Stitch Fix, Inc.

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

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.

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.