Q4 2024 Stitch Fix Inc Earnings Call
Speaker Change: I think I'm going to be a good one.
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Speaker Change: Good afternoon and thank you for standing by. Welcome to the fourth quarter of fiscal year, 2024, Stitch 6 earnings call. At this time all participants will be in a listen only mode. After the speaker's presentation, you will be invited to participate in a question in answer session.
Speaker Change: to ask a question during the session and please press star 1-1 on your telephone. You will then hear an automated message indicating your hand is raised.
Speaker Change: To withdraw your question, please press star 1-1 the game, please be advised that today's conference is being recorded. I would now like to hand the call over to Hayden Blair.
Hayden Blair: Good afternoon and thank you for joining us today for the Stitch Fix 4th Quarter fiscal 2024 earnings call.
Speaker Change: with me on the call are Matt Baer, Chief Executive Officer, and David Aufderhaar, Chief Financial Officer.
Speaker Change: We have posted complete fourth quarter, 2024 financial results and a press release on the quarterly results section of our website, investors.stitchfix.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 have 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 FEC for discussion of the factors that could cause the result to differ.
Speaker Change: In particular, our press release issued in bile today.
Speaker Change: as well as the risk factor sections.
Speaker Change: of our annual report on Form 10K for fiscal 2023, previously filed with the SEC and the annual report on Form 10K for 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.
Speaker Change: We disclaim any obligation to update any forward-looking statements except is required by law.
Speaker Change: During this call, we will discuss certain non-gap financial measures.
Speaker Change: Reconciliation to the most directly comparable GAP financial measures are provided in the press release on our investor relations website.
Speaker Change: These non-gap measures are not intended to be a substitute for our gap results.
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 Matt.
Matt Baer: Good afternoon, thanks for joining us.
Matt Baer: I recently completed my first year as CEO at Stitchfix and I'm encouraged by the significant progress our team has made.
Matt Baer: I'm also pleased that in the fourth quarter we delivered results at the high end of our guidance on both the top and bottom line.
Matt Baer: We continue to execute our transformation strategy.
Matt Baer: We are successfully strengthening the foundation of our business by embedding retail best practices, increasing the efficiency of our operations, and optimizing our organizational structure.
Matt Baer: We've also begun to reimagine how we engage with our clients from the Assortment we offer to how we bring no styles to them.
Matt Baer: Through these efforts, we delivered expanded gross margins in FY 2024 and positive adjusted EBITDA for the last seven quarters.
Matt Baer: We have $247 million of cash, cash equivalent, and investments with no debt.
Matt Baer: Looking ahead, we expect to continue to drive improvements this fiscal year, and we expect to return to revenue growth by the end of FY26.
Speaker Change: Since I joined StitchFix, we have been hard at work, formalizing and executing our transformation strategy, which includes three distinct phases.
Speaker Change: A rationalization phase, a build phase, and a growth phase.
Speaker Change: Our rationalization phase which took place over the past year was a period of critical assessment.
Speaker Change: It was during this phase that we began to strengthen the foundation of our business and ensure we had the right priorities in place to improve our financial position and enable us to operate as a more nimble and efficient organization.
Speaker Change: As part of this, we exit into UK, close to fulfillment centers, right-sized our corporate head count, and continued our cost discipline management.
Speaker Change: These actions, among others, resulted in over $100 million of SGNA savings in FY24.
Speaker Change: Today, we are squarely in the build phase of our transformation strategy, which includes our foundational work as well as our efforts to reimagine the client experience.
Speaker Change: of Note, as we execute our transformation, we are continuing to invest in AI and data science, which have been core to our model since day one.
Speaker Change: Over the last several calls, we've shared a few examples of how we are strengthening our foundation.
Speaker Change: This includes how we've optimized our pricing architecture, made enhancements to our AI inventory buying tool.
Speaker Change: Leverage our advanced algorithms to reduce underperforming shipments.
Speaker Change: Streamlined our merchandise assortment and improved our CRM capabilities.
Speaker Change: We continue to advance these efforts among many others across the business.
Speaker Change: Now, I am proud to share our progress on how we are reimagining our client experience.
Speaker Change: We recently announced the first in a series of changes we are making to bring to life a more modern and dynamic stitch fix.
Speaker Change: One of our key differentiators is how well we know our clients.
Speaker Change: 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.
Speaker Change: However, over the past several years, as the retail market and our clients' expectations evolved, we did not adapt our service and assortment quickly enough.
Speaker Change: We've spent the past year working to better understand our clients of all we need, and I'm excited about the changes we have made to better serve them today and into the future.
Speaker Change: First, we have created a more engaging, visual, and interactive way for clients to communicate their style, fit, and budget preferences when they begin their relationship with us.
Speaker Change: To demonstrate to our clients that we get their style, we are presenting them with their style, file, a personalized snapshot that shares their individual style personality and the specific elements that contribute to it.
Speaker Change: Our proprietary AI models, which leverage the style and fit insights we have collected for more than 100 million fixes, enable us to present a style file that reflects each client's unique preferences.
Speaker Change: In our early testing, we saw 5% uplift in conversion from clients who received a style file.
Speaker Change: While first introduced to new clients when they sign up for the service, as of today, we are launching style files to all existing men's and women's clients.
Speaker Change: We believe this will be a valuable tool that will drive meaningful engagement and demonstrate how we understand our client's style preferences.
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Speaker Change: We are increasing the visibility of our stylists so they can build deeper relationships with clients.
Speaker Change: One of the ways we are doing this is by creating stylus profiles, which will showcase each stylus unique expertise and work portfolio as well as their related interests.
Speaker Change: As a first step, this quarter we began presenting stylish photos to clients.
Speaker Change: These photos are also shared with clients on the recently launched digital style cards, which accompany each fix and include outfit ideas and personalized notes, stylists write to clients.
Speaker Change: When the note was written by a stylist with a photo, we saw a 12% increase in engagement.
Speaker Change: We plan to introduce additional opportunities to further deepen these relationships in the future.
Speaker Change: Third, we are increasing the flexibility of our fixed model.
Speaker Change: This includes expanding beyond the traditional five items in a box.
Speaker Change: In response to client feedback, we are opening up the opportunity for clients to receive up to 8 items.
Speaker Change: This enhances our ability to better help our clients both explore current trends, as well as update their wardrobes for major life events, like starting a new job, moving to a new city, or body transformations.
Speaker Change: When offering the ability for clients to receive more than five items, we are seeing positive results with revenue upwards of 50% greater when compared to our traditional fixed offering.
Speaker Change: We also recognize our customers' outfitting needs are constantly evolving and have added additional flexibility by making it more seamless for our clients to adjust their fixed cadence.
Speaker Change: This change yielded an impressive 14% reduction in client's turning off recurring shipment.
Speaker Change: Borg.
Speaker Change: For any retail business to be successful, it must have the right brands, styles and price points.
Speaker Change: After the extensive work we completed during our rationalization phase, to streamline our assortment in brand matrix in FY24, we are now well positioned to bring considerable units into our assortment.
Speaker Change: We are adding thousands of new styles in Q1 and expected triple the amount of newness as a percentage of our broader assortment by the end of this fiscal year.
Speaker Change: As part of this, we are beginning to launch two new private brands, Montgomery Post, which offers contemporary workware to women and the comments offering modern, sophisticated, and trend-right styles in both our women and men's business.
Speaker Change: In addition, we are extending some of our most popular private brands, market and spruce, we wander an O1 Algo to now offer styles for kids.
Speaker Change: We look forward to how these styles will help us better meet the trend needs of our current clients as well as successfully extend the stitch fix experience to new client segments.
Speaker Change: We also recently introduced a refresh brand identity, the first significant update to our brand in more than a decade.
Speaker Change: The new looking feel is bold, it is modern, and it is designed to help us further deepen connections with our clients.
Speaker Change: In addition, we continue to execute our marketing strategy, which includes targeting professional segments that value the convenience our service provides.
Speaker Change: As an example, we conducted a dedicated campaign targeting teachers during teacher appreciation we can cue for.
Speaker Change: The campaign yielded a new client conversion rate more than double our average.
Speaker Change: and moving forward as part of our broader marketing program, we will continue to target specific segments for which we know our service resonates.
Speaker Change: To support Stitch Fix during this transformative time, we also recently announced the addition of two highly accomplished retail leaders to our board of directors.
Speaker Change: Tim Baxter, who brings extensive experience in apparel retail and merchandising and Fiona Tan, who brings deep expertise in retail technology.
Speaker Change: I look forward to partnering with both of them.
Speaker Change: Now, as upshared previously, transformations take time.
Speaker Change: While there is still a lot to do, I'm confident in our strategy and encouraged by our initial results.
Speaker Change: We are taking a disciplined approach to change the trajectory of our business, which began with our rationalization phase, so we can now build and then look ahead to growth in FY26.
Speaker Change: Now, I'll turn the call over to David to share our financial results and future outlook.
David Aufderhaar: Thanks Matt, let's get into the results.
David Aufderhaar: Our Q4 and fully RF524 results reinforce my belief that we've implemented the right strategy to get us back to sustainable, profitable growth in the future.
David Aufderhaar: This past year, we focused on rationalizing the cost structure of our business to deliver a strong foundation we can build on going into FY25
David Aufderhaar: In line with expectations, FY24, Net Revenue was $1.34 billion, down 16% year over year.
David Aufderhaar: We ended the year with approximately 2,500-8,000 active clients, a decrease of 20% year over year.
David Aufderhaar: Despite the revenue decline, we continue to drive leverage in our business FY24.
David Aufderhaar: Our merchandising teams focused on optimizing our inventory portfolio while our transportation teams diversify our carrier mix.
David Aufderhaar: This resulted in FY24 gross margins of 44.3% of 190 basis points year over year are highest annual margins since FY21.
David Aufderhaar: We also drove variable labor efficiency across our operations, styling, and customer service teams.
David Aufderhaar: This allowed us to actively manage our variable expenses, resulting in contribution margins above the high end of our historical range.
David Aufderhaar: We reduced our fixed labor costs, including stock-based compensation by more than $65 million FY24.
David Aufderhaar: We've reduced facility costs by consolidating our warehouse footprint and subleased access space.
David Aufderhaar: and we reviewed each category of our fixed operating expenses to identify potential cost savings.
David Aufderhaar: These actions allow us to deliver a justice debate after the year of $29.3 million or a 2.2% margin of 30 basis points compared to FY23.
David Aufderhaar: We generated over $14.2 million in free cash flow in FY24, and we ended the year with a strong balance sheet, including $247 million of cash, cash equivalent and investments with no debt.
David Aufderhaar: As Matt said, transformations take time and we're encouraged with where we stand today.
Matt Baer: We are being methodical in our approach and investing in targeted areas of the business.
Matt Baer: We will continue to take this approach through FY25, as we build towards sustainable profitable growth.
Speaker Change: Before I discuss Q4 results, I want to provide a quick reminder that Q4 FY24 consisted of 14 weeks compared to our standard 13 weeks.
Speaker Change: which resulted in FY24 being a 53-week year.
Speaker Change: Two four-net revenue was $319.6 million.
Speaker Change: Down 12% year over year, or down 18% year over year on a 52 week basis.
Speaker Change: and down 1% quarter of a quarter, revenue-proactive client grew year over year for the second quarter in a row to $533, up 5% year over year and up 2% quarter of a quarter.
Speaker Change: Fix AOV, which helped drive our pack improvement for the quarter, was up the earlier for the fourth quarter in a row, driven mostly by Keep Break.
Speaker Change: A 50 basis point zero of a year and down 90 basis points quarter of a quarter.
Speaker Change: The Corps of a Quarter Decrease was driven mainly by reduced merchandise margins related to summer promotional activity.
Speaker Change: Advertising was 9% of net revenue in Q4, up 210 basis points year of year, and up 10 basis points quarter of a quarter.
Speaker Change: Q4 Adjusted Ebetta was $9.5 million for approximately 3% margin, down 60 basis points year over year, or up 90 basis points quarter of a quarter.
Speaker Change: The quarter of a quarter increase was do mainly to continued variable cost leverage in the PNL.
Speaker Change: We ended due for, with net inventory of $97.9 million, down 25% year over year, and down 14% quarter of a quarter, as we continued our efforts to align our inventory position with demand, and we generated $4.5 million of free cash flow in the quarter.
Speaker Change: Turning to our outlook.
Speaker Change: For the full year FY25, we expect total revenue to be between $1.11 billion and $1.16 billion.
Speaker Change: and we expect total adjusted e-bits off of the year to be between $14 million and $28 million.
Speaker Change: This guidance also assumes we will be free cas flow positive for the full year. Though similar to this year, we may see some variability between quarters due to the timing of working capital requirements related to our inventory purchases.
Speaker Change: For our first quarter of FY25, we expect total revenue to be between $303 million and $310 million.
Speaker Change: We expect Q1 adjusted EBITDA to be between $5 million and $9 million.
Speaker Change: We expect both two-one and fully-year gross margin to be approximately 44% to 45%.
Speaker Change: And we expect advertising to be approximately 8% to 9% to revenue.
Speaker Change: Similar to prior years, we expect inventory balances to rise in Q1 due to the timing of receipts ahead of fall winter. But expect our inventory turns to improve in Q2, remaining relatively stable through the rest of the year.
Speaker Change: Taking a step back.
Speaker Change: I'm excited about the work we're doing to strengthen the foundation of our business and reimagine the client experience.
Speaker Change: We continue to see improvement in many of our key metrics, and we'll build on those trends in FY25.
Speaker Change: We will do so by remaining focused on acquiring healthy clients, engaging our existing clients in dynamic ways, and continuing to drive leverage and profitability.
Speaker Change: This provides us a path to a quarter of a quarter increase in active clients during FY26, which will contribute to a return to year-of-year revenue growth by the end of FY26.
Speaker Change: With that, I will turn it back over to Matt to close us out.
Matt Baer: Thanks, David. Before we close, I want to reiterate that I'm encouraged by the progress we are making on our transformation strategy and remain energized by the bright future we see for this company.
Matt Baer: I also want to express my appreciation to the employees of Stitch Fix for their hard work and dedication throughout this period of transformation.
Matt Baer: Change demands that we think and work differently.
Matt Baer: In on both proud of and impressed by everything the team has done to get us to where we are today.
Matt Baer: I look forward to further advancing our transformation strategy together and returning to sustainable, profitable, growth in FY26.
Speaker Change: With that, I'll turn the call over to the operator for questions.
Speaker Change: Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced.
Speaker Change: We ask that you limit yourself to one question and a follow-up question and to refrain from multi-part questions until everyone in the queue has had a chance to participate.
Speaker Change: If time allows, we will then come back to answer any remaining questions.
Speaker Change: Our first question comes on the line of use of squally, of twist.
Speaker Change: Hi, guys. Good afternoon. Two questions please. So we're turning to revenue growth by end of fiscal 2026 is quite a bit of time later than I think what most of you when most of us expected you guys to do that. So give me maybe.
Speaker Change: Talk about the biggest gate in factors there, anything in the macro that's going on that you guys are taking into a sound or is it all companies specific dynamics?
Speaker Change: and does that comment also hold true for active clients as well, meaning that you do not expect active clients to turn positive until the end of 2026. Thank you.
Matt Baer: Hey, yous, if it's Matt. I'll answer your question and I'll speak to our path to revenue growth more generally as well as what we're thinking about in terms of the macro environment today. And hopefully that will also provide some insights around how we think about active clients along this journey as well. And then David can share some additional details in terms of how we get back to that path to growth.
David Aufderhaar: So I think first what I'd say is just you know as a reminder when I joined Stitch Fix over a year ago
David Aufderhaar: We were in the middle of our Q4 of fiscal 23, and we had just finished, or we're finishing that quarter down over 22 percent, and then finished that fiscal year down over 21 percent.
David Aufderhaar: I'm proud of what we have accomplished since then, and I think the results that we've delivered in this most recent fiscal year, where we improved revenue trend by about border-based points, and then ultimately also slowed this sequential decline in active clients.
David Aufderhaar: Now the guidance we just shared projects revenue improvement of almost another 400 basis points in fiscal 25 and also shows sequential improvements and revenues throughout the year and we'd expect our active client count to track pretty considerably to where we have revenue there.
David Aufderhaar: has a stated before and will continue to share transformation's take time. And the methodical approach we're taking to our transformation is producing these results.
David Aufderhaar: and we're confident that our strategies, the right one, we're confident that our strategy will enable us to return to that revenue growth by the end of fiscal 26.
David Aufderhaar: and the company ends his route in a few things.
David Aufderhaar: One is that our core value proposition is we've discussed on prior calls meets a customer need.
Speaker Change: At Stitch Fix, we know more about our clients on day one than many retailers could aspire to know over the course of their relationship.
Speaker Change: This enables us to provide an incomparable service, a service that delivers to clients home, a sort of that matches their style preference, aligns with their value orientation, and it's a sort of that actually fits. Second, is it the strategy that we have in place is producing results?
Speaker Change: The results of a rationalization phase that we just spoke to, and it's creating a healthy balance sheet, you know, $247 million in cash, no debt, and this gives us the financial runway that's required to continue to execute a disciplined transformation.
Speaker Change: and to ensure that when we do return to growth, it's built on a strong foundation, and it's one that will allow us to be both profitable and sustainable in the long run.
Speaker Change: As I stated in the opening remarks, now that we're squarely in the build phase, I'm encouraged by the results we've seen from the recent launch of the first iteration of our reimagined experience and also the new brand identity.
Speaker Change: The client's feedback has been extremely positive, and the improvements in business performance are significant.
Speaker Change: But this was also just the beginning, and we have an ambitious roadmap that will enable us to continue to enhance how we engage our clients.
Speaker Change: These enhancements will continue to roll out over the course of this year, and I think important to note too, as I shared in the prepared remarks, over the past several years, as the retail market and our clients' expectations evolved, we did not adapt our assortment quickly enough.
Speaker Change: and it's going to take time for us to address this.
Speaker Change: I'm extremely excited by the work that our merchandise team has done and to tripled amount of newness in our assortment by the end of this fiscal year is an impressive feed and that will help us better meet the needs of our clients and ultimately exceed their expectations. But again, it takes time to overhaul our assortment as well.
Speaker Change: So, you know, in retail, the successful transformations can take several years and I strongly believe that a judicious and discipline transformation is one that will lead to profitable and sustainable growth in the future. I'm confident that we will return to that growth.
Speaker Change: Specific for the macro environment, you know, I think the main or in which we're thinking about that is one in which, you know, we're focused on what's within our controllables.
Speaker Change: in a parallel accessories, a discretionary category. I think there is some sensitivity to what's happening in the macro environment. And just like everyone else, we're working through that. That's contemplated in our guide, but I'm also confident in our ability to deliver for our clients throughout this period. And that's what our team is exclusively focused on.
Speaker Change: And you know, so I think it might help just to double-click a little bit into the guide and I think that'll answer some of the questions as well that you had, you know, so just to provide a little bit more color around that.
Speaker Change: First, I think Matt called this out. Like we continue to see improvements in many of the key metrics as we closed out the year and we actually expect to build on that going into FY25 and throughout FY25.
Speaker Change: Active Clients is one of the things you ask for, I think Matt answered this, but just to be clear, we do expect active clients to be down in FY25, but we do expect to see a significant improvement in the client.
Speaker Change: and we expect that momentum to continue in FY25. We saw strength in...
Speaker Change: AOB and our pack, we continue to see momentum and sort of the promotional work that we've been doing around freestyle volume, all of those things, you know, are creating momentum going into FY24 because we expect that to continue as well in FY25.
Matt Baer: And all of that's included in the revenue guide, and I think Matt called out, you know, the sequential, which is pretty important when you look at the year over your revenue guide of, you know, the midpoint of our guide assumes an improvement of almost around 400 basis points from a year over your perspective if you adjust for that 53rd week.
Matt Baer: and that sort of the second year in a row that we're showing that type of improvement from a year over a year standpoint.
Speaker Change: It's also important to note that it also assumes improvement throughout the year if you look at the midpoint of our Q1 guide versus the full year guide. It also assumes improvement throughout the year as well. And I think those are really important points that sort of move us towards that.
Speaker Change: Gross trajectory in FY26.
Speaker Change: and on the expense side, I think we've had sort of that proven track record of identifying cost savings and really driving leverage in the P&L. I think Matt called it out in his earlier remarks that we removed the over $100 million of SGA spend from the P&L in FY24.
Matt Baer: and some of the initiatives that drove that actually have sort of annualized savings that would go into FY25 and drive.
Speaker Change: Additional savings there. The other thing around STNA spend that's really important to call out is part of that is variable labor leverage and our ops teams are styling teams are customer service teams.
Speaker Change: and we talked on the earlier remarks around our historical ranges that we used to talk about between 25 and 30 percent was our contribution margin and in Q4 we actually landed above that and we actually expect that to continue in FY25 as well.
Speaker Change: And really, you know, if you think about over the last few quarters, you know, we've created that strong financial position, and that allows us to do what Matt was describing, which is really being methodical in our approach.
Matt Baer: that as we return to growth we're returning to long-term sustainable growth with healthy clients and that's really what we're focused on and we'll continue to build on that success throughout the year and that's what gives us the confidence to make that longer-term projection that we have of returning to revenue growth.
Matt Baer: by the end of FY26 and we also did call out that we also expect a quarter of a quarter increase in active clients during FY26 as well.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you for watching.
Speaker Change: Thank you. Our next question comes from the line of Simeon Siegel, a BMO Capital Markets.
Speaker Change: Hey, this is Dan on Persemin and thanks for taking our question. Since you mentioned launch launch some new private brands and extending others, I was just curious where private brand mix is now versus maybe any type of target level if you want it today.
Speaker Change: Hayden, yeah, appreciate the question. As we've shared on prior calls, private brands play a critical role for us.
Speaker Change: Both in terms of how we serve our clients, but also in terms of the really strong financials and contribution, profit, David just spoke to.
Speaker Change: Our private brands make up roughly about 50% of our product makes today. I am used about 5 to 10% higher than our market or national brands, and also impressively have a higher key rate as well. Our clients continue to tell us in both effectively vote for our private brands.
Speaker Change: What we've been working to do within our private brand portfolio is to identify white spaces where we can continue to serve client needs or client need states that we currently aren't meeting as well as we otherwise could with our private brand portfolio.
Speaker Change: and we just mentioned the launch of two new private brands, Montgomery Post and the Commons, and I think both of them do exactly that. They help our private brand portfolio meet in terms of where we're at for business attire within our women's business and also more elevated in modern assortment for our men's clients. And we're going to continue to identify opportunities there to either expand our current brands and additional light space.
Speaker Change: Or want to new private brands to capture it.
Speaker Change: In terms of a long-term view of the ultimate makeup between private brands and national brands, we're going to continue to work towards what is most client-right. We're going to continue to have an important mix of both national and market brands. It helps drive confidence and conversion during client-onboarding. It also helps us serve certain client needs that wouldn't make sense for us from a scale perspective.
Speaker Change: But then it also is just something where a lot of our clients, you know, national and market brands, you know, play an outside role in terms of their purchasing decisions. But we've also had a lot of success with those private brands and we'll continue to lean into those wherever possible.
Speaker Change: is a appreciate the color. I found that I put on brush margin for the year, the 44 to 45 percent guide. I guess it does anything secure in terms of the puts and takes as soon as you send that or we get to each other higher or lower end. Thanks.
Speaker Change: Yeah, thanks for the question. You know, the 44 to 45 percent I think we've said on the last couple of quarters where we're really encouraged with the progress we've made over the last, you know, couple of years of really driving that gross margin up to those ranges. And really, you know, the good thing about being at that range that gives us the opportunity to really make sure that we're being opportunistic within gross margins.
Speaker Change: and this last quarter in Q4 was probably a great example of that. I think we guided to 45 to 46% for the quarter, but came in slightly below that.
Speaker Change: and that's because we saw an opportunity to really engage our clients in more dynamic ways around promotions and leaned into that a little bit for the quarter.
Speaker Change: and so that's probably one of the bigger puts and takes within Gross margin and I think the reason why we feel comfortable with that as well is because of what I just described around contribution margins, that because we're driving.
Speaker Change: Increased leverage in contribution margins, that just gives us the room to be of the move within that range and grows margin when we see those opportunities.
Speaker Change: Thanks very much. Yeah.
Speaker Change: Thank you.
Speaker Change: Next question.
Speaker Change: comes from the line of Dana Telsey.
Dana Telsey: of Kelsey Advisory Group.
Dana Telsey: Hi, good afternoon, everyone!
Speaker Change: As you think about the act of clients and reductions you've had
Dana Telsey: Can you talk about who is the client today, what you're seeing change in that client base and how you think about it going forward?
Speaker Change: and given what you talked about with the promotional environment in this current quarter with the net revenue practice.
Speaker Change: Castamaret.
Speaker Change: This kind of improving how you're thinking about that going forward and how does the private label help or hurt? How you're thinking of those dynamics? Thank you.
Speaker Change: I'll address the questions one by one if I got them correctly the first is
Speaker Change: around who our current client is that we're serving. The second is around the promotional environment and then ultimately the third then is how that's influencing our revenue proactive client.
Speaker Change: If I go back to, if I go back to, in terms of who our client is today, and I believe we've talked about this before, I'll start with just a high level of conviction that the service that we provide is one that can meet the needs of nearly all US consumers from a
Speaker Change: Where our focus is at the moment is the client that we're serving well today. That client is one that really appreciates guidance and inspiration when it comes to outfitting. That is a client that struggles with finding the right styles. That's a client that really puts an emphasis on convenience and comfort where fit is critical for them or where they're challenged finding a parallel that fits in other retail offerings. Other retail offerings.
Speaker Change: and one that also just values the personalized recommendations and that we're able to do with our human stylist uniquely serve clients.
Speaker Change: The ease in terms of which our service gets product into a consumer's home is again a critical competitive differentiator for us as well. And the number of clients that we're serving is quite vast.
Speaker Change: The work that we've done over the last year, too, is to ensure that we make sure that when we go to market, we're as segmented as possible so that we can talk to the specific consumer segments and make clear what that value proposition is.
Speaker Change: What I mentioned earlier in terms of what we did for teachers, which is one of the professions that we over indexed with is a great example of where we're building tailored messaging for that consumer segment and building out experiences or certain promotions in order to drive and deepen our engagement with them and also bring new clients into this ditch fix environment.
Speaker Change: We're working across multiple different consumer segments and we'll continue to lean into that going forward.
Speaker Change: In terms of the promotional environment where we're in today, we feel really well positioned given the progress that we've made over the last year to strengthen the foundation of our business.
Speaker Change: Where we are today versus where we were a year ago, the capabilities of our marketing tech stack, as well as our CRM capabilities are significantly improved.
Speaker Change: We have more tailored and personalized CRM, we've significantly improved our ability to send SMS and push notifications, their tailored to individual clients.
Speaker Change: And we're also better equipped to make sure that the promotions that we are providing are the ones that are going to have the greatest impact at the individual client level. So that we can ensure that we're judicious with our margin dollars and only providing those promotions when it's going to drive incrementality for us.
Speaker Change: I also believe that a competitive advantage of ours that we've spoken to a few times already is the really strong contribution process that we're driving. Now north of 30 percent, that gives us the ability to profitably invest in promotions again to increase our wallet share and drive up revenue-peractive client over time.
Speaker Change: For revenue-proactive client to be up 5% for us is something that we're really encouraged by. We also believe it's something that we have significant opportunity to lean in even further going forward.
Speaker Change: Our average client is spending over 1,500 upwards of 2,000 dollars a year in a pair on the accessories.
Speaker Change: and one of the most interesting things in all of the work that I've done to meet with and talk with our clients.
Speaker Change: in person is so many of them are eager to spend more with us.
Speaker Change: and that's why it's so important when I speak to the flexibility in our fixed business model so that we can continue to meet more of their needs, more frequently, and capture more wallet share with them over time. So, a part of our strategy going forward is to drive up that revenue-proactive client and to use promotions judiciously to drive increased engagement and to ensure that those promotions are ultimately once that are yielding profitable lifetime value for us.
Speaker Change: And Dana, one more data point on our pact that I think we've talked about the last couple quarters is our new client cohorts.
Dana Telsey: and that is an area that we talk about 90 day RPAC and 90 day LTV and those are areas that we continue to see strength.
Dana Telsey: and that's why, you know, we're being so methodical about the approach of how we're bringing new clients in and making sure that the new clients that we're bringing into the experience are truly healthy, long-term clients.
Dana Telsey: because that is driving up that R pack number and that's one of the reasons why R pack is up for the second quarter in the row from a year over year standpoint.
Speaker Change: Got it. Thank you.
Speaker Change: Thank you, next day.
Speaker Change: Thank you.
Speaker Change: Next question comes from the line of Anisha Sherman of Alliance Bernstein.
Anisha Sherman: Hi, thanks for taking my question.
Speaker Change: If I look back to where the business was about seven, eight years ago in 2017, 2018, you had a similar size active client base of about two to two and a half million. But the margin profile was a lot stronger. You were doing about five, six percent, a year since the beginning.
Speaker Change: Do you talk about kind of how the business has evolved, like if you compare the cost based, then versus now, on a similar size customer based and similar size revenue based.
Speaker Change: Could the call space get back to that kind of algo or what are the things that are changed over the last 70 years that prevent you from getting back to that Martian profile.
Speaker Change: Yeah, and it's a good question. I guess one of the big reasons that we want to be careful about going back to that profile is because of what Matt was describing of where we are in a turnaround and in transforming our business.
Matt Baer: We want to make sure that we are balancing driving cost savings and leverage in our with investing and growth.
Speaker Change: and especially at this time now, when we see a path to returning to growth in FY 26, I think it's that much more important to make sure that we're balancing that. And so I think we've done to your point, a lot of great work over the last.
Speaker Change: a few years of deriving leverage in the P&L, but we're also looking at areas to reinvest that leverage into the P&L to make sure that we're driving towards that growth. And that's sort of the focus and where the balance is right now.
David Aufderhaar: That makes sense. And then I have a quick follow-up David you mentioned, new client acquisition.
Speaker Change: I know, you know, all that, as you were talking about your success with teachers and certain pockets of consumers, and maybe wonder whether you were seeing more of a referral strategy you worked out for you. I know there was some adverse selection in referrals a couple of years ago and you backed off from that.
Speaker Change: Is that part of the increase in advertising spend and is that a strategy that seems to be paying off? Now, as you look at closer into it.
Speaker Change: Yeah, I think I've highlighted a couple of things on active clients. Like one, you know, some of the teacher's strategy I think is both around just being very focused to Matt's point around, around customer segmentation, but also what we're seeing is strengthen reactivation.
Speaker Change: and I think that's the area where we're leaning into maybe a little bit more than referral right now. Referrals are certain area that we continue to focus on as well, but reactivation.
Speaker Change: is a big area of strength for us and it's been up year over year over the past three fiscal years and we expect that to continue.
Speaker Change: into F825. I think the other area, you know, when you think about sort of double clicking into our guide and active clients, where...
Speaker Change: You know, I think Matt called this out, but just a... just a...
Matt Baer: double check, like for the full year, you know, I know I'd said we expect active clients be down, but we expect them, you know, if you think about from cops perspective, to be approximately in line with with revenue camps.
Matt Baer: and a big part of that trend improvement is actually on the dormancy side as well. You know, all of the things that we've talked about over the last couple of quarters around really making sure that we're engaging our existing clients in new and dynamic ways.
Matt Baer: Making sure that we're giving them more license.
Matt Baer: and making sure that, you know, when we do engage with them, it's valuable. I think we talked about the quick fix experience and adjustments we made to that last quarter, talking about the autoship management changes this quarter. Those are all things to make sure that we are truly listening to our clients.
Matt Baer: and giving them the license to be as flexible with our experience as possible and see value at sort of every interaction and because of that, you know, that's where we're seeing a big improvement going into FY25.
Matt Baer: And that's, you know, those are two of the big components as to why those trends will continue in FY26 and that provides us a path of sort of what I had called earlier, which is a quarter of a quarter increase during FY26.
Speaker Change: Thank you, that's helpful.
Speaker Change: Thanks for nature.
Speaker Change: Thank you.
Speaker Change: My next question comes from the line of Maria Ripps, Utt Cannecord.
Maria Ripps: Great, thank you, two questions, please. Can you please talk about any additional course associated with including up to 8 items in one shipment? How should we think about any sort of any additional inventory investment needed to accomplish this?
Marianne Smith: Hey, Marianne Smith. I appreciate the question. You know, one of the things in the NIH shared in the prepared remarks is how excited we are for the flexibility that we're building into our business model and what that's been able to do for us to better serve our clients.
Marianne Smith: We're approaching it in a few different ways and ensuring that as we roll this new service or new feature out for our clients that we're providing it for the clients that is going to be the most benefit for it and it's going to be the greatest benefit for them at the right time.
Marianne Smith: and what we've seen in all of the testing that led up to our wide launch of this feature.
Marianne Smith: is that when clients select into it, they ultimately have higher keep rates than in our traditional fixed experience.
Marianne Smith: and Better Order Economics for us. We'll continue to monitor that going forward, but it is something that's really important, so it's not just an increase of revenue that we're seen through these transactions, but also improve profitability as well, because it's generating higher key breaks for the clients that are self-selecting into these fixes with more than five items.
Speaker Change: I got a bit of that make sense and then I just wanted to follow up on your new expenses so your fiscal 25 guidance implies further decline and expenses in terms of year over year so as we look towards fiscal 2026 so it looks like it's going to be another year of revenue decline for the full year it sounds like but how should we think about sort of margin that year and would you expect that of your expense based to decline maybe a little bit further in 2020 to 26th?
Speaker Change: Maria, in FY25, I think you're right. I think in the guide, it definitely assumes additional savings. I think I called out a couple areas. There are one, it's just 100 million savings that we have this year. Some of those initiatives were only partially, they started halfway through the year. Going into FY25, you think it gets the full year annualization of those savings and so that's...
Speaker Change: Part of that, you know, I know we had talked about, you know, the warehouse consolidation, that's part of that savings.
Speaker Change: from an annualization standpoint. And then the other big thing is sort of that variable labor leverage that we talked about, being above the 30%. Those are two big components to the savings that by 25.
Speaker Change: and at an FY26
Speaker Change: You know, what I just want to make sure of is that, you know, just like we're being on the top line that we're being very methodical in our investments
Speaker Change: in FY26.
Speaker Change: that, you know, we still want to be able to make sure that we're doing targeted investments in areas that will grow the business, but I think the thing that we're encouraged by and excited by is as we return to growth, like what Matt said, we have very good unit economics, and so as we return to growth, we'll be able to continue to drive leverage.
Speaker Change: Great, thank you so much for the call-up. Yeah, thanks, Maria.
Speaker Change: Thank you.
Speaker Change: Next question.
Speaker Change: Come from the line of Dylan, Carden of William Blair.
Speaker Change: Hey guys, all this is Alex, I ask you how I'm doing, thanks for taking our questions.
Speaker Change: First, maybe just a bit of a follow-up on one of the prior questions. Maybe you could just talk about your expectations for advertising spend heading into the holiday season and throughout the rest of fiscal 25. You're previously mentioned that you're being very judicious with marketing spend, you know, targeting specific client cords.
Speaker Change: especially given elevated broader advertising spend going on the making industry. We just love to get an update on how you're doing advertising spend for the year and maybe any color on how you plan to spend it be advised towards newer existing customers, anything on that. Thanks.
Speaker Change: Hey Alex, I appreciate the question. I'll speak to it a little bit and David can follow up with some additional color
David Aufderhaar: I'll go back to what I said earlier too, just in terms of the work that we've done, you know, the strength and the foundation and prove our marketing capabilities over the course of the year. That's enabled us to be much more targeted, much more segmented in terms of how we go to market with our media budget, with our advertising budget in order to drive increased productivity. You know, along those lines, our customer acquisition costs in Q4 actually declined as the first time that we've seen that in a while. And in terms of conversion, which we've talked about on prior calls.
David Aufderhaar: We're comfortable with where a conversion is today. It's stabilized and you know feel that you know where conversion is and where you know we have it forecasted to trend and able to us to get back to growth over time So feel feel pretty good overall in terms of our advertising budget and the effectiveness of it We also feel really good about our ability to compete in a crowded marketplace or during a period of inflated media investment And in part that's due to the differentiation of the service that we offer It a very tactical level. We're not out there beating on the same keywords for example is a more traditional retail experience and having to compete With the likes of Amazon or Walmart or Macy's in order to win win win
David Aufderhaar: and those impressions are when that conversion and feel really good about how we've continued to tailor and segment the creative content as well so that we can speak to very unique audiences and have a message that clearly explains the value proposition of our business and brings potential clients into the experience with the right expectations and then brings them into the right landing experiences well that aligns with how we best meet their needs.
David Aufderhaar: Something else that's important to hit on too when you're talking about how our advertising budget would be deployed relative to client new client acquisition versus engaging our current clients.
Speaker Change: One of the awesome things about our business model is that once we've acquired a client, almost all future transactions are organic ones.
Speaker Change: In a traditional retail environment, our retailers often having to pay not just to acquire a client, but having to pay for every subsequent transaction over the course of that client's lifetime. For us, once we bring a client into the Stitch Fix ecosystem, and they signed up for the Fix Experience.
Speaker Change: We don't have to pay for those subsequent purchases. It's one of the unique advantages of our business model. It's one of the reasons why we have such confidence in the future profitability as well once we've returned the growth. So, David, if there's anything additional that you'd want to add.
David Aufderhaar: Yeah, I think it was just a couple of data points. I think we guided to 8 to 9% of revenue from an advertising spend perspective, but I think we've always sort of voiced over with that we'll be opportunistic with that. And so that number from a quarter to quarter standpoint can vary.
David Aufderhaar: and because of all the cost savings initiatives and what we've done to really create leverage in our piano, it allows us that opportunity that when we do see opportunity we'll lean in and it's just more about that methodical approach to make sure that when we are leaning in that we're driving healthy client growth.
David Aufderhaar: and not just driving for a gross sake and so that approach has served as very well. As we've gone through sort of this transformation and we'll continue to use that approach.
Speaker Change: Got it, it makes a lot of fun. Thanks for all that color.
Speaker Change: and then just one quick one on modeling a little clarification. See talking about the SGNA savings that came as a result of your rationalization phase that over a hundred million for fiscal twenty-four.
Speaker Change: I just wonder if you could give a bit more color on these savings going forward. You mentioned in a response to a prior question that some of these savings are run rate going forward and then that you'll also be getting the full annualization of others.
Speaker Change: I'm just wondering if you could give a bit of my color on where you expect overall SGA savings to land in fiscal 25. If that's 100 million numbers, it's a good run rate. One going forward. Thanks.
Speaker Change: Yeah, I think you could back into that Alex, if you just think about sort of the midpoint of our guide, then we got into 44 to 45% gross margin and really the remaining part of that below the 44 to 1.5% which is the midpoint would be the SGA spend. So you could back into that assumption of SGA spend.
Speaker Change: [inaudible]
Speaker Change: and a few years ago.
Speaker Change: to make sure that we are always looking at ways to save in the quarter, but also a big part of it is driving a driving leverage across those line items.
Speaker Change: Thanks for that, Castelon. Yeah, thanks so much.
Speaker Change: Thank you again to ask a question, please press star 11 on your telephone again at star 11 to ask a question.
Speaker Change: and next question, come from the line of J Soul of UBS.
Speaker Change: That serves the right track to dial in in for Jason.
J Soul: We were just wondering how things are trending in August and September so far, right soon, in terms of...
Speaker Change: Thanks for that. Right now, things are trending right within where our guidance is. From an active client standpoint.
Speaker Change: We tend to talk about active clients when we talk about quarterly active clients. We tend to talk quarter or quarter instead of year over year.
Speaker Change: Um...
Speaker Change: And from a quarter of a quarter standpoint, we do expect a quarter to be down, but definitely better than the last couple of quarters, if you think about where we've been, we were at 6% and we were at 5% going into Q1, rough size and shape, probably a little bit above 3% from a down quarter over quarter.
Speaker Change: from an active client standpoint. And then on the revenue side, it's everything is included within our guide.
Speaker Change: Got it, and just to follow up, so if there is a macro downturn or the macro downturn can continue, are you planning to make any additional adjustments?
Speaker Change: Yeah, I think we have a proven track record and really being able to identify cost savings in our piano. I also think we have, you know, when you think about the leverage that we've created in gross margin and variable labor.
Speaker Change: from a contribution margin standpoint, all of that is variable. And so that also gives us the ability that if we did see a headwind, to be able to reduce expenses when volume goes down. And so I think we feel really comfortable that we're in a good place.
Speaker Change: Got it. Okay, thank you.
Speaker Change: Thanks so much.
Speaker Change: 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.
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