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spk05: everyone and welcome to today's stitch fix fourth quarter 2020 earnings call today's conference is being recorded at this time I'd like to turn the conference over to mr. David Pierce vice president of investor relations please go ahead thank you for joining us on the call today to discuss the results for our fourth quarter in full fiscal year for 2020
spk13: Joining me on today's call are Katrina Lake, founder and CEO of Stitch Fix, Elizabeth Spalding, president, and Mike Smith, president, COO, and interim CFO. I would also like to mention that we are joining you remotely today from our home offices. We have posted complete Q4 and full year financial results in our shareholder letter on the IR section of our website, investors.stitchfix.com. A link to the webcast of today's conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for discussion of the factors that could cause the results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the 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.
spk04: Thanks, David, and thank you for joining us. After the market closed today, we issued our quarterly shareholder letter with more details on our results and strategy. As of here today, our business ended Q4 in a position of strength, and we're excited about the opportunities that lie ahead in fiscal 2021. Specifically, there are four themes on today's call. First, we navigated the COVID trough and have emerged even stronger. Second, our business is healthy with strong underlying fundamentals. Third, we are well positioned strategically and financially to take market share and play offense in 2021. And finally, we are accelerating the expansion of our consumer experience due to the momentum we've seen across our fixed and direct buy offerings. Combined, these themes give us confidence and optimism for the year ahead. With that, I'd like to rewind the script to talk about the first point and paint the picture of where we were when we last met in June. Our distribution centers were recovering from significant disruption due to the COVID crisis. At one point, half of our warehouse nodes were closed, and we were operating at nearly 30% fulfillment capacity. Our supply constraints were not limited to our warehouses. As we spoke about last quarter, we had also pulled back on inventory, both in the interest of conservatism as well as relevance, as we anticipated and would see very significant changes in the types of apparel that consumers were looking for. Given this constrained environment, we dramatically reduced our marketing spend from late March, April, and into May to ensure our limited capacity could be used to serve the demand we were seeing from existing customers well, while minimizing the risk that we would spend to acquire new customers into a suboptimal and potentially disappointing supply environment. While we recognize that the decision to limit new clients during the time would impact our subsequent fixed demand in the quarters that followed, It was the right decision that prioritized the long-term success, happiness, and profitability of our client cohort. Emerging from the peak of the crisis in the spring, we began to play offense. We rapidly strengthened our foundation and adapted to the consumer. In the new work-from-home backdrop, we realigned our assortment to what was relevant and joyful for our clients. We unveiled new experiences to our active fixed clients with direct buy-in. And we ramped up our marketing spend in June as we gained confidence in our fulfillment strength and in consumer sentiment. With that backdrop, we are really pleased that we didn't just manage to survive the deepest trough of the crisis, but that we delivered results that we are very proud of. In Q4, we returned to positive year-over-year top-line growth, grew gross margins by over 400 basis points from Q3, and delivered over $50 million in free cash flow. These results are all the more notable when compared to many apparel retailers reporting double-digit declines for the same time period. We are particularly excited about our new client demand. As our distribution center capacity rebounded in late June, we dialed marketing back up. In July, we saw a 50% year-over-year increase in our first fixed shipments, and we saw elevated growth continue through the month of August. This is the highest sequential first fixed growth rate we've seen in the last three years. so much so that we've had some higher than average fixed wait times as we catch up to support this windfall of new client demand. We believe this elevated first fixed demand will also drive incremental subsequent fixed volume in the quarters ahead, given that the majority of our clients choose to receive fixes on a recurring basis. The flexibility in our model allowed us to meet the consumer in this moment. With our overall value proposition anchored on the convenience of shopping at home, and by adapting our inventory to what is most relevant today. We will continue to pursue this path of adaptability and personalized relevance, which has been central to Fitch Fix since the beginning. Now more than ever, it will help us capitalize on a forever changed apparel retail environment. Before I discuss our Q4 results, I want to provide a quick reminder that Q4 2019 consisted of 14 weeks, which resulted in a fiscal 2019 being a 53-week year. As such, when we reference adjusted growth rates in this call, we're noting that we've removed the impact of the extra week in a given month, quarter, or year to show you a comparison that we believe more accurately reflects our performance. With that, I'm pleased to share that in Q4, we generated net revenue of $443 million, reflecting 11% adjusted year-over-year growth and 19% sequentially from Q3. We delivered a net loss of 44.5 million and adjusted EBITDA loss of 8.3 million. Our adjusted EBITDA excluding SBC was positive 11.8 million. During the quarter, we grew our active client count to 3.5 million. This represents a year-over-year increase of 286,000 clients and 9% growth. In addition, net revenue per active client increased 2% year-over-year on an adjusted basis. Now, turning to our second theme, I'd like to share more color on how we deliver this Q4 performance and the strength we are seeing across our business. Over the last few months, our business has exhibited some of the strongest levels of performance we've seen since going public. Each of our major categories performed well, and we saw notable tailwinds in demand, including increased adoption of our offerings. Our first fixed shipments accelerated, and we saw continued strong retention of our auto-ship consumer base. We also saw growing momentum in women's and plus continued growth in men's, and notably real gains in both the scale and margin profile of our most nascent kids and UK businesses. On top of all of this, our expansion into direct buy, a critical part of our feature, has shown unabated growth both pre and post COVID, and we believe it will unlock our total addressable market in new and very material ways. With that, I'll now provide some updates on each of our client categories to give you a sense of the momentum we're seeing. One of the main contributors to strengthen overall fixed trends has been the health and heightened demand in women. We've seen ongoing improvement in the last few months, and in Q4, women's first fixes grew approximately 25% year over year on an adjusted basis. We've also shifted volume out of categories like workwear and blazers that have been hit harder by COVID and into more in-demand product categories like athleisure. Our women's activewear assortment in particular has surged in demand in the past few months as clients seek apparel that balances comfort and style. In the last few years, we expanded our activewear mix, which has allowed us to capitalize on recent trends and work-from-home mandates. In Q4, women's activewear revenue grew by over 350% year-over-year on an adjusted basis, benefiting from strengths across both fixes and direct buys. We also delivered year-over-year growth and success rate and client satisfaction in Q4 as key brands such as Reebok and Beyond Yoga resonated with clients, and we feel well-positioned to continue serving clients' active wear needs in the months ahead. In Q4, our women's category also benefited from accelerated growth in our plus offering. While we believe plus size has historically been an underserved market by traditional retail, It's one that we've served well due to our understanding of fit and sizing and our ability to address client preferences through our exclusive assortment and strong market vendors. As traditional plus channels contract due to store closures, we saw higher demand in Q4 with plus first fixed growth exceeding 35% year-over-year on an adjusted basis. Plus also benefited from year-over-year growth in success rate and average order values in Q4 and FY20 as we broadened our assortment across price points and end uses. While Plus represents a low double-digit percent of women's clients today, we think it comprises 40% of our women's addressable market, and we plan to invest aggressively in Plus inventory and FY21 to support further acceleration. Similar to women's, our men's category benefited from the surge in demand for activewear and drove improvement and first fixed demand in Q4. In particular, we saw brands like New Balance and Public Rec resonate with clients, as well as our own exclusive activewear brand, 01 Algo, and we're broadening our assortment in fiscal 2021. Beyond women's and men's, we drove momentum in our more nascent kids and UK categories during the last quarter. In Q4, we celebrated the second anniversary of kids, which has been especially resilient during COVID, with kids surpassing even our pre-COVID expectations for the year. As kids have scaled, we've leveraged client feedback data to improve our personalization capabilities, and strengthen our inventory assortment. In the two years since launching KIDS, we've improved success rates by over 15%. In Q4, our KIDS clients kept the highest proportion of items in their fixes since the category launched. These improved outcomes have also been a function of our enhanced exclusive brands assortment with sales of our exclusive KIDS product doubling on an adjusted basis year over year in FY20 and fueling the category year over year gross margin expansion. While kids are still in its early days, it is quickly scaling and on a similar profit trend line as our larger offering, underscoring why we're so excited for this immersion category. We also recently celebrated the one-year anniversary of our UK launch. Six months ago when we discussed the UK, we highlighted a few of our early challenges and uncertainty around Brexit. Now, six months later, we are optimistic about our UK trajectory. As with our other roll-ups, we've taken a launch and learn approach in the UK and have focused on collecting client feedback and leveraging learnings to improve our recommendations, buying, and merchandising strategies. These enhancements resulted in UK success rates and average unit retail price each growing by approximately 20% year-over-year in FY20, translating to a lift in average order value of over 40%. These improvements meaningfully strengthen our unit economics and margins, but also demonstrate how quickly we are learning and refining our UK offering. In Q4, we also saw highly efficient client acquisition trends, which we believe were a function of strong organic and referral demand, as well as the broader pullback in digital spent by other retailers. While our UK offering is still in its early innings, we believe its momentum validates the viability and strength of our personalization model and other geographies. And we remain very excited by the progress we're seeing in this promising new market expansion. Across the board, we're excited by the health and momentum we're seeing across the business and the opportunities that lie ahead. With that, I'll hand it over to Elizabeth to share more on our future, direct buys ramp up, and how we plan to take share in the year ahead. Thanks, Katrina, and hello to all of you on the line. On top of the company success Katrina shared, this moment in history is a once-in-a-lifetime opportunity in the shift of apparel retail, and we are playing offense. Consumers are rapidly moving their apparel buying online approximately three times faster than in pre-COVID period. While overall demand for apparel is undoubtedly not what it was pre-COVID, the pandemic is completely resetting enduring client behaviors. Consumers are changing their habits, and we are here to help them establish these new shopping behaviors, providing the personalized discovery and guidance that was previously met offline. We are also able to rapidly toggle our inventory to what is most relevant right now. As a result, now is our moment to define the new apparel model as the traditional apparel retail sector shakes out. We saw this shift very much underway in Q4 and into Q1, with surging growth in our new customer shipments. As traditional retailers close their doors, consumers are shifting to Stitch Stix as evidenced by our increased demand and growth, validating that we're taking shares When retail spend rebounds in the coming months, we expect more than 30 billion of market share to move online over a 12 to 18 month period. We anticipate capturing more than our fair share of this given the relevance of our model, particularly with the expansion of direct buy. We will be focused on the consumer segments, categories, and elements of our offering that we believe will enable us to take disproportionate share in this time. Now let me share how we started to play offense in Q4 with the results we delivered through direct buy, and by enhancing our experience to appeal to a greater set of purchase occasions. In June, we launched Trending for You, which expands our feed-based shopping experience, enabling more shoppable looks, widening the breadth of items from which clients can choose to purchase, and removing the requirements that clients have purchased with us in the past. This will set the stage for new to Stitch Fix customers engaging with us through direct buy in the quarters ahead. In the first two weeks of introducing Trending4U, our weekly direct buy orders grew by over 30%, suggesting that as we add features and broaden ways to engage in shop, we will be able to capture a greater share of wallet with clients. This expansion is part of our robust product roadmap that will continue to give clients more reasons to engage with us and broaden our offering to appeal to a larger consumer set. We are preparing for more of these enhancements in FY21 to widen product discovery for both inspiration-based as well as higher intent purchases. In July, we also introduced an algorithmic recommendation engine exclusively for DirectBuy clients that uses our DirectBuy data set to more fully capture clients' interactions and preferences. Compared to our prior fixed-based recommendations, clients purchased more items on average, bought products with higher average prices, and converted at higher rates. This new engine was also built to work in real-time with clients who are onboarding directly into shops, and we plan to test this cold start recommendation capability in Q1. Now I'll share a few updates on DirectBuy's financial performance. In Q4, it continued to meaningfully outperform our expectations, driven by faster existing client adoption, higher purchase rates per client, and greater levels of engagement. While we won't share direct by penetration every quarter, we'll note that women's penetration grew into the high teens percent, while men's grew into the high single digits, with both categories demonstrating strong traction, but also meaningful headroom for growth. We also achieved very high success rates driven by our ability to pair data-driven recommendations with clients' high-intent purchase decisions. As a result, return rates associated with direct buy have been less than half that found in traditional apparel e-commerce. These client outcomes have led to strong repeat purchase behavior. From the launch of direct buy through the end of Q4, nearly two-thirds of clients who completed a direct buy purchase returned to make a subsequent purchase. These factors have reinforced DirectBuy's impressive unit economics with the offering-delivering contribution margins that are already at parity with our fixed offerings. In addition, in August, we introduced our shopping bag functionality to all DirectBuy clients, and we believe that this cart-like feature, which combines multiple items into fewer shipments, will drive incremental cost savings and thus further margin expansion. Offerings like DirectBuy, which we believe can offer a step change in our growth trajectory, bolster our belief that the investments we're making in our people and across our business will result in outsized market share gains. Many in our industry pulled back their growth investments in response to COVID. We did the opposite, and we see results, share gain and adoption of new experiences. We continued investing across engineering, data science, and product, to broaden our experience and innovate our personalized shopping experience that complements our unique personalized styling service. We have made significant progress in demonstrating real gains in our new direct buy platform, as well as in early stages of testing and piloting of enhancements to our fixed offerings, which we believe is more relevant than ever as consumers shop from home. With our fixed form factor, we're enhancing the client experience to leverage our differentiated styling team to deliver stronger client outcomes. One initiative that is currently in flight in the UK enables clients to engage directly with stylists to select anchor items in their fix and identify other ways they'd like stylist support before the fixed ship. This beta has driven strong early results, and we believe this approach appeals to an even broader set of clients as consumers seek higher touch engagement, especially while reducing their frequency of shopping in stores. Based on the results of this initiative to date, We plan to introduce it to US clients in the quarters ahead. Beyond product innovation, we're also investing in our distribution centers to support higher levels of demand. As we continue to expand our offering, we believe these investments will help to remove limiting factors tied to capacity constraints and allow us to fulfill higher demand in conjunction with our more aggressive marketing strategy. We're very excited about the opportunity that lies ahead and we are confident that we're well positioned to extend our market share. With that, I'll hand it over to Mike to provide more on our financial performance and our outlook.
spk10: Thanks, Elizabeth, and hello to everyone on today's call. First, I'll share more detail on our results from the quarter and full fiscal year. In Q4, we generated net revenue of $443 million, representing 3% growth year over year, or 11%, excluding the impact of the extra week in Q4 of 19. Fiscal 20 net revenue was $1.7 billion, growing 9% over the prior year, or 11% on an adjusted basis. In the quarter, we grew active clients to 3.5 million. This represents a year-over-year increase of 286,000 clients and 9% growth. Q4 net revenue per active client was approximately flat year over year on a 53-week basis and grew 2% on an adjusted basis. Note that the net revenue per active client is based on the last four fiscal quarters, such that Q4 20 revenue per active client of $486 is not impacted by the extra week from Q4 of 19. Q4 gross margin was 44.9%, representing a 410 basis point increase quarter over quarter, driven by a reduction in our inventory reserve as we stabilized our inventory position. We're proud of this large sequential margin improvement and our ability to execute against the directional guidance we provided during June earnings. Full year gross margin was 44.1%, or 50 basis points lower than last year. Advertising was 9.9% of net revenue in Q4 compared to 9% in Q4 of 19 and was 9.8% of net revenue in fiscal 20 compared to 9.6% fiscal 19. Other SG&A excluding advertising was 38.3% of net revenue in Q4 compared to 34.6% in Q4 19 and was 37.3% for the full year compared to 33.4% in fiscal 19. This reflects ongoing investments in technology talent and the associated SBC expenses. Q4 adjusted EBITDA loss was $8.3 million, and fiscal 20 adjusted EBITDA loss was $29.1 million. This performance was in line with our expectations and reflects lower gross margins in Q3 20, as well as ongoing strategic investments we made to support long-term growth. In fiscal 20, these investments totaled approximately $110 million and included $68 million in stock-based compensation as we invested in technology talent, roughly $25 million in supporting our UK category as it scales, and nearly $15 million in one-time COVID-related expenses. Adjusted EBITDA excluding SBC was $11.8 million in Q4 and $38.4 million in fiscal 20. Q4 net loss was $44.5 million and diluted loss per share was $0.44. For fiscal 20, net loss was $67.1 million and diluted loss per share was $0.66. And finally, in Q4, we delivered free cash flow of $51.8 million and ended the quarter with no debt and $381.6 million in cash, cash equivalents, and highly rated securities. Before I discuss our outlook, I'll note one change we're making in FY21 on how we report EBITDA. As we look ahead, stock-based compensation will remain an important lever for us as we invest in growing our data science and engineering teams. We also note that most comparable companies exclude SBC from EBITDA. As a result, going forward, we will only provide adjusted EBITDA excluding SBC as we believe it more closely reflects our operating performance. Now onto our outlook. As Katrina mentioned, we've been very pleased with first fixed demand trends in July and August, which we believe will bolster our active client growth in the year ahead. One prevailing trend she also mentioned is lower subsequent fixed volume impacted by our demand side pullback in Q3 of 20. Let me explain this temporary phenomenon in greater detail. As we shared in Q3 20, our COVID related fulfillment challenges led us to pull back significantly on marketing for nearly eight weeks, which we knew would lower our active client count and the subsequent base of clients we served in the quarters thereafter. Given the fact that repeat clients comprise such a large portion of our business, we expect the loss of those new March through May clients, who would on average receive multiple fixes and spend hundreds of dollars with us in their first year, will roll forward and particularly impact subsequent fixes in the first half of fiscal 21. However, as we enter the second half, we expect the effects of the temporary pullback in marketing to subside, giving us confidence in our accelerating growth for the year ahead. In addition, as Katrina referenced earlier, we're playing catch up to support the renewed surge in client demand. As such, in Q1, we expect to deliver mid to high single-digit revenue growth, which reflects robust recent demand trends offset by lower subsequent fixed volume I just mentioned. It also reflects some of the benefit from our new client growth moving into Q2. Given the uncertain macro environment, we also think it's prudent to hold off on providing specific full-year guidance at this time. However, we do expect year-over-year revenue growth to accelerate meaningfully in the second half of fiscal 21 as the impact of COVID stay-at-home orders subsides. Now I'll share how we're thinking about our investments and implied margins in FY21. Fiscal 2019 and 2020 were heavier investment years for us as we invested in initiatives that will fuel long-term growth, such as our kids in UK categories, as well as data science and engineering talent. In fiscal 2021, we plan to continue investing in growth opportunities like the UK, but at lower levels than last year as the category continues to gain traction and scale. Even with this continued investment, we plan to begin showing expense leverage in our adjusted EBITDA, excluding SBC. I'll only caveat this by saying that we'll be flexible in how we allocate marketing dollars in FY21, And if we see the opportunity to invest and to drive outside share gains, we may take advantage of that. In line with Elizabeth's earlier comments, we plan to invest higher levels of CapEx in FY21 to increase our operating capacity, which should mitigate growth constraints and also drive leverage in our model over time. CapEx has historically comprised less than 2% of revenue, and in FY21, we expect it will increase by 100 to 200 basis points over historical levels. This is part of our longer-term investment in our inventory management strategy, which we will share more about in the co-orders to come. In summary, we're proud of the results we delivered in FY20 and our ability to return to generating positive top-line growth in Q4. We have a healthy cash position, no debt, an undrawn revolving credit facility, and we're generating cash flow. As we look into 2021, we believe that our strategic and financial position will allow us to capture outsized share gains while we also deliver accelerated year-over-year growth and continued profitability. With that, we're ready to open it up for questions. Operator, over to you.
spk05: Thank you. At this time, if you do have a question, that will be star one. Again, star one for questions at this time. We'll hear first today from... Edward Uruma with KeyBank Capital Markets.
spk07: Hey, good evening, guys. Thanks for taking the question. I guess first on the success of direct buy, obviously lots of great commentary, and we appreciate that. With the basket sizes, wondering if that's changed now that you have the shopping bag capability, where you've seen kind of the benefit, I think, in August and post that. And then as a follow-up, Mike, I think you had mentioned in the release about the inventory reserve release that helped those margins. As you rebuild inventory, Does that weigh in the P&L? Thanks.
spk04: Thanks for the questions, Ed. We'll have Elizabeth probably answer the question on direct buy, and then Nike can take the one on inventory. Yeah, hi there, Ed. This is Elizabeth. You know, I think we've been really pleased to see the momentum, as you mentioned, with direct buy. And in terms of the shopping cart, we had it in a beta mode for a few months, and we just very recently launched it to our full client set. So in terms of the kind of incrementality that I think you're asking about, a little bit early days to share that. I mean, I think one thing that's interesting is even pre-having the shopping cart, we had clients converting to multiple purchases even through the Buy Now feature. And so I think we'll know more in the months to come. I think what we're excited about is that, you know, the gross margins of direct buy were already at parity with our fixed offering. And now with the kind of benefit of consolidated shipping that we'll be incorporating, we would expect to see margin enhancement, as well as other new features that we're launching with the cart where, you know, something ends up being out of stock, we can, you know, help recommend items that are by similar to consumers. So more to come as the cart is in place for a longer period of time, but we were seeing people buy multiple items pretty hard as well.
spk10: And hey, Ed, this is Mike. Yeah, the inventory reserve, we feel pretty confident about where we are relative to managing inventory. There's a couple of things I'd note. One is just given the surge in demand that we're seeing, there's a chance we'll chase into more inventory to accomplish kind of meeting client demands. But I would say that where we are from a gross margin perspective, without guiding to gross margin, we feel really good about sort of what we did in Q4 and, you know, in and around that number for the rest of the year. And we feel inventory is in great shape.
spk07: Great. Thank you, guys.
spk05: Here are notes from Ross Sandler with Barclays.
spk01: Hey Katrina, just had a question about the first fix up 50% versus the repeat. So are these new first fix customers? Are they comparable to customers you brought in at other time periods? And are you guys having the same success? converting them to auto ship? Or is there like a propensity, you know, given the environment to have kind of more of a one and done phenomenon? I'm just trying to kind of reconcile that with, you know, the guidance that Mike gave on first half and second half. And then Mike on CapEx. So Is this investment going into automation, and if so, I guess, what will that allow Stitch Fix to do today or in the future that you're not doing today in terms of just improving processing time and dealing with inventory? Thank you.
spk04: Thanks for the questions, Ross. Yeah, on the first question, we're seeing really great trends on the client demand side, and And, you know, we really see this as just confirmation that, you know, right now the model of trying and buying personalized selections of clothing on at home, you know, this way of shopping is more relevant than ever. And so when we, in terms of like, you know, the dynamic between repeat and new client, you know, as a reminder in Q3, we pulled back pretty significantly on marketing. And what that means is, you know, in our business, The clients that we acquire don't just generate revenue in the quarter that we acquire them, but they actually generate revenue over a much longer period of time. So, which means that in Q3, if we acquire fewer clients, we'll see the impact of that temporarily this quarter, next quarter. But that, you know, the flip side of that is that the really good trends that we're seeing on new client acquisition will also sustain for multiple quarters ahead. And so, you know, what we're seeing were the client trends that we're seeing while we opting in. What we have shared is that we've seen, you know, almost kind of best ever trends in terms of people retaining, staying on auto ship in terms of the dynamics we're seeing within the fixes. And we don't see any reason to believe that that will change. But, you know, right now, I think we're at a place where we're looking at kind of a first half that really is kind of anniversarying some of the client demand trends that we saw in Q3 and what that looks like for our temporary effects, but really optimistic as we think about the trends that we're seeing now in July and kind of what that goodness will look like in the back half of the year. Mike, why don't you take the question about CapEx?
spk10: Yeah, sure. I mean, there's a few things going on, Ross. There's One, we can add more automation to your point and improve efficiency. So that's one area that we're going to continue to invest in. Nothing other than improving efficiency within the four walls. The second thing is we need more space. Given demand trends and some of the things that Elizabeth touched on in the last two quarters in terms of new inventory models, we need more space. So there's a combination of efficiency within the four walls and more square village.
spk02: We'll move next to Mark Mahaney with RBC.
spk12: Thanks. I want to ask a question about direct buy, the impact, and a question about the UK. I would have thought that the impact of the direct buy functionality would have been kind of in order, increased retention, increased spend per customer and then only at a distance would have been kind of an impact on bringing in new customers. But it almost sounds like you're seeing it kind of evenly balanced across all three of those areas. Could you just comment on that? I would have thought that would have been harder, stretchier, I guess, to really kind of convince new people to come on. But could you just comment on the impact on all three levels of customer acquisition and retention? And then real quickly on the UK, is there something new that you've been able to do there? Do you think you've just finally reached some critical mass? I know you had some marketing issues, I think, early on. Just talk about where you think you are in terms of the playbook in reaching success in that market. Thanks a lot.
spk02: Great.
spk04: This is Elizabeth. Mark, I can answer both of those on DirectBuy and the impact of your questions around retention relative to spend per customer and new customers. You know, it's interesting because, you know, as we've said, we've not yet unleashed this, so to speak, to brand-new customers. We did a very small amount of testing with the influencer program that we did in June, but that was very much on a small scale relative to the big idea so far, which is just driving incremental spend of our existing customers. And I do think it's probably, you know, something, another reason to stay longer or stay more with Stitch Fix. So I think the majority of what you're seeing is actually really more on retention and spend per customer. That new customer demand that Katrina was talking about, that 50% year-on-year fixed growth within July and into August, I mean, that is clients opting into fixes, opting into auto-ship. The happy benefit is now as soon as they come in, we're very much marketing our shop offering to them as well. But the spend per customer, I think, is really what we've seen to date and just penetrating our existing base And then we have done some work already in beginning to do dormant reactivation of historic clients. And the early read on those tests have been quite successful. So we'll continue doing that as well as clients that we consider to be prospects, meaning those who've shared a lot of information with us in the past but not yet converted. And so those are attractive pools that we will be going after. But that new customer idea is actually the big white space ahead of us. And then on your UK question on critical mass, I mean, I think we're just seeing a lot of really good things that the learning over the last year has really benefited us. So as Katrina mentioned in the call earlier, we've seen, you know, 20% year-on-year improvements in both the average, you know, the AURs that we're seeing as well as keep rates per customer, and that's translating to this 40% AOV improvement. And what that means is just we're really getting on the glide path, a great contribution margin and something that gets us excited about the growth. I also just think our model has really been relevant in this moment. And the customer acquisition that we saw, I'd say starting in kind of mid to late April and throughout the last few months, just has had great momentum, both on the organic and referral side, as well as on on paid acquisition where we think, you know, a number of our, you know, the competitive set has probably just had to pull back. And then just some creative things we've done to just educate more about our offerings. So we introduced a stylist ambassador program where we've, you know, helped our stylist really amass large Instagram following and using that vehicle to help customers really better understand this model, which I think now that it's gaining more awareness, we're just seeing greater traction.
spk14: Thank you, Liz.
spk05: And from Piper Saylor, we'll hear next from Erin Murphy.
spk04: Great. Thanks. Good afternoon. I have a couple of questions, maybe first for Elizabeth or Kat. Just following up on the surge of demand that you saw in July and August, can you just share kind of what you're seeing from kind of what type of customers these are? Is it different from an age demographic? How does the mix break down versus what you've seen historically when you've seen a surge in first fixed demand? And then a second question on the shift of stylists. I believe last quarter you guys had planned to see a shift of about 1,400 stylists into lower-cost regions. Just would love an update there. How easy has that been? Have there been any sticky points or kind of challenges, I guess, as you've done that? Thank you. Yeah, thanks for the great questions. You know, I think firstly on first fixed demand, you know, what we're seeing, we're seeing really, we're seeing a lot of strength on women and kids. And I think in women's, what's been really exciting is really seeing that strength in plus size. And, you know, I see that as both just a reflection of what's happening in the plus size market, which was historically very dependent on physical in-store experiences and kind of our ability to be able to capture some of that demand And I think it's also, it's also, I think a testament to just like the, you know, the convenience of our model and really being right where the customer wants. And so we're really, really thrilled about kind of what we're seeing there. You know, I don't think that there's a ton in terms of like, how did these, how did these clients look different from past clients? But I mean, I think plus size is one place that, you know, we're pretty excited about. Actually, one last thing I'd add on a plus too, is that, you know, we've really focused on inclusive inclusivity and marketing and, and the imagery that you'll see. And I think that's another, It's another thing that's now helping that side of the business. That's definitely some of what we're excited about with First Fixes. On the stylist side, so far it's been great. Right now we have a lot of open recs in the many other geographies that we hire stylists, such as Minneapolis and Texas and Ohio. And hiring a stylist has never been a challenge for us. We really have found that there's a really, really great labor pool to draw from. And we have been used to kind of hiring at scale and hiring high volumes. And so we are currently hiring about 2,000. We'll be hiring about 2,000 stylists across those geographies. And we feel pretty good about our ability to onboard them seamlessly and that there'll be great demand on the stylist front. for us to draw from.
spk14: Great. Thank you.
spk05: We're next from Heath Carey with Goldman Sachs.
spk11: Great. Thank you. I just wanted to dig a little bit further into the comments that you made around advertising. You mentioned the decline in advertising spend that we saw kind of quarter over quarter. Just if you can quantify for us, you know, kind of what you, what you mean by that, just given the increase that we saw in absolute dollar spend. And then as we, as we think about the, um, uh, as we think about the, um, the second half recovery that you're seeing, um, or expect to see as we get into next year, um, how much of that do you expect to be just recovery and overall average, uh, uh, apparel spend, um, versus a, um, a significant increase in the wallet share that you're seeing with your customers, particularly relative to what you're seeing along that dynamic now of apparel spend versus wallet share?
spk04: Yeah, I'll take a stab at the first part on marketing, and the second question is really around wallet share and and so I'll take a stab at those two, and I think we'll just, Mike, if I missed anything, you can jump in, but, you know, the marketing pullback was really speaking to Q3 primarily, where for about eight weeks, we pulled back pretty significantly in marketing, and that was really because of supply-side constraints that we had during that time period, and pulling back during those eight weeks has a knock-on effect because the clients that we that we acquired during those eight weeks don't just generate revenue then, but they actually generate revenue for the weeks and months and years to come. And so when we're talking about the pullback, we're really talking about that. And then as we kind of moved out of our backlog at the end of June, July, August, we've been able to turn marketing pretty fully back on. And we've been really, really pleased with what we've been seeing on that front. And we've already talked about the 50% year-over-year for fixed growth that we've seen, and that's really been the result of being able to turn that marketing engine fully back on. In terms of our expectations around where that spend is going to come from, I mean, there's definitely all the dynamics that you spoke to. I think this is undoubtedly a strange time in that people are buying less apparel for very good and obvious reasons, They are still buying apparel, however. And, you know, I think one of the really great benefits of our model is that we've been able to shift our assortment to what clients need. And, you know, you may not have thought that Stitch Fix would be known for active wear and athleisure a year or two years ago. And now we're really able to sell that really effectively to our clients and really we're able to meet our clients where they are. And so, you know, I think as people's apparel needs change, we are able to shift the assortment appropriately to where they are. And I do think that we will continue to see people more comfortable buying clothes online and people more committed to continuing to buy clothes online. And so while this is a very challenging time for apparel retail in general as people, behaviors are changing dramatically and people are buying less volume today, we really do believe that the behavior shifts that are happening today are going to be permanent and those will be pretty significant tailwinds and benefits benefits to our business long term.
spk14: Great. Thanks, Katrina.
spk05: We'll move on to Corey Carpenter with JP Morgan.
spk08: Great. Thank you. So just wanted to dig in a bit more on margins, maybe relative to the strategic investments you called out. Last year, it was $110 million in the shareholder letter. Could you just talk about your biggest priority this year and how they differ from last year and then, you know, where you expect to see the better leverage to really drive the margin expansion you guided to? And then, as a follow-up, you mentioned still planning to catch up on the supply side. Could you just expand some around where you're aiming the constraints and your ability to address those in the near term? Thank you.
spk04: Yeah, why don't I can take the first one about supply constraints and then Mike, it's so hard. We can't see each other in the room. Um, Michael takes a question around margins. We'll do a little bit in reverse order, but on supply constraints, um, you know, we, we've largely worked through a lot of the supply constraints that we talked to. We talked about were ones that were temporary to the time period that really were COVID related. Um, we had shared, um, in our prior quarters that we had given our warehouse staff flexibility. with four weeks of additional PTO to be able to stay out of our facilities if they needed to. And now we're in a place where we feel pretty good about our ability to be able to coexist with the threat of COVID in our warehouses. And so we've really figured out how to systematize and operationalize and operate safely. And so while there, of course, could be small disruptions in the future, we don't anticipate significant disruptions. And then the second one is really around inventory. We canceled a lot of receipts. We moved around a lot of receipts. And that was really, I think, one out of conservatism of just not knowing how demand was going to materialize. And the second part was really around relevancy. And we're quite glad that we did that. Obviously, the consumer has changed a ton in terms of what he or she is looking for. And so being able to shift receipts out of things like workwear and things that we knew were not going to be relevant and into more relevant categories was super important for us, but also, you know, that takes some time. And so those are really the primary supply constraints that really we, you know, we see those are pretty much behind us. You know, now we've actually been seeing such great demand on the first fixed side that we actually see some elevated wait times, you know, which means that, you know, we're a little bit above kind of where we anticipated being, but of course that's a really nice problem to have. And, you know, we feel good about our supply side operations. We feel good about the the inventory dynamics and the inventory that we have coming in our doors right now. And so, you know, largely I think we've worked through a lot of the supply side constraints. So, Mike, why don't I have you take the question about margin?
spk10: Yeah. Hey, Corey. I mean, there's kind of three big things. One is what we referenced, accelerated growth in the back half of the year. So just, you know, expected higher revenue numbers against the cost basis from where we are today. I mean the second one is just scale of the business. We continue as we grow the business. The scale finds opportunities to get leverage in certain cost parts of our business. And so scale helps kind of on inventory costs as an example, and other parts of our variable expenses. And the third is what we referenced on the call which is just the way businesses like the UK and kids are scaling And the improvement in contribution margins that we're seeing in those businesses as they grow, we're excited about that. And so, you know, like I said, 19 and 20 were heavier investment years. We've talked about that with you guys for a long time. We knew 21 would likely be a little bit less, but we also felt like now is the time to continue to invest because of things like direct buy and things like that are driving other, you know, better client experiences, that it makes sense to continue to invest in this. But it's really, you know, growth scale and the glide path of those investments that I mentioned.
spk14: Thank you.
spk05: From Tourist Securities, we'll move next to Yusuf Squally.
spk09: Great. Thank you very much. Two questions for me please. On that $30 billion that you talked about in your prepared remarks and also in the letter that's likely to move online in the next 12 to 18 months, how much of that is truly relevant to you today? And as you look into the opportunity of taking more than your fair share, do you feel that it's more happening or it's going to happen on the fixer side, your traditional business model, or is it going to happen on the direct buy side and how will you be going after it on the direct buy side is trending for you, kind of one of the key pieces there. And then, Michael, maybe for you, with all the cost adjustments you made for COVID, Does that change your 11% to 13% long-term EBITDA margin target, which you've shared with us in the past? And I know that 11% to 13%, that's inclusive of SBC. So if we were to exclude SBC, what would that new target look like, if you could provide an update? Thank you.
spk04: Thanks for the question, Yusuf. I will have – yeah, I'll have Mike take the second part of the question. On the first one, the $30 billion that's moving online, I think a large portion of that is pretty relevant to us. Of course, today, as we think about where are the places that we don't play, we don't play as much in the very low value price point and in the very high end. But candidly, a lot of where we play right now is in the accessible, everyday, very democratic price points. And so from that lens, I think a lot of that market share is available to us. And from a category perspective, I think we just talked about how we've been able to shift our assortment from one where jeans and tops and things for work were things that we sold a lot of to a place where we're now selling a lot of comfortable clothes and athleisure and sport. And so, you know, I think from a category assortment perspective, we actually have a pretty wide playing field and the ability to pivot into anything that is really highly relevant and where the customer wants to be. And so, you know, I think we see that opportunity as a pretty compelling one. In terms of how we think about the business all working together, I mean, I would love to see a future where we're really talking about such fixes, the personalization engine and spending less time around the channel of whether it's direct buy or fixes and You know, what we've learned is that they really work together really well. I mean, a lot of our, we talked about the really strong growth that we're seeing in fixes right now. Fixes are still a really significant growth engine for us. And, you know, what we're finding right now is that fixes are a great way to get somebody to, acquainted with such fix, get somebody to understand such fix. And a direct buy is a great way to be able to get to know them even better and to be able to fill even more of their needs. And as Elizabeth alluded to, over time, we believe that direct buy can also potentially be an acquisition vehicle. But we really see all of these as kind of building blocks on top of this personalization capability that, you know, that can kind of give people a lot of different ways to be able to engage with us. And so, you know, I think right now in the near term, we see fixes as being a a primary way that we're acquiring clients, bringing people into our ecosystem and then being able to upsell and capture greater share of wallet through direct buy. But there's so much potential with direct buy and that we could see those kind of engaging in different ways over time. So hopefully that answers most of your questions. And if Elizabeth, if you want to weigh in, if I missed anything. No, I think that was a great, I mean, overall exactly where we're headed. I mean, I guess the one thing you said is just, You know, historically, Stitch Fix has not been able to participate in things like SEO and bringing customers in if they were looking for a particular product category. And as we expand our shopping experience to be something that customers might start with as part of that overall personalization engine that Kat is describing, that allows us to have that as an entry point rather than simply as an add-on. And that's where we get really excited about the expansion of our TAM and really looking you know, largely tapping to the majority of that $30 billion that we talked about. And so we view that as a real opportunity for us in the quarters to come as we begin to ungate direct buy to new clients.
spk10: Yeah, and hey, Yusef, I mean, the changes in COVID kind of in our cost structure, while it's been hard and we've worked through them, I don't feel, I feel really good about kind of where we are as a not deleveraging our cost structure. So to answer your question directly, the 11% to 13% with SPC still represents what we believe is the long-term margin targets. You know, there's just more tailwinds in the business that we're seeing that gives us even more confidence about those targets. We have not given sort of, you know, guidance or talked much about what that number might look like without SPC.
spk14: All right, thank you both. Thank you all.
spk05: We'll move on to Kunal Madhukar with Deutsche Bank.
spk00: Hi, thanks for taking the questions. A couple, if I may. One, looking back, as you see the, or as we see the decline in revenue per active customer, how much of that was because, you know, you missed a couple of maybe fixes for a few subscribers, versus people kind of going dark on the subscriptions themselves. That's one. And second, with regard to our follow-up to Yusuf's question right now, in terms of your marketing message, as you go out and you target this $30 billion opportunity, will your marketing message be more focused on the subscription side or will it be more focused on the direct buy side? Thanks.
spk04: Yeah, thanks for the questions. And I think when you're talking about sales for active client, are you talking about sales for active client not growing as fast as it has in prior quarters, just to specify? Because we actually didn't show a decline.
spk00: So what I did was I looked at, you know, the proportion of direct buy. So direct buy is, you know, teens for women and, you know, is high single digits for men. That means direct buy is probably about 10% of revenue. So if direct buy is 10% of revenue, then that means that the 486 on a comp basis would probably be more like 446 versus last year.
spk04: I see what you're saying. Right. So, I mean, what we've seen in A-B tests is that we've seen that giving people access to direct buy actually increases the total amount that they spend with Stitch Fixx. To your point, this definitely can be that there are some people who are spending a lot more in direct buy and less in fixes. And there are some people that might be spending slightly more in direct buy. But net-net, what we know from the AD test that we ran was that with statistical significance, direct buy was increasing our wallet penetration. And so we are able to serve our clients better. We are able to serve more of their needs. And so... I think that's the broader trend that you're talking about. I think over time, we're not super worried, honestly, if there is going to be some people who are going to be spending a lot of money in direct buy. We actually see that as a really good thing. We see those as clients that we may not have been able to serve really well with just fixes. I think it's really just a testament to the model being able to be flexible, to be able to serve people who want to shop in different ways. And then the second part of your question around marketing messages, we think about how to move forward from here. When we think about fixes, we probably don't think of it as a subscription. We really think of this Stitch Fix as being this high revenue engagement model. And so people who choose to get fixes on a quarterly basis or an every other month basis, that's just a convenient way for them to be able to have access to the personalization that they want. Direct buy is another way that allows them to be able to engage with us in a more a la carte way. And of course, you can get fixes a la carte as well. And so we really see all of these things as ways to drive engagement, ways to drive revenue engagement, ways to drive LTV over time. And the marketing messages really have been less about the cadence of it. And our marketing messages have really never been around the cadence and using any subscriptive language, but has really been around the personalization and And, you know, our ability to meet them where they are. And, you know, we definitely saw in the women's business as an example. The team was really, really on top of changing the marketing messages and the imagery to better reflect where customers are today in a work-from-home environment, in a much more casual environment. And we saw that working, and we see that working now. So, you know, of course our marketing messages will evolve as we, you know, as the world changes, as we understand where customers are in their journey. But, you know, But the fundamental marketing message that's really around personalization, that's really around us really getting to know people and sending them what they want, that's definitely not going to change.
spk00: Great. Thank you so much, and be safe. Thank you.
spk05: We'll hear next from Dana Telsey with Telsey Advisory Group.
spk03: Good afternoon, everyone. As you think about the plan for fiscal 21 of showing this expense leverage in adjusted EBITDA, what levers are you working with in order to get that leverage investment versus spend or is it top line? And then on the product side would be increasing penetration of active. How does that differentiate in terms of margin and what percentage of the business you think it goes to? Thank you.
spk04: Yeah, thanks for the question, Dana. I'll probably take your first one around active. You know, our active business actually has really great growth margins. You know, we have in some of our business lines, just in men's as an example, we have an exclusive brand called O1 Algo that's been doing really well that, you know, that has great margins, an exclusive brand of ours. And we actually have a pretty good balance of branded product, EB, lesser known active brands, as well as the active brands that people know that we've talked about. And so active, I think, will continue to contribute to the margin profile. There's nothing we're concerned about there. I'll have Mike take kind of the first part of your question around kind of more broadly where we're seeing that leverage come from.
spk10: Yeah. Hey, Dana. I mean, there's a few things. You've called it out. Top line is probably the biggest driver of it. But there is just less hiring that we'll be doing in fiscal 21. It's always what we've talked about. When we don't need to hire against amazing initiatives, then we won't. But we always have like a whole steady state of amazing things to do. But I think it's mostly pipeline that's driving it and just running the business better. I mean, we've had leverage in past years almost every year and variable expenses we've called out before as places that we've gotten leverage, I think, every year that I've been at the company. So it's running the business better, but mostly coming out of pipeline.
spk03: Thank you.
spk02: And from Baird, we'll hear from Mark Altwager.
spk10: Good afternoon. Thanks for squeezing me in. I also wanted to follow up some of the marketing backdrop. Maybe first, can you talk about some of the efficiencies you're seeing in the various channels and maybe how you're feeling about ROIs relative to earlier this summer? And then separately, given this unique moment here with customers accelerating the adoption of online shopping, Many perhaps haven't refreshed their wardrobes in a while, given the pandemic and work from home. Just curious if there's any change to your approach to advertising over the fall and holiday this year, which is how you've approached it historically. Separately, just for Mike, when you spoke to leverage, you had the caveat in there that you'll be responsive to opportunities on the advertising front. Curious if your thoughts on that 9% to 11% range have changed at all. I guess you were slightly below the midpoint of that in fiscal 2020, so I'm trying to get a sense of how much of a swing factor that could be in fiscal 2021.
spk13: Thank you.
spk04: Yeah, thanks for the questions, Mark. In terms of anything we've seen, the efficiencies that we're seeing in July, August, I mean, this is really as we've been able to ramp up marketing again and You know, spending less in June, May, in those prior months was actually not a result of efficiency, but it was really about our capacity. And so, you know, I think what we're seeing is that, you know, since the pandemic and since people see this as being, you know, kind of a less temporary way of living, that there is more and more demand for an offering like ours and that Our message is around being able to have personalized selections of apparel, to be able to shop from the comfort of your own home, that that value proposition is really resonating. And we're seeing that really across kind of all of our channels. And, you know, I think, and as Elizabeth alluded to, I think one of the opportunities even incrementally to all of this is as we think about having direct buy and having direct having products that is kind of standing alone outside of our site, then we would actually be able to use channels like SEO in ways that we haven't historically. And so those are, I think, other reasons that we're optimistic on the marketing front. But, you know, given your question around, like, are we going to change any of our approach in terms of channel shift on marketing? You know, every day we're always looking at ROIs. We're always looking at, you know, where we're seeing better ROIs on different messaging and where we're seeing on different channels. And so, We have a big data science team that's devoted to this very exercise. And so we are always looking at our channels to understand are there channels that are doing better or worse or places we should invest more in. And so we will continue to do that. And so there will undoubtedly be a shift that happens in between channels. But I don't think that there's really big significant changes that we're anticipating now. But the fact that we have a very diverse set of channels to to market, to be able to choose from, and to be able to shift dollars to and from means that we can always be pretty flexible to make sure that we're taking advantage of channels that are working really well for us. Mike, I think there's a second question there around just how we're talking about the long-range marketing spend.
spk10: Yeah. I mean, Mark, you picked up on it.
spk14: I mean, I think, and Katrina talked
spk10: And we will continue to have a very ROI-focused approach to how we're spending our marketing dollars. But again, there is a chance that when you see the government market in the suit, which is a share, and I'll tell you the percentage sale needs to pre-populate because of how comfortable it is. and the contribution margins that we've seen. So, you know, more to come, but again, it will likely be opportunistic if we're in the market and we see opportunities to take share on a, you know, on a very comfortable ROI basis.
spk02: And that will conclude today's question and answer session.
spk05: At this time, I'd like to turn things back to Katrina for closing remarks.
spk04: Thank you, everybody, for joining us today. We look forward to keeping you up to date on our business in the quarters to come. Stay safe.
spk05: And that will conclude today's conference. Again, thank you all for joining us.
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