Q4 2019 Earnings Call

Good day, everyone and welcome to these statistics fourth quarter 2019 earnings Conference today's call is being recorded at this time for opening remarks, I'd like to turn things over to David Pierce. Please go ahead Sir.

Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year for 2019, joining me on todays call or Katrina Lake founder and CEO Stitch fix Mike Smith, President and COO and Pony, our Seattle, we have posted complete Q4 full year financial results in our shareholder letter.

On our IR section of our website investors that the trick dotcom.

The linked to the webcast of today's conference call can also be found on our site.

We would like to remind everyone that we will be making forward looking statements on this call, which involve risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements.

The results should not be considered as an indication of future performance.

Lets review our filings with the FCC for discussion of the factors that could cause results to differ.

Note that the forward looking statements on this call are based on information available to US as of today's date, we disclaim any obligation to update any forward looking statements, except as required by law.

During this call we will discuss certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

Finally, this call in its entirety is being webcast on our IR website and a replay of this call will be available on the website. Shortly I'd now like to turn the call over to Katrina.

Thanks, David and thinking for joining us after the market close today, we issued our quarterly shareholder letter with more details on a result in our strategy, which I encourage you to read.

I'm excited about your fourth quarter and full fiscal year result, which demonstrates strong topline growth in both periods. While we continue to make strategic investments to drive long term growth and profitability.

Q4, 19, we generated net revenue was 432 million at the high end of our guidance range, reflecting 36% year over year growth.

As a reminder, fiscal year 2019, with a 53 week here with Q4 19, consisting of 14 week.

They impacted the extra week in Q4, we grew revenue by 26% in the corner.

We also delivered 7.2 million and net income and 6.4 million and adjusted EBITDA inline with our guidance.

During the quarter, we grew our active client count to 3.2 million, an increase of 494000 clients at 18% year over year.

In addition, we grew net revenue per active client by 9% year over year, our fifth consecutive quarter for us in a reflection of our strengthening ability to help fine fine, but they bought.

2019 was a very busy year fraud, and we're proud of all that we accomplish in our second here the public company.

We earned net revenue, 29% year over year to 1.58 billion.

Generated positive adjusted EBITDA for this consecutive year and delivered 37 million in that.

We captured more of our large addressable client base by adding nearly half a million active clients in 2019.

And we're serving those claims even better evidenced by our growth in revenue per African client every quarter in fiscal 2019.

Further extended our addressable market by watching in the UK, our first international market and recently celebrated our one year anniversary of kit.

We're excited about the longer term opportunity for both of these markets would add to the already significant opportunity me Hot continue growing our women's and men's category.

You didn't while we invested in our kids in UK category, the health and scale of our women's and men's category allowed us to offset these investments and drive leverage across our business.

We girls margins year over year and turned our inventory at a rate of more than six times annually a bunch. It our continued scale strengthening capabilities and the growing impact of data science, such as our inventory optimization algorithm and style shuffle platform.

We also continue to invest and strengthen and diversify our marketing capabilities.

Our marketing strategy focuses on return on investment and quick payback.

I mean, we may not always be managing to a lowest customer acquisition cost without regard to quality of client and it also means that we're not spending to a hypothetical lifetime value, but instead optimizing for pay back within a few quarters.

We wanted to illustrate this strategy with data in a onetime disclosure in our Q4 shareholder letter.

This disclosure shows that over four recent quarterly cohorts each has generated payback on marketing spend over two to four times in their first three to six full quarter.

Having both near term payback and returns that grow with clients continue to engage event over many years as a strategy that helps us to deliver long term growth as well as profitability.

Sure well I'd highlight on the marketing front 2019 also marked our first investments and longer lens marketing channel with a watch of our first integrated brand campaign. We're excited about the prospect of using brand marketing had another channel can frame our value proposition and drive greater awareness and affinity with both new and existing client overtime.

I'd now like to take a moment to look forward and discuss the significant opportunity we see to extend the reach of our personalization capabilities and capitalize on the extensive market share we have available to us in 2020 and beyond.

For many years, we have characterized the business that we are and as that personalization.

We believe strongly that winters in apparel retail will be those who most effectively help clients fine but they bought.

This company was founded with the premise that personalization is it that way to help clients navigate the crowded world of apparel retail. This was our belief in 2011, and we have even deeper connection today that personalization is a feature.

We've been in this business and personalization for almost a decade and we believe that our investments in these capabilities is precisely what that does not to be successful for many decades.

Almost all of the nearly 5 billion of apparel and accessories. He sold in the last five years has been a recommendation not chosen by the end customer our business model has required us to build an incredibly strong instead of recommendation capability made possible by the wealth of data we collected across each transaction.

We now have a personalization engine that gives us the ability to deeply understand clients and products and generate powerful recommendation on what products will be successful and with him.

To date this personalization and it has generated great value to us and it has powered are primarily side items fix format. While this one form factor has served us in our clients extremely well, we believe the market opportunity for personalized experiences and apparel is massive and that our platform can be extended much more broadly than this one.

Form factor and we're excited to start talking about it and demonstrating it in 2020.

With that I'd like to discuss what example of an initiative that demonstrates how we plan to extend our personalization platform.

Recently, we began testing in offering called Choppier luck. This offering is part of our new directbuy functionality, which enables clients to choose and purchase items outside of the fixed directly from our website.

However, unlike most ecommerce offerings, which choose to show every available product every visit or what's unique about shop. Your luck is that its hyper curated and personalized to every client.

Feature is based on items that clients have already purchased from US, but also presents a person wised up that algorithmically generated items deliver to clients in the form of Shoppable dialing recommendations for piece is already in their pocket.

Any given time, we might have tens of thousands of items available in our inventory assortment that we could be showing clients. We're still confident in our personalization capability that we choose to only show clients. An average of 30 to 40 Shoppable items at one time on this page.

We are excited and optimistic that even in imperfect not yet optimize beta test offer to a portion of our women's client that through this hyper personalized shoppable experience we've seen success.

In fact in just a brief eight week beta test over one third of clients that purchase through shop, your looks engage with us multiple times and approximately 60% of clients, who buys or the offering purchased two items or more.

Well soccer looks it's still early and the remains a lot for us to alert and enhances the product the operating Leverages. The personalization and then we built over the last eight years and demonstrates its tremendous potential as we explore maximizing our capabilities in new and incremental ways.

Leveraging these capabilities in a directbuy format is an exciting sacroc and one that has the potential to drive further engagement between fixed and increase our ability to serve clients well and getting deeper share of wallet.

Innovation such as this one also provide potential benefit with respect to new client, enabling more ways for clients experienced the benefit of personalization can provide new entry points into our business and allow us to customize the ways in which people want to die in a gauge it back they address many more types of clients anything.

It's this confidence in our personalization platform that feeds our investment strategy in 2020 last year, we invested in your category since then or market opportunities and 2020, we'll be investing in our digital products bring more possibility and making the incredible capabilities that we have more expansive and better position to capitalize on.

The enormous opportunity in the markets where it.

We have deep connection in the capabilities of developed and excitement for what we can do in the near and long term is getting I'm confident in 2020 to guide in the high end of our long term growth target as follows share anything on it now.

Now I'll turn it over to Mike will discuss how our strengthen data science capabilities and improved inventory assortment have allowed us to enhance our personalization.

Thanks, Katrina and Hello to everyone joining us on todays call over the course of 2019, we've talked about how we continue to invest in our data science advantage and in our inventory assortment to deliver greater personalization to our clients.

I'd like to take a few minutes to discuss both of these areas and highlight how these investments are supporting stronger client and business outcomes.

Let me take a minute to step back and remind people of the advantages of scale that we've achieved in this business and how it relates to this platform.

To date, we've shipped over 200 million items and solve that over 85% of shipments in 2019 result in direct client feedback.

We believe that piece client feedback loops and the resulting rich data we receive are instrumental in strengthening our recommendations and capability.

Over time, we've begun leveraging aren't in aside strength.

More broadly inform our strategic decisions.

One recent example, this install shuffle, which has become a valuable platform that is now fueling multiple areas of our business.

As a reminder, relaunch style shuffle in 2018 and as of today, we've collected over 3 billion ratings with over 80% of our active clients providing detailed feedback.

To date, we've used the ratings to learn about our client style preferences and to inform better inventory matching.

Over time, we see multiple other end uses of the platform that include informing our merchandise buyers testing new styles and further personalizing our marketing campaign.

Most recently, we integrated style shuffle data into our styling application to improve our recommendations.

I was one of the most challenging areas of retail to unlock and we believe that this data enables us to address this pain point.

We've now translated style shuffle learnings into visual galleries, the provide stylish with greater visibility into each client style preferences.

Since integrating these insights for our women's clients, we've increased the number of items purchase perfects average order value and client satisfaction.

The deep insights from cell shuffle reinforce our powerful datadvantage and show the platforms growing impact across our businesses.

Nearly one third of our data scientists use style shuffle insights to power other initiatives across the business.

This investment continues to clearly show a competitive advantage and as Paul will share is why we plan to continue investing and building our data science and technology teams and 2020.

In 2019, as we further improved our inventory management capabilities to match product and clients, we reinvested the resulting working capital gains in inventory Brett to support our growing and diverse client base.

This investment enables us to apply our lunch and learns strategy to new categories, such as kids in the UK expand our addressable market and capture greater wallet share.

For example in women's we increased the number brands, we shipped by nearly 50% and grew the number of styles, we offer by nearly 70% over the last two years, which allowed us to further penetrate our addressable market and serve more clients.

He also grew our assortment of items with distinct and uses such as workwear special occasion in casual wear by over five times since 2017, enabling us to better serve our clients diverse needs and drive greater wallet share.

In men's we also expanded our assortment of brand styles in end uses.

[noise] activewear, specifically, we doubled the number of products and brands over the last year to more closely aligned with our clients style preferences.

Even while making these investments we continue to quickly turn our inventory at a rate of more than six times annually.

Overtime, we plan to use data science to inform even more of our inventory decisions, enabling us to enhance our assortment better serve clients and capture greater wallet share.

In today's Shirley letter, we discuss our enhanced data science capabilities and strength in inventory assortment. It allowed us to deliver stronger personalization for our clients.

Specifically, we shared that in both 2018 and 2019 cohorts. We grew our average success rates for items are cross clients first second and third fixes.

For clients are 2018 coal is we've increased success rates between their first and second fixed by 8% at between their first and third fixed by 14%.

We saw increasing success rates across fixes and our 2019 cohorts as well.

In addition to illustrating our success within a cohort we also highlight our strength and personalization capabilities across cohorts. For example, the success rate of items sense in the first fix of our 2019 cohort was 17% higher than in the first fix of our 2018 cool.

Believes that shows that our data science insights paired with our strengthen inventory assortment offer significant competitive advantage that we expect will grow overtime.

I thought I will now turn the call over the Paul will discuss our financial performance and outlook.

Thanks, Mike.

Our results demonstrate our ability to invest in a long term.

Balancing growth and profitability, we delivered revenue growth in both Q4 and full year 2019 above first it a long term range of 20% to 25%.

At the same time, we'd be strategic investments in talent inventory and marketing appeals healthy client growth and gains and net revenue per client. We also laid out plans for future growth.

The first ever integrator brand campaign, and our expansion into the UK.

Katrina hardly a new ways, we're using our personalization capabilities to engage with clients and Mike shared how we continue to harness the power of data and feedback loops to serve them better.

As we look to apply 20 remain firmly committed to self funding initiatives that widen these competitive notes.

<unk> for 20 revenue guidance reflects our confidence.

Q4, net revenue was $432 million, representing 35.8% growth year over year.

Definitely 19, net revenue was $1.58 billion, 28.6% in above last year.

Remember the impact of the extra week the revenue growth rate for both Q4 and the full year was approximately 26%.

Gains in both periods, where the high end ever guidance were driven by both women's and men's that's we continue to ramp kids in the UK.

I could clients grew to 3.2 million or 18% year over year.

After clients represent anyone to check out to fix or ship in items using our new direct by service in the preceding 52 weeks measured as of the last date and out period.

Net revenue per active client grew 9% year over year or 7%, excluding the impact to the extra week, representing our fifth consecutive quarter of growth, even as men's and kids became a higher mix of our business.

Do you for gross margin was above our expectations at 44.1%. This represents a 30 basis point decline from last year, driven by an increase in inventory reserve as we invested in inventory year over year.

Full year gross margin was 44.6%, representing a 90 basis point improvement versus last year.

This expansion was driven by lower clearance as a manager inventory effectively.

And implemented initiatives to reduce shrink.

Do you for advertising was 9.0% I've got revenue versus 9.1% and key for 18.

This leverage reflected our choice to spend less than July into play marketing dollars more effectively at other times a year.

For the full year advertising was 9.6% of net revenues compared to 8.3 percentage point 18, driven by brand investments concentrated in Q3.

Other as Trina, excluding advertising was 34.6% of net revenue in Q4 and 33.4% for the full year.

This line increased year over year as it built our UK team and invested in payroll and stock based compensation to attract and retain top talents.

Together are over 200 engineers in 125 data scientist introduced new product features strengthen our style shuffled platform expanded the ecosystem of algorithms that guide or daily operation.

Notably these as Trina investments were partially funded by higher efficiencies in our warehouse styling teams.

Today variable labor costs represent less than half of our other SG nay, excluding advertising, reflecting a very strong unit economics.

We expect to continue leveraging variable costs through efficiency initiatives and expansion of our direct flight capabilities over time.

Before adjusted EBITDA was $6.4 million or 1.5% up that revenue.

COVID-19, adjusted EBITDA was $39.6 million or 2.5% of net revenue inline with our guidance ranges.

Before net income was $7.2 million until later EPS was seven cents.

For 19, net income was $36.9 million and diluted EPS was 36 cents.

Lastly, we're proud of our ability to grow our business in a capital efficient way.

19, we self funded meaningful investments across technology marketing any markets and did so while maintaining profitability and generating $47.8 million in free cash flow.

We ended the year with $316 million in cash cash equivalents in Hollywood Securities and no debt.

Healthy balance sheet continues to enable us to self undergrad maintain flexibility.

Before I provide 2020 guidance I'd like to step back share how we're approaching decisions around growth in investment.

They are impacting our financial outlook.

First on growth, we're more confident than ever in our platform, a personalization and our ability to extend our capabilities to enhance the size of addressable market improve our ability to serve clients.

In addition, our early reads across our direct by platform on a fuel our conviction.

This confidence is reflected in the full year growth outlook now share in a moment.

We also believe that by investing more aggressively in these capabilities will strengthen our service and extend our leadership in personalization.

As a result, we plan to invest more heavily technology talent in 2020 to accelerate our momentum.

With that I'll start with our full year fiscal 2020, and then share how our Q1 outlook fits within this year.

For full year fiscal 2020, we expect net revenue in the range of $1.90 billion to $1.93 billion, representing growth of 20.5% to 22.5% year over year.

Importantly, adjusting out the impact of the 50 Threerd week in 2019, our guidance range reflects growth of 23% to 25% the high end over a long term growth target.

In line with my earlier commentary on a ramping up by 20 talent investments, we expect EBITDA in the range of $10 million to $30 million.

Besides investments across our operations. This guidance includes stock based compensation or SPC have $75 million I'd punch invest aggressively inter data science engineering teams to advance our personalization capabilities, including direct spine.

Given these telling investments as we look ahead, who recognize the need to balance the ongoing importance of SBC, while driving leverage in our business.

At the same time, we note that comparable companies exclude SPC from adjusted EBITDA.

As a result in a point 20 will provide you put up both including and excluding SBC.

I believe that by providing this visibility become more clearly demonstrate the leverage we drive across our business.

And that's why 20 this resulted in adjusted EBITDA, excluding SBC in the range of 85 to one under $5 million.

The comparison this range is higher than last years, adjusted EBITDA, excluding SBC of $75 million.

Finally note this guidance includes impact and the recently announced that list for tariff.

Well today. These tariffs have been immaterial to our business, we're working closely with brand partners to mitigate potential future impacts while also continuing to diversify our supply chain.

For Q1, 20, we expect net revenue in the range up $438 million to $442 million, representing growth of 20% to 21% year over year.

We plan key was softer than our full year growth for two reasons.

First we've had greater success this year with summer product like T shirts, and sleeved tops.

Items carry lower average unit retails and average order values were happy to see the seasonal product successful deep into the summer season.

Second as I noted earlier, we spent less on marketing and late Q4, which meant we had pure clients to contribute to revenue at the start of Q1.

Our guidance reflects continued momentum in our revenue per client growth, which was 9% in Q4 inconsistent client count growth, which is 18% year over year in Q4.

We expect Q1 EBITDA in the range of negative seven to negative $4 million. This includes SBC costs of $13 million as well as planned investments in marketing in the UK, resulting in adjusted EBITDA, excluding SBC in the range of $6 million to $9 million.

Looking ahead to Q2, we expect EBITDA to return to positive levels.

In summary, we are proud of the strong growth and profitability. We delivered in 2019 and are confident the strategic investments, we're making in 2020 will fuel our personalization capabilities and allow us to capture greater market share overtime.

With that ready to open it up for questions.

Operator over to you.

Thank you at this time, if you do have a question that will be star one again star one for questions. We'll hear first today from Edward rumor with Keybanc markets.

Hey, good afternoon. Thanks for taking the questions guys. I guess first you know it seems like you've been locked in exciting growth opportunity in kind of more self selection through extra that maybe now shop. Your loved how does that change the longer term economic model given that it seems like a more automated process and then I guess my follow up on parents I know Paul you mentioned you're working.

Mitigate what's.

Impact that you've baked into guidance. Thank you.

Thank God and I'll take your question probably to start on a new models and then Paul can speak a little bit about the financials and the terrorists.

Yeah, we're really excited about kind of being able for years, you've talked about how what we're building is a set of capabilities and this ecosystem of personalization and and this is or it's just really exciting for us to be able to demonstrate how we're going to take that outside of that box format and so yeah. I think we shared pretty early results here were about eight weeks into the into the beta test that we have.

Robin so while we can't speak specifically to like how much of our business will this be or what well what will that kind of what proportionally will it be in the and the future I think Paul has some perspective on the financial side and he can speak to tariffs as well.

Hi, Ed right now as you're aware, we have very positive unit economics. So as you think about directbuy as a future channel growth, we see opportunities to be additive on that front. So overtime will give you more color or not.

But as we scaled the business, which we see opportunities to improve our margins over often the business with rock buys.

I, specifically what tariffs I noted in my remarks that we've integrated the impact of tariffs, including the list for a poor be tariffs in our guidance. We deem the net impact of these turns to be immaterial, we've been working very closely with our brand and manufacturing partners to mitigate the impact and so overall for the.

Year, we deem the number to be fairly immaterial and we'll give you an update along the way as we see how this progressive.

Great. Thanks, much guys.

Well hear next from Doug Anmuth with JP Morgan.

Thanks for answering questions first.

We've talked a little bit more.

Last one marketing in late Q.

Trend is going forward.

Thank you.

Through 2020.

And then also just on stock based comp.

In the near the 75 million.

Changed.

And just.

The industry. Thanks.

Great. Thanks that I'll start a little bit of marketing and I'll hop Paul wrap it up I mean first thing, we're really happy that tisher disclosures on the marketing side and so just philosophically stepping back and we talked a little bit on the call in our disclosure show that we're on our philosophy in marketing is not to acquire clients Jeff for that.

Because of acquiring clients were looking to acquire thoughtfully and clients that are going to be successful there our business and that generate quick payback and we're not kind of spending to this hypothetical LTV and so the disclosure it hopefully Ken can help to share a little bit of kind of what they strategy is around there and so as were thinking about planning at all.

Here as we are looking to kind of fit as they finished out this last year and we're looking PD on the high end of our growth range again in the next year and we're really thoughtful about where we're placing those marketing dollars. So that we can make sure that were generating the basket on return on those dollars and at the same time, achieving our growth goals and at a high level.

Hi, Doug This is Paul in regard to your question around SBC now that we've been a public company for two years been look back we're very proud of the capabilities. We've built the competitive notes, we built the personalization and what underpins as talent and as we looked and planned out 2020, we knew that we had an opportunity to continue to widen that note not only to continue to high.

Okay, and retain great data engineering and data Science engineering talent, but also higher world class leaders that translate into our SPC guidance up $75 million for the year. We think this visibility is helpful for investors to understand that we do feel confident and growing this business over the long term that being said a lot of other companies as a benchmark.

Due to exclude SBC from EBITDA, and we felt by sharing that number people can do their own analysis. It doesn't noncash expense internally, we have looked at that's an investment in one that will pay off overtime.

And just a follow up anymore clarity just on the acceleration through the through the course of the year just what drives the confidence there. Thanks, absolutely. So our guidance for the full year is 23% to 25% on adjusted 52 week basis, one areas Directbuy, it's very much an early in early stages today, but the reason we have so.

<unk> give us confidence that will play out over the course of the year, we have a whole variety of other initiatives stealth still shapell. It's a platform that's continuing to allow us to get an appliance better and getting the right product. So those initiatives are reflected in our full year guidance and then finally, while kids in the UK are still small they are growing and they'll continue to grow throughout the year. So all of these initiatives come together to reflect.

For full year guidance of 20, 325%.

<unk> adjusted basis, which is on the high enough arranged all on a long term basis.

Okay. Thank you.

From Barclays will move to Ross Sandler.

Hey, Hey team I have three questions first one.

Gross margin was down a little bit then you mentioned inventory I assume this is mixed into the new categories can you talk a little bit about the trends that you're seeing with gross margin.

Women's versus kind of the newer.

Categories is that mostly just the mixture.

Any color there would be helpful.

And then Katrina going back to the marketing common. So you mentioned in your prepared remarks, you can actually target higher quality clients and pay a higher cap because you know.

Hmm frequency or the retention might be better. So is this sort of a new capability.

This is something that.

You don't fairly recently to get them payback period.

You know improvement any color there lastly.

Im sorry for the three questions.

Amazon recently rolled out of a personal shopper product for wardrobe. So any initial thoughts on that or you are you seeing any impact from.

From that offline. Thanks.

Sure I'll I'll, probably have Paul start and then I can take your questions on competition and and on marketing.

Yes, it's Paul regarding your question on our gross margin it was.

30 basis points lower year over year that was that was inline with expectations. There was a slight mix impact due to the UK, but more notably this reflects our choice mid year last year to best in more inventory. We knew we had opportune to meet customer demand the second half and continue to broader inventory speaking to what Mike talked about to better serve a broader and more diverse client base.

And when you have higher inventory you do have a reserve impact so year over year, we did have a higher inventory reserve a cost that was reflected in our gross margins will see this sort of annualized in the first half of 2020 and it gets reflective of our confidence in our ability to buy the right inventory write clients and so overall at the health of our gross margins by virtue of our inventory.

Management and operating efficiencies with shrink and also expanding an exclusive brands that those trends continue and we just have some investments underneath that that we're allowing that these in addition initiatives are allowing us to invest accordingly.

So on your question on marketing so firstly on I think we the capability of I guess like Theres. Two part question here like one is really just like our philosophy and our philosophy is not new and so we have been and we've been thinking about our customer acquisition cost and pay back in a short period of time for a long time and that's why we.

Then profitable for five years now and you know this is this has been a strategy that we has employed since the early days of how we can make sure that we're building a healthy business with healthy margins along the way and I think what you're seeing that newer is a in the last in probably 2019 or so we really hold into our capabilities on the using algorithms and the marketing world.

That being able to you on target clients that we cannot be easily know that we can spend more for but that we know we're going to get payback for and and I'd say that was newer you know in the last year or so on compared to prior years, and so that helps us to get competence to buy I just spend more in certain time versus others, because we can feel like we're.

Going to see that really good payback and and so that's that's that's a good and your capability that we're really proud of.

On the competition for I mean, just this step back we're in a huge we see a $400 billion as market opportunity here and on 80% as that market opportunity is still in stores and and so the I would say that are from our competition is really the migration.

On a those dollars that are stuck and kind of retail stores and migrating those dollars online and so and I think head to head competition wise like you know, we're not necessarily looking at look alike models of who the competitors that is.

I think we see our differentiation is being really strong in that one like personalization is entirely what we're focused on you know even in Choppier looks if you talked about which has more about directbuy component and that case, we are doing almost the opposite of showing you everything we are taking tens of thousands of things and actually only showing you at any given time 30 or.

40, shoppable items and so at the very counter approach to what a lot of other E Commerce does and and that's really compelling and that's really driven by our our feedback model and Mike reinforced this statistic that we had that 85% of our on interactions are on generating this really powerful first person high.

Signal feedback data and that's really what helps us to be able to deliver that capability to be able to understand that people are going to love and then lastly, it's real were differentiate in our roles with vendors and by brand and brands Love working with US then on you know where a channel that really helps them to preserve their brand integrity that helps them to be introduced to climb.

Once in a really authentic way and I think that's another huge point of differentiation in our model.

Anything else Mr. Sandler.

No that's super helpful 16.

Next we'll hear from a mark mahaney with RBC capital markets.

Okay guys. Two questions. Please first your year end to stitch fix for kids could you talk about some of the learnings you've had a from that and then secondly on this direct by functionality I think this is fascinating I think it could be highly material and I wonder if you already know to what extent, it's increases spend per customer.

Get the data point about how you had these.

So this short very short term cohort had whatever two items or more purchasers. The clients you did buy that way, but I can't tell is is that cannibalistic from what they would've bought from their fix and if not that's highly accretive. The you know if you assume six day week period that your average customer would maybe purchased two items a month or three I.

Comes a month, you're talking about 25% to 50% increase in spend potentially so just talking about whether it's too early to know.

Or what your guesses as to how much of that's going to be incremental spend with you or how much of that could actually be just reduction in what they purchased from fixes.

Thanks.

Thanks, Mark Thanks for your questions then for your enthusiasm [laughter] I'll have Mike start, adding that all that's all I'll talk a little bit about dropped by yes. We continue to be really excited about kids product market acceptance.

With all of our clients boys and girls with a wide range of ages continues to be very strong and we continue to learn that we can develop great product on the exclusive brand side and have a phenomenal market brand business. Our team is really strong and I think the combination of exclusive brands and market brands and the product except.

Vince and the strength of the team gives me a lot of confidence that you know sort of when I was GM of men's we had this very good glide path expectations of gross margin and where we would land and I've seen the same thing and kids kids is now kind of expanded into two warehouses, where so it's just in one men's is now before and it's fun to kind of see these businesses.

Our to seedlings as kind of talked about in the past and then ultimately grow to more maturities so as we.

Further along in kids will share more swing as we learn and grow just like we did advancement excited about where kids is today.

And then I've taught by and we definitely we share your enthusiasm and excitement and that being said he has eight weeks and and so I don't think we are in a place right now to know exactly how and how this is going to interact with and with our other way so fine, but we definitely think that though that in aggregate, it's very incremental and and it's.

That one could be very incremental and that this is allowing people another way to buy and another way to find things where they are looking for something more specific where they can have confidence that we recommend that it's going to fit and that is going to sit there style and the other thing is the eventually and yeah. This is it today, but eventually we see that this is actually going to be away that we can actually bringing people into this.

Its fixed ecosystem on in a more productive way in a more lightweight way and so you know while <unk> dollar for dollar it's well have to figure out how much of it is going to be overlap and spend and there will be a you know smelled a small portion of that that will be cannibalistic. It is broadly really incremental to our onto our company in our service because it's really.

The allowing people in other touch point to engage especially fixed and that in some cases going to allow them to increase our share of wallet without that in some cases actually my allow for a a better entry point or a more productive entry point into the suspects ecosystem and so you know we're excited.

Hey, Katrina will shop, your looks be available for men.

[laughter] that'd be great question, right now actually only available to I think 20% of women. So it's still a pretty narrow beta I know well definitely share more as as we add as we roll it out.

Okay. Thanks Katrina Thanks, Mike.

Welcome.

Well hear next from Scott debit with Stifel.

Hi, Thanks, I had two first one is just a clarification on the first reason for the one Q guide relating to this summer products and I just want to make sure that I understand it I think what you're saying is that you're comping a summer lower price summer products relative to fall sales last year because.

The weather was warmer in the first two months of the quarter. So just wanted to make sure that that that is actually what you're saying and then secondly on China and supply and you mitigating the impact.

Could you talk about how much supply does come from China, and how your mitigating it or suppliers.

Sourcing from.

Moving manufacturing out into other locations or are they digesting the tariffs and not passing prices on to you or are you tweaking price.

To the consumer.

Which of those or are you levers are you polling ore suppliers pulling to kind of mitigate the impact. Thank you.

Hi, Scott. This is Paul Thanks for your questions first regards to Q1, we noted that we're selling more summer product. This year year over year, it's still hard in August which is the first about the Q1 and we're really pleased that we able to serve this clients' needs a lot of retailers out there and barked on other goods in July by by comparison, we knew that we haven't had demand to me than we were able to satisfy clients.

So year over year that wasn't impact.

And on a movie early part in the quarter and those metrics have normalized now that we're squarely in the fall season.

Especially with the tariffs are our mix of China like a lot of apparel retailers is large its a big source a manufacturing for the apparel industry. The good news as we have three key parts of a tool kit to lots and mitigate dot cost and that's why.

Financial impact in our for your guidance is not material first and foremost we have very strong partnerships with our brands as well as our manufacturing partners. So as a result, we can partner together I'm finding ways upstream to reduce cost and mitigate the tariffs to you're talking about the before with our data science capabilities. We do have an ability to look at pricing options.

Should we have to surgically pass on cost to clients can do so in ways are not very impactful in the finally more long term working with both our brands as well as our own acts as a brand partners is to reduce our mix in terms of country of origin from China Dot Dot work is already underway that is longer term in mind, and we want to balance sort of the marketplace and me.

Sure we have I diversification I'm not front, so all that we feel very confident our tools and well again update you as we see how this progressive.

Well move onto Piper Jaffrey Erinn Murphy.

Great. Thanks, Good afternoon, two questions as well for me I guess first just following up on the inventory up 39% versus your low twentys guidance for sales in the first quarter can you just kind of walk through what that disconnect is and I guess, Paul as it relates to that are you expecting pressure on the gross margin in Q1 as a result, and then secondly Katrina.

For you more on the UK can you share learning kind of how the brand mix is evolving there how long it takes an average or for a customer to get their fixed and then just any kind of expectations. That's what's implied in 20 twenties guidance for this scaling that business.

Great. Thank Karen I'll have Paul started out actually I, probably have Mike was a little closer to the UK business talked to talk a little more on a cash sounds good.

And this is Paul we ended the year or 39% a higher inventory that was in line with their expectations. Our plans. We noted earlier Q2 last year, we made a conscious decision to best inventory, we turned six times a year and so we knew we an opportunity to reinvest some for working capital gains and ability to personal lives that Mike talked about some changes.

I never make year over year in terms of broadening our a number of brands in our skews and womens as well it's across the business and I guess is really great confidence to be able to serve I'm very broad set of clients and so that's been in investment that continues in the first half that this year. So from a gross margin standpoint, well that's on clearance or more on inventory reserve, which is a function of how and how much inventory we haven't.

The books, we do see that reflected a inter gross margins in the first half in that's reflecting the guidance given for Q1, but stepping back we are really going to managing inventory and we're really excited that we'd be able to use that capability to serve even more clients better going forward.

Yeah, Hi, Aaron on the UK, it's still early and newly launched in May that Theres a couple.

Sort of Nuggets that I'd say, a one is our men's product is really reaching clients and a favorable way like our clients love the men's product I'd say the second thing is brands, we're able to work with all the brands or want to work with and so it's really fun to have a wide range of brands, both in mens and womens as well as work with all the other brands.

We want to work with some learnings for US is like how do you do click and collect and how do you have different transportation options and so we're working through those kind of as we launch and as a reminder, that we talked about on the call. We spend a lot you know a decent on time and this launch in learned phase between sort of new businesses and it allows us to better.

Vince figure out what capabilities lifestyle shuffle kind of when do include them into these newer business lives and that's kind of where we are in the stage of the UK.

Got it thank you guys.

And from Suntrust, we'll move on to use of Wally.

Excellent. Thank you very much I have two questions can you speak to growth in the women's category I guess relative to what you've seen in the last couple of quarters, where I'm trying to figure out is are we really are we seeing any signs of maturation in this category since it's a year oldest and then second your old rolled out a new onboarding flow.

Try to figure out what kind of impact as it having on conversions and marketing efficiency I think one of your employees was quoted or how to block in which you talked about seeing maybe a 15% lifting tile profile completion right I'm just trying to see if that potentially could be a good indicator or at least in convey.

And as well thanks.

Hi, Lisa This is Paul I'll take the first question and then what what because that's an excellent. So overall women's continues to be very healthy part of our business our client growth.

In Q4 was across men's women's and kids UK was very early and then as I noted, 9% growth or revenue per client would only be possible because it winds up the newer categories overall store very exciting opportunities have a lower revenue per client. So women's continue to be very healthy effect or investing in inventory to broaden our ability to service serve many women's clients.

Oh, it gives us great confidence going forward in 2020.

And you said Hey, this is Mike I'll take that Onboarding flip question. I mean, we are testing a lot of different things on conversion all the time and we had a very robust kind of AB test as we talk about to Paul's point about the investment strategy and data science and engineering, we're going to continue to do that because of how much opportunity I think we have to optimize experience.

But some of these test work and some of them dealt and it's an important part of our profile to always be testing things that we think are going to improve the client experience. So no kind of specific conversation about that specific up conversion test, but we do that all the time.

Okay. Thank you.

You're welcome.

Well hear next from I., Bruce Shaw with Wells Fargo.

Hey, good afternoon, everyone apologies three questions from me. So first you you say you spend less on marketing in Fourq just curious.

Got a dynamic that should reverse in one can you just kind of curious maybe Paul whats baked in for marketing spend in the first quarter in that guidance.

The Q1 revenue just curious the revenue dynamics.

Kind of plug in similar type of rough per customer that gives me basically no net adds of kind of curious for your comment rubber customer versus net ads are then apologies the last question.

Bigger picture you know I think this year as an implied around 1%.

Full year EBITDA margin, which includes the SBC and now we have the shift in strategy.

By strategy I'm I'm, just curious how that how does this will inform your thinking on the longer term EBITDA margin guide of 11% to 13% just longer term do you think about the business is any of that changing when you think about you know 510 years down the road. Thanks, so much.

Hi, This is Paul.

So your first question was around our marketing spend so we were in July the depth summer we didn't just see the efficiencies. There. So we made the choice not to invest in that period and rather spend it when there are efficiencies, we're very focused on ROI and we'll be spending some of that in Q1, but we did leverage our marketing spend as I noted I'm, 9.0% this year versus 9.1% last year.

In Q1, another or in the fall, where we do see efficiencies, we have real confidence and spending both paid and brand in the quarter and these investments are reflected in the EBITDA guidance for Q1, specifically to the sort of drivers of Q1, we see growth in both revenue per client seen that momentum continue that was 9% in Q4, but.

Also consistent growth and client count. So there will be mathematically you do that net adds quarter over quarter and that's reflects reflection of our continue to focus on ROI positive performance marketing initiatives.

Finally in terms or.

EBITDA question no for long term, we're very confident our long term margins of 11% to 13% and then also growing 2020, 5% for many years to come we're also coughing or investments. This year again, two years and we've been able to set the stage and delivered on our commitments and this year, we see near term opportunities invest an amazing.

Talent, that's continued to build the pipeline initiatives sharp looked at just one of many initiatives. We have ahead of us to continue to engage with clients and to get to get to know them really well. So from that standpoint, that's a fuel that's going to allow us to grow 2020, 5% for many years to calm and that's the path to scale and that will get us to the long term margins, but right now we see the opportune.

Ladies and again, we have great confidence given our past two years of performance.

Got it thanks Paul.

Well not hear from Rick Patel with Needham.

Good afternoon. Thanks for taking my question and two for me as well so a very nice a continuation of growth in sales per active client can you provide some additional color on what the drivers of this where in the fourth quarter and your confidence in the sustainability of this trend as you look out fiscal 20 sounds like direct buying will be a pretty big driver, but curious what else is.

Got it in guidance and the second question is really around.

Investment spending going forward so be put SBC. Aside your you planned incremental investments for the UK in the back half of fiscal 19, as we look out the fiscal 20 I'm. Assuming this will continue to be a pressure point until you anniversary it but what else maybe in the pipeline for investment spend that we should be keeping in mind.

Hi, Rick Thanks for your questions. This is Paul So first of all yes, we're really excited with the fact that we've grown revenue per client five quarters in a role in a row and that is a function of a whole variety of initiatives such as if it to Q4, but we talked about style shuffle has has being has been transformative and our ability to understand.

Clients style. So we've embedded that information into our algorithms to guide or stylists and Thats helped us drive a wallet share. Another thing we talked about earlier is that our client base is quite diverse and early on we have had opportunities for clients who are very early in our journey with us to serve them better Mike talked about the fact that over the first.

Three fixes, we've gotten better I, increasing our success race success rates over those three fixes and that's helping us drive overall improvements or revenue per client and the final driver is the fact that we've invested inventory and broaden the assortment that again continues allows continues to allow us to serve clients well all of these initiatives continue to play out.

In 2020, and then direct bias layered on top of that.

In terms of investments, we're making on in 2020 beyond SBC. As you noted we really want the costs in terms of people infrastructure in the UK and the second half that was $12 million in the second half last year those will be annualizing in the first half and that's reflected in my guidance for Q1 in the full year Secondly, marketing we ended last year with.

Marketing as a percent of revenue at 9.6%. That's a low end overstated long term range of 9% to 11% you seem to quick paybacks, we have in a sharper letter, we're starting to really build our branches abilities. So we see for the full year opportune to inch that up further to the midpoint of the range and continue to drive long term returns on a marketing spend so all of its investments.

Taken together give us great confidence that we can grow 2020, 5% for the long term and that's also reflect in the full year guidance for 2020.

That's very helpful. Thanks very much.

And at this time I'd like to turn things back to Katrina for closing remarks.

Great. Thank you all for joining US we look forward to seeing many of you down the road and I will connect next quarter.

That does conclude today's conference again, thank you all for joining us.