Avram Siegel: Thanks, Hi, everyone. Good afternoon.

Hey, nice progress on the gross margins could you quantify maybe the quarters moving pieces, a little bit more on how you're thinking about how those should look both within Q4, but then really as you make these changes how you think about beyond what gross margin could look like and then just apologize if I missed it did you give the 90 day are back thank you.

Speaker Change #102: Yes, I mean, a couple of things there around gross margin.

Speaker Change #103: Some of the big components are really similar to what we've talked about in the past that there was there was nothing structurally different about the organization that suggests that we couldnt get back to the 45% Mark and you can see that we are there.

Speaker Change #103: And so a big part of that is the work that the merchant teams have been doing around driving inventory health and so that's been a big component to this the other component is the transportation side of the business and I think we've called this out.

The other component is the transportation side of the business, and I think we've called this out before, and as you know, different than other retailers, we have significant reverse logistics. For a majority of our fixes that we send out, we have items sent back to us. You know, if someone keeps three items or four items out of a fix, they're able to return those and, you know, at no cost to them.

Speaker Change #103: Before and as you know different than other retailers, we have significant reverse logistics for a majority of our fixes that we sent out we have items sent back to us.

Speaker Change #103: It keeps three items or four items out of effects, they're able to return those and at no cost to them and so shipping is a big part of our expense base and it's something we focus on quite a bit and so.

And so shipping is a big part of our expense base. It's something we focus on quite a bit. And so, you know, the last couple of quarters.

Speaker Change #103: The last couple of quarters.

The teams have done a lot of work really focusing on our existing carriers, diversifying into new carriers, and even using last mile carriers to drive efficiency there. And even in some of those last mile carriers, it's also driving efficiency while having a better client experience, and so just a lot of great work there. And so that's sort of the double click on gross margins, and those are the benefits that we see, and we expect them to continue going into Q4. That's great, thank you. And then just, did you guys give a 90-day RFA?

Speaker Change #103: The teams have done a lot of work and really focusing on our existing carriers diversifying into carriers and even using last mile carriers to drive efficiency there.

Speaker Change #103: And even in some of those last mile carriers, Thats also driving efficiency, while having a better client experience and so just a lot of great work there and so that's that's sort of the double click into gross margins and any of those of the benefits that we see and we expect them to continue going into into Q4.

Speaker Change #104: That's great. Thank you and then just did you guys give a 90 day pack.

Yeah, we didn't give a specific number, but we're seeing the same trends that we've seen historically that absolutely the new client cohorts, excuse me, are still very healthy. And we see that coming through the 90-day RPAC, you know, where it continues to increase from a year-over-year perspective. So I'm definitely happy with what we're seeing there. That's great. Thanks a lot, guys. Best of luck for the rest of the year.

Speaker Change #105: Yeah, we didn't give a specific number but we're seeing the same the same trends.

Speaker Change #105: That we've seen historically that absolutely new client cohorts cohorts excuse me are still very healthy and we see that coming through the 90 day our pack.

Speaker Change #105: We're it's it continues to increase from a year over year perspective, so definitely happy with what we're seeing there.

Speaker Change #106: That's great. Thanks, a lot guys best of luck for the rest of year.

Speaker Change #107: Thank you Simeon.

Thank you, and... Our next question comes from the line of Aneesha Sherman from Bernstein. Your question, please. Thank you.

Ann: Thank you Ann.

Our next question comes from the line of any Sherman from Bernstein. Your question. Please.

So congrats on a nice quarter. So you've talked in the last few quarters about cycling through some lower LTV clients and retaining the kind of higher LTV fixed first, high quality clients. It looks like some of the metrics of quality in your P&L are improving, like RPAC risk margins. Do you feel like you're almost there?

Speaker Change #109: Thank you.

Aneesha Sherman: Congrats on a nice quarter, so you've talked in the last few quarters about cycling through some lower LTV clients than retaining kind of higher LTV first higher quality clients.

Speaker Change #110: It looks like some of the metrics of quality in your P&L are improving like our pack gross margins.

Speaker Change #111: Do you feel like you're almost there I know youre guiding for another quarter of of active declines, but at a lower number do you feel like Youre. There at the point, where you should start to see improvements in active client numbers in 2025 with a higher quality base of clients.

I know you're guiding for another quarter of active declines, but a lower number. Do you feel like you're at the point where you should start to see improvements in active client numbers in 2025 with a higher quality base of clients? Yeah, Aneesha, I'll take that.

You know, we're not guiding to FY25, but the way that I look at this from an active client standpoint is sort of both sides of active clients. If you think about our business and how we drive revenue, it's about engaging our existing clients, as well as adding new clients. And what you saw this quarter and what you're alluding to is absolutely that foundational work, and we're seeing that come through in engaging our existing clients with AOV up 6%, RPAC up, from a year-over-year perspective for the first time in a while, at 2% up year-over And so we're definitely seeing those trends with engaging our existing clients, and that's really a testament to the foundational work that we're doing.

Speaker Change #112: Yes, I'll take that.

Speaker Change #113: We're not guiding to FY 'twenty five but the way that I look at this from an active client standpoint is sort of both sides of active clients. If you think about our business and how we drive revenue, it's about engaging our existing clients as well as adding new clients and what you saw this quarter and what youre alluding to absolute.

<unk> is that foundational work and we're seeing that come through in engaging our existing clients with <unk> up 6% our pack up.

Speaker Change #113: From a year over year perspective for the first time in awhile at 2% up year over year.

Speaker Change #113: And so definitely seeing those trends with engaging our existing clients and that's really a testament to the foundational work that we're doing.

And, you know, what we've called out in the last couple of quarters is that we still see a lot of opportunity for adding active clients and driving conversion. And so that's a lot of the focus that includes the foundational work, but it also includes the marketing work that Matt had called out earlier, as well as the reimagining of the client experience. And those things together, we believe, will put us on a path to return to growth in the future. Okay, that's really helpful.

Speaker Change #113: And what we've called out the last couple of quarters is we still see a lot of opportunity on adding active clients and driving conversion and so thats a lot of the focus that includes the foundational work, but it also includes the marketing.

Speaker Change #114: The work that Matt had called out earlier as well as the re imagining our client experience.

Speaker Change #114: <unk> things together, we believe will put us on a path to return to growth in the future.

Speaker Change #115: Okay. That's really helpful. And then can I ask a quick follow up on gross margin and dig into some of the drivers David you talked about product margin strength.

And then can I ask a quick follow-up on gross margin and dig into some of the drivers? David, you talked about product margin strength, just putting aside the transport side, just kind of underlying product margins. Can you elaborate on the drivers of that? Is that primarily the private brands mix or lower markdowns or something else? I think it's I think it's a couple components. I think it's what you described.

Speaker Change #116: Putting aside the transport side, just kind of underlying product margin can you elaborate on the drivers of that is that primarily the private brands mix or lower markdowns or something else.

I think, you know, it's also us looking, you know, I think we talked a couple quarters back around sort of looking at our vendor base and making sure that we are rationalizing our vendor base and really making sure that we are partnering with, you know, strategic vendors and really combining some of those efforts. And so that's part of it is the work that we've done there where we can just drive better, better IMUs through that as well. And then there is composition.

David: I think it's I think it's a couple of components I think it's what you described I think it's also US looking I think we talked a couple of quarters back around sort of looking at our vendor base and making sure that we are rationalizing our vendor base and really making sure that we are partnering with strategic vendors.

David: And really combining some of those efforts and so thats part of it is the work that we've done there where we can just drive better.

David: Better better I am used through through that as well.

David: And then it is composition.

You know, it's the merchandise teams really driving towards a much better composition of our inventory and focusing, you know, on the fixed experience and what that means from an inventory perspective. And then also utilizing the AI buying tools that we've highlighted. I think that's a big component to it as well, leveraging our technologies to make sure that we're being as efficient as possible in the inventory that we're buying. Okay, really helpful.

David: It's the merchant teams really driving towards much better composition of our inventory and focusing on the fixed experience and what that means from an inventory perspective, and then also utilizing the AI buying tools that we've highlighted I think thats, a big component to it as well as leveraging our technologies to make sure that we're being as efficient.

David: <unk> is possible in the inventory that we're buying.

Speaker Change #117: Okay really helpful. Thank you.

David: Thanks.

Thank you. Thank you. And our next question comes from the line of Maria Ripps from Canaccord.

Speaker Change #118: Thank you.

Speaker Change #119: And our next question comes from the line of Maria <unk> from Canaccord. Your question. Please.

Your question, please. Good afternoon, and thanks for taking my questions. So you talked about sort of some of the new or improved functionality like Quick Fix. Can you maybe dive a little bit deeper into some of the specifics behind the Q3 performance, especially what seems to be on the revenue per customer side, and maybe just talk about how sustainable some of those could be as we kind of look towards the next couple of quarters? Hey, Maria, I appreciate the question. It's Matt here.

Speaker Change #120: Good afternoon, and thanks for taking my questions.

Speaker Change #121: So you talked about sort of some of the new or improved functionality like a quick fix.

Speaker Change #122: Maybe dive a little bit deeper into some of the specifics behind the Q3 or four months, especially with just to be on the revenue per customer side.

Speaker Change #122: Maybe just talk about how sustainable some of those could be as we kind of look over the next sort of towards the next couple of quarters.

I'll provide some insights, and David, go ahead and follow up. But when we talked about quick fixes, I think one of the things to be really mindful of is just the way that we've been approaching our business, the way that we've been working to strengthen the foundation of our business, is that we're constantly reviewing our ongoing programs. We want to ensure that we're delivering the absolute best client experience in every single fix that we ship, and every single fix that our clients receive.

Matt: Hey, Maria I appreciate the question, it's Matt here I'll provide some insights and David go ahead and follow up.

Speaker Change #123: But when we talked about quick fixes I think one of the things to be really mindful of is just the way that we've been approaching our business. The way they have been that we've been working to strengthen the foundation of our business is that we're constantly reviewing our ongoing programs. We wanted to ensure that we're delivering the absolute best client experience in every single fix that we ship every single fix that.

And as we shared, and what we're really excited about is that we were able to make very successful adjustments to existing programs, and they're paying immediate benefits. So some of those changes were made closer to the start of the year and are now beginning to have a compounding impact. Others were made within Q3 and had almost an immediate positive impact.

Speaker Change #123: Our clients receive and as we shared and what we're really excited about is that we were able to make very successful adjustments to existing programs and theyre paying immediate benefits. So some of those changes were made closer to the start of the year and are now beginning to have a compounding impact others were made within Q3 and had almost an immediate positive impact.

As we've made these changes, and as you noted, we've seen the fixed AOB hit some of the highest levels we've ever seen, as well as a material improvement in the trend of client retention metrics. So we're able to retain the best aspects of these programs from both the client experience and the financial perspective, while reducing negative outcomes. You know, it's our fundamental belief that every client has the potential to be a healthy, high-value, long-term client with us, and we're focused on delivering the right personalized experience to each client. That includes the right style of clothes, the right quantity, and the right cadence.

Speaker Change #123: As we've made these changes and as you noted we've seen the biggest hit some of the highest levels, we've ever seen as well as material improvement in the trend of client retention metrics. So we're able to retain the best aspects of these programs for both the client experience and a financial perspective, while reducing negative outcomes.

Speaker Change #123: It is our fundamental belief that every client has the potential to be a healthy high value long term client with us and we're focused on delivering the right personalized experience to each client that includes the right style of closed the right quantity the right cadence and the right thing to do for the business is getting that highest quality fix and the right cadence.

And the right thing to do for the business is get that highest quality fix and the right cadence that serves those clients' needs. That remains our focus. In terms of, you know, how much of this pulls forward, I'll let David get into the details.

Speaker Change #124: Services clients needs that remains our focus in terms of how much of this pulls forward I'll, let David quick into the details, but as he noted.

But, you know, as he noted, our Q4 guide anticipates the positive trends that we're seeing in AOB carrying forward into the quarter. Yeah, Maria, I'll just add a little bit about Q3, and then I'll talk about the future as well. Like, for Q3, I think the first thing to call out is that, from a methodology standpoint, we definitely aim to establish guidance that's reasonable and achievable.

Speaker Change #125: Our Q4 guide anticipate the positive trends that we're seeing in <unk> carrying forward into the quarter.

And I think what we saw in Q3 was simply just better than expected performance across, you know, multiple initiatives that Matt had just highlighted. And so, seeing that come through in both Fix, AUR, and Keep Rate, where those benefited from those initiatives and were, you know, exceeded our expectations. The Quick Fix example is a great one that Matt talked about, where that was implemented in mid-March, and by early April, you know, we were seeing AOV increases of 25% on those shipments, and the pricing worked, and the merchandise worked.

David: Yes, maybe I'll just add a little bit about Q3, and then I'll talk about the go forward as well like for Q3 I think the first thing to call out is from a methodology standpoint, we definitely aim to establish guidance thats reasonable and achievable and I think what we saw in Q3 is simply just better than expected performance across.

Speaker Change #126: Multiple initiatives that Matt had just highlighted and so seeing that come through in both fix AUR in keep rate where that those benefited from those initiatives and were.

Speaker Change #126: We exceeded our expectations. The quick fix example is a great one that Matt talked about where that was implemented in mid March and by the by early April we were seeing <unk> increases of 25% on those shipments and the pricing work. The merch work. So they are just quite a bit of things in the same quarter.

So, there's just quite a few things going on in the same quarter that really affects performance. In addition to that, our promotional strategy, which we continue to hone, resulted in better performance on the freestyle side. And so, definitely. You know, quite a few components in the quarter.

Speaker Change #126: Is really what the performance was about in addition to that our promotional strategy that we continue to hone resulted in better than performance on the freestyle side and so definitely.

Speaker Change #126: A few components in the quarter.

When you're talking about playing those forward, you know, certainly, you know, to Matt's point, I think we've included, you know, what we expect to play forward in the Q4 guide. You know, if you're talking sort of longer term, you know, we're not providing any specific guidance around FY25 yet. We'll provide guidance next quarter, but there are a couple of big pieces to think about. First, as we highlighted, we expect Q4 active clients to be down sequentially in Q4, and we expect that to continue into FY25.

When you are talking about playing those those forward.

Speaker Change #127: Certainly to Matt's point I think we have included what we expect to play forward into Q4 guide, if youre talking sort of sort of longer term.

Speaker Change #128: We're not providing any specific guidance around FY 'twenty five yet we'll provide guidance next quarter, but.

A couple of big pieces to think about.

Speaker Change #129: First as we highlighted we expect Q4 active clients to be down sequentially in Q4, and we expect that to continue into FY 'twenty five that's why we remain focused on driving more clients into the into the experience and engaging them in a more dynamic way and thats all about that re imagining work and the marketing work that Matt had highlighted.

That's why we remain focused on driving more clients into the experience and engaging them in a more dynamic way, and that's all about that reimagining work and the marketing work that Matt had highlighted. On the expense side, you know, we called out gross margins.

Speaker Change #128: On the expense side.

We've done a lot of work across our business to drive leverage in the overall P&L, and, you know, we've been able to get gross margins back to that 45% level, and we expect the benefits of that to sort of continue into FY25. And then on sort of the rest of the expense space, I know we've talked about SG&A spend in the past, and, you know, if you look about where we are this quarter, from an annualized perspective, if you go back to Q3 FY22 and look at annualized spend there and where we are now, we've been able to remove over $400 million in SG&A spend.

Speaker Change #128: We called out gross margins, we've done a lot of work across our business to drive leverage in the overall P&L and we've been able to get gross margins back to that 45% level and we expect the benefits of that to sort of continue into FY 'twenty five and then on sort of the rest of the expense base I know, we've talked about SG&A spend in the past and.

Speaker Change #128: If you look about where we are this quarter.

Speaker Change #128: From an annualized perspective, if you go back to Q3, FY 'twenty, two and look at annualized spend there and where we are now we've been able to remove over $400 million in SG&A spend and so I think we're really comfortable with where we.

And so I think we're really comfortable with where we are from an expense management standpoint, and we'll continue to actively manage that. And so, as Matt and I both called out earlier, we've got a healthy balance sheet, no debt, and we'll continue to focus on adjusted EBITDA and free cash flow positivity to protect that position. And we'll do that while balancing, you know, the necessary investments to drive growth into the future. I got it.

Speaker Change #130: We are from an expense management standpoint, and we'll continue to actively manage that and so as as Matt and I. Both called out earlier, we've got a healthy balance sheet no debt and we will continue to focus on adjusted EBITDA and free cash flow positivity to protect that position and we will do that while balancing the necessary.

Our investments to drive growth into the future.

That's very helpful. Thank you. And maybe just a quick follow-up, can you maybe share an update on the advertising spending environment? And is there anything to highlight sort of around the competitive intensity? Maria, could you please repeat the question?

Speaker Change #131: Got it that's very helpful. Thank you and maybe just a quick follow up can you may be sharing an update on the advertising spending environment and is there anything to highlight sort of around the competitive intensity.

Maryann could you please repeat the question.

Yeah, can you maybe share an update on kind of the broader advertising spend environment? And is there anything that you would highlight around the sort of intensity of the competitive dynamics of sort of competitive spending out there? Yeah, absolutely. Happy to answer that.

Speaker Change #131: Yes.

Speaker Change #132: You may be sharing an update on kind of on the broader advertising spend environment and.

Speaker Change #134: Is there anything that you would highlight around their sort of intensity of the competitive.

Speaker Change #133: Dynamic style.

Speaker Change #135: <unk> spending out there.

So, you know, as you know, and as part of us strengthening the foundation of our business, we continue to be maniacally focused on a healthier client franchise. We're being extremely judicious with our marketing spend. We're being extremely methodical in terms of which client segments we're targeting. And that's so that when we bring a client into the experience, they're demonstrating all the characteristics of high lifetime value customers and ones that will have an enduring relationship with us over a longer period of time. We do continue to see competitiveness in the media market.

Speaker Change #136: Yes, absolutely happy to answer that so.

Speaker Change #136: As you know and as part of.

Speaker Change #136: Strengthening the foundation of our business, we continue to be maniacally focused on a healthier client franchise.

Speaker Change #136: We're being extremely judicious with our marketing spend we're being extremely methodical in terms of which client segments. We are targeting.

Speaker Change #136: And that's so that when we bring a client into the experience, they're demonstrating all the characteristics of high lifetime value customers and ones that will have an enduring relationship with us over a longer period of time.

There are a lot of people aggressively spending, and we're working hard to manage through that so that we can make sure that we're attracting or speaking to the right prospective clients with the right message on the right tactic at the right time. You know, I think the team is doing a good job leaning in there, continuing to evolve our media mix, and continuing to optimize each of our media tactics so that we can make the most of our media budget while delivering against what I just shared as our objectives.

Speaker Change #136: Do continue to see competitiveness in the media market.

Speaker Change #136: There's a lot of people aggressively spending.

Speaker Change #136: And we're working hard to manage through that so that we can make sure that we're attracting are speaking to the right perspective clients with the right message on the right tactic at the right time.

Speaker Change #136: I think the team is doing a good job leaning and they're continuing to evolve our media mix continuing to optimize each of our media tactics. So that we can make the most of our media budget and delivering against what I just shared is our objectives.

So I think that, you know, we're encouraged by the positive signs in terms of the new client RPAC and LTV for the clients that we are bringing in, and the clients that we are acquiring. And that gives us confidence in our strategy going forward as well. Great, thank you both.

Speaker Change #136: I think that we are encouraged by the positive signs in terms of the new client our pack in LTV for the clients that we are bringing in the clients that we are acquiring and that gives us confidence in our strategy going forward as well.

Speaker Change #137: Great. Thank you Bob.

Brian: Thanks, Brian.

Thank you. Thank you. And once again, as a reminder, if you have a question at this time, please press star one one on your telephone. And our next question comes from the line of David Bellinger from Mizzou. Your question, please. Good afternoon, thanks for the question. Maybe a follow-up on the last one.

Thank you and once again as a reminder, if you have a question at this time. Please press star one on your telephone.

Speaker Change #138: And our next question comes from the line of David Bellinger from Mizuho. Your question. Please.

Just on the active customer number, down about 20% year over year, looks like you're guiding to a similar level for fiscal Q4. And those are both all ad spend that's sort of moving up and moving higher year over year. Maybe just walk us through that.

David Leonard Bellinger: Hey, good afternoon. Thanks for the question, let me just follow up on the last one.

David Leonard Bellinger: On the active customer number down about 20% year over year, it looks like youre guiding to.

Speaker Change #139: A similar level for for fiscal Q4, and then those are both will add spend is sort of moving up and then moving higher year over year.

Speaker Change #140: Maybe just walk us through that.

You talked about the headwinds on new customer acquisition. So is there potentially a rebase to find higher ad spend dollars in order to even maintain your customer base if not even grow further from here? Just how do we think about the level of ad spend required, you know, in 2025 and going forward? Hey, David, it's Matt.

Speaker Change #141: You talked about the headwinds on new customer acquisition.

Speaker Change #142: Is there potentially a rebase lining higher AD spend dollars in order to maintain your customer base, if not even grow further from here.

Speaker Change #143: How do we think about the the level of AD spend required in.

Speaker Change #143: 2025 and going forward.

I appreciate the question. So I'll start at a higher level. And David, if you want to jump in with any additional details here,

Matt: Hey, David its Matt I appreciate the question.

Speaker Change #144: I'll start at a higher level and David if you want to jump in with any additional details here, but in terms of us attracting new client acquisition.

But in terms of, you know, us attracting new client acquisition, the primary priority remains to drive sustainable growth over the long term. And, you know, we really believe that our focus on strengthening the foundation and reimagining the client experience will help us attract and retain high lifetime value customers. So we continue to evolve both program and channel strategies, as I just shared, to optimize that media mix for efficiency and to strengthen our brand affinity.

Speaker Change #144: The primary priority remains to drive.

Speaker Change #144: Sustainable growth over the long term and we really believe that our focus on strengthening the foundation and re imagining the client experience will help us attract and retain high lifetime value customers. So we continue to evolve both program and channel strategies as I, just shared to optimize that media mix for efficiency and to strengthen our brand affinity.

Because we do know that when we reach the right client for whom our offering resonates, they have higher order values and purchase frequencies. And as I just shared, and as we also shared in the prepared remarks, as we're seeing higher LTV and RPAC from our new client acquisition, that gives us additional confidence to go out into the market and acquire these customers. So in terms of, you know, what our ad spend as a percentage of revenue is, that will continue to move as we optimize towards getting it at the right level, based on, you know, a pretty rigorous analysis of where that return on investment is.

Speaker Change #144: Because we do know that when we reach the right client for whom our offering resonates they have a higher order value and purchase frequency and as I just shared and as we also shared in the prepared remarks, as we're seeing higher LTV in our pack from our new client acquisition that gives us additional confidence to go out into the market and to acquire these customers. So in.

Speaker Change #144: Whereas our AD spend as a percentage of revenue that will continue to move as we optimize towards getting it at the right level based on a pretty rigorous analysis of where that return on investment is so when we see new client acquisitions with higher fixed frequencies with higher <unk> that gives us the confidence.

So when we see new client acquisitions, with higher fixed frequencies and higher AOVs, that gives us the confidence to go out and spend more to acquire them. And we're reviewing that, you know, every day, every week with the team so that we can get to the right place at the right time. So it's really something that's evolving over time. But again, as I shared previously, we're pretty confident in the strategy that we have at the moment and how our team is going out to market in order to execute against it. And I think that's the only thing I really like. Yeah, sorry, Dave.

To go out and spend more to acquire them and we're reviewing that every day every week with the team. So that we can get to the right place at the right time. So it's really something that is evolving over time, but again as I shared previously you were pretty confident in the strategy that we have at the moment and how our team is going out to market in order to execute against it.

The only thing I would add.

The only thing I would add is that Matt just highlighted the methodical approach that we've talked about, you know, over the last few quarters that we're taking to managing marketing investments. And it is sort of about an LTV to CAC ratio. And I think, you know, the encouraging signs that we're seeing right now on the LTV side, allow us to feel more comfortable investing more in marketing.

Yes, sorry, Dave the only thing I would add is I think I think what Matt just highlighted is the methodical approach that we've talked about over the last few quarters that were taking to managing marketing investments and it is sort of about an LTV to CAC ratio and I think the encouraging signs that we're seeing right now on the LTV side.

Speaker Change #144: Allow us to feel more comfortable investing more in marketing I think I would also call. This back to what we had said earlier around sort of the two different sides of our business and clients that the more we can engage our existing clients and dynamic ways. The more we can drive higher ltvs of those clients. That's why we've really.

I think I would also call this back to, you know, what we had said earlier about the two different sides of our business and clients. That, you know, the more we can engage our existing clients in dynamic ways, the more we can drive higher LTVs for those clients. That's why, you know, we've really been focused on a lot of that foundational work and how that will tie to our, you know, reimagining of the client experience.

Speaker Change #144: Been focused on a lot of that foundational work and how that will tie to our re imagining of the client experience because it creates a really healthy loop of really engaging our existing clients that drives higher LTV and it provides confidence and sort of our marketing efforts as well.

Because it creates a really healthy loop of really engaging our existing clients that drives higher LTV, and it provides confidence in sort of our marketing efforts as well. I understand that that's very helpful. Then my second question, maybe a more of a macro one, but you know, a lot of our companies have been talking about the split between the lower and the middle or upper income consumer. Have you seen that play out or widen even more as the quarter progressed? Just any update on what you're seeing in your customer base? Any differences across the segmentation?

Speaker Change #145: Understood that's very helpful.

Speaker Change #146: My second question, maybe more of a macro one but there are a lot of our companies have been talking about the.

Speaker Change #147: The splitting between the lower and the middle or upper income consumer.

Speaker Change #148: Have you seen that play out or widen even more as the quarter progressed.

Speaker Change #148: Any update on what Youre seeing in your customer base any any differences across the segmentation.

Yeah, David, I'll jump in. So, you know, I think in terms of what we're seeing from the impacts of the macro environment, we're not seeing any material impact at the moment, but I do think that in a discretionary category like ours, there does remain ample reason to take a cautious view of the U.S. consumer. They remain under pressure. I think that, you know, is being noted as particularly true in higher income households trading down at the moment.

Speaker Change #149: Yes, David I'll jump in.

Speaker Change #150: I think in terms of what we're seeing from impacts of the macro environment.

Speaker Change #150: We're not seeing any material impact at the moment, but I do think that in that discretionary category like ours. There does remain ample reason to take a cautious view of the U S consumer.

Under pressure I think that is being noted is particularly true in higher income households trading down at the moment, we have not seen any of that with our current.

We have not seen any of that with our current, you know, client base at the moment. And also, as I've shared previously, where we are, regardless of the macro conditions, our teams remain focused on what is within our control. We work every day to serve our clients better. Our focus, regardless of the conditions, will be having the best assortment, the most intelligent pricing, judicious in terms of our client acquisition, and strengthening our experience to foster deep and enduring relationships with our clients.

Speaker Change #150: With our client base at the moment and also as I've shared previously.

We are regardless of the macro conditions. Our teams remain focused on what is within our control. We work every day to serve our clients better our focus regardless of conditions will be having the best assortment.

Speaker Change #150: Most intelligent pricing judicious in terms of our client acquisition and strengthening our experience to foster deep and enduring relationships with our clients.

And we're seeing that in the results that we just shared, and it manifests in the work we're doing to strengthen the foundation of our business. So delivering for our clients, in my mind, is the best way to navigate a tough environment. And that's what our team is focused on.

And we're seeing that in the results that we just shared and it manifests in the work we're doing to strengthen the foundation of our business so delivering for our clients in my mind is the best way to navigate a tough environment and Thats, what our team is focused on.

We're good. Thank you both. Thank you. With that, I see no further questions in the queue. Thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great day.

Speaker Change #151: Very good thank you both.

Speaker Change #152: Thanks, David.

Speaker Change #152: Yes.

Speaker Change #153: Thank you.

With that I see no further questions in the queue. Thank you for your participation in today's conference. This does conclude the program you may all disconnect have a great day.