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spk11: Good day, everyone. Welcome to the Stitch Fix first quarter 2021 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, sir.
spk12: Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2021. 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 Q1 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 a 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 the 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.
spk05: 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 strategies, as well as a press release announcing the appointment of Dan Jetta as our new Chief Financial Officer. Today, I'll be sharing our first quarter results and highlighting three key themes that position us to accelerate top line and client growth in the year ahead. First, our business has great momentum and reached several multi-year highs in Q1. Second, the secular shift to online shopping and the share gain opportunity we've discussed in past quarters is well underway, and we expect accelerating active client growth to play a significant role in our full year outlook. And third, we're enhancing our fixed and direct buy offerings to expand our addressable market, deepen client engagement, and grow wallet share over time. Before I dive into these themes, let me first discuss our Q1 results. In Q1, We generated net revenue of $490 million, reflecting 10% growth year-over-year and 11% growth quarter-over-quarter. We delivered net income of $9.5 million and adjusted EBITDA of $6.9 million. During the quarter, we grew our active client count to nearly 3.8 million. This represents a year-over-year increase of 347,000 clients, our 10% growth, and a quarter-over-quarter increase of $240,000, our highest sequential client addition on record. This surge of new clients who are still early in their spending journey with us resulted in an expected decrease in year-over-year net revenue per client of 4%. Even early in their journey with us, these new clients have demonstrated very strong purchase behavior in their first fixes that we believe to be a strong signal of future satisfaction, retention, and lifetime value. Q1 was a quarter that saw great momentum in client growth and in our business more broadly. Our offering continues to benefit from strong product market fit. In a time period where many traditional brick and mortar retailers are still experiencing double-digit year-over-year revenue declines in their most recent quarter, we delivered an increase of over 240,000 net active clients quarter-over-quarter, a return to double-digit year-over-year active client growth which we expect will increase further this fiscal year. In their very first experience with us, these recently acquired fixed customers are demonstrating both strong purchase behavior and satisfaction. We previously shared a measure that we internally refer to as a successful first fix, which we define as the percent of clients who purchase at least one item in their first fix and look forward to their second fix. In each of the last two quarters, nearly 80% of our first fixes met this criteria, which is the highest level we've seen in five years. Even as we acquired a high volume of clients, we're very pleased that we're able to meet their needs and preferences. The strength of these recent cohorts are due in part to our ability to shift our inventory to meet the client in the moment but also our longer term efforts in improving our recommendations by leveraging our growing data set to bolster our style graph and power our algorithmic models. We believe that establishing a favorable first six outcome is a strong indicator of future client engagement and retention that will serve as a tailwind in the quarters to come. We saw strong client outcomes in our newest clients and also in our broader existing client base. We're pleased to share that across our entire fixed offering We've increased success rate every year on record, and in Q1, we delivered our highest level yet. We believe this strength is driven by our ability to leverage data to generate insights that allow us to relentlessly adapt our inventory assortment and continually strengthen our recommendations. In women's, for example, we've grown our athleisure assortment as a percent of our women's inventory by over 150% compared to pre-COVID levels, helping us to serve elevated demand for these products and meet our clients' work-from-home needs. In kids, we've used sourcing speed to our advantage. We're now sourcing a meaningful portion of some of our most in-demand styles using a rapid sourcing model, where product arrives to our distribution centers in as little as 10 weeks. This contributed to a strong back-to-school season in which we grew first fixed shipments by 60% year-over-year. We've also reacted to the current environment by expanding our assortment of more affordably priced products across categories, which have resonated well with women's and men's clients and led to outside success rates. As we look ahead, we have growing confidence that our track record of strengthening personalization capabilities paired with our nimble supply chain will allow us to deliver better client and business results. As we look to the remainder of fiscal 2021, our strong foundation of client and business trends sets the stage for the quarters ahead. We are pleased to reinstate annual guidance that reflects the momentum we're seeing. As Mike will discuss later, we expect to deliver net revenue growth of 12 to 14% year over year in Q2, and to drive further acceleration in the second half of the year, resulting in full year revenue growth of 20 to 25% year over year. There are several drivers underpinning this outlook, but most notable is our expectation of further acceleration of our active client growth. While the apparel industry is currently contracting, we expect to take share and drive higher new client signups as the relevance of our model of personalized discovery and convenience grows. In Q1, we delivered first fixed growth exceeding 25% year over year. As a large majority of our new clients choose to receive fixes on a recurring cadence, We expect this will drive strong engagement and repeat purchase behavior in upcoming quarters. In addition, we shared in September our plan to hire over 2,000 stylists outside of California, and we're pleased to share that due to such strong demand for our styling role, we've already met this hiring target and feel well-positioned to serve higher fixed demand in the remainder of fiscal 2021. In addition to our strong outlook for fixed demand, we believe that DirectBuy will serve as another catalyst as we attract new clients, convert prospective clients, and reactivate lapsed clients. We've continued to see DirectBuy's penetration grow across our men's and women's client base, and we plan to introduce it to new and prospective clients later this fiscal year. These strong trends we've seen in our business, combined with the ongoing market share shift to Stitch Fix, gives us excitement for the quarters ahead. In Q1, the combination of record quarterly client additions, strong auto-ship retention, multi-year highs and successful first fix rates, and our highest success rates to date demonstrate the resonance of our offering and the power of the personalization engine that fuels our business. With that, I'll hand it over to Elizabeth to share more on the enhancements we're making to our direct buy and fix experiences as well as some of the exciting marketing initiatives we're investing in to capitalize on the retail share shift that is underway.
spk07: Thanks, Katrina, and hello to all of you on the line. I'd like to begin today by sharing more about how we continue to evolve the offerings within our Stitch Fix ecosystem, which we believe will give us more ways to win. Our goal has always been to deliver the most personalized shopping experience to every client, And what has enabled us to do this so well is the nearly 10-year advantage we have building an algorithmically driven engine for highly personalized apparel-based shopping. As I'll share in a moment, we're currently in the midst of further enhancing our core fixed experience, which has generated billions of dollars in revenue since the company's inception. In addition, we've embarked on our next form factor, direct buy, which we expect will expand our addressable markets deepen client engagement, and grow wallet share over time. Let me begin by sharing more on how we're enhancing our direct buy experience, including leveraging the usage of our proprietary StyleShuffle experience. Since its launch, StyleShuffle has proven to be a highly engaging experience. We have collected over 6 billion ratings with millions of clients having played. During Q1, we've seen, on average, more than 50% of our app-engaged users playing daily. With such strong client engagement, StyleShuffle has evolved into a key vehicle for data collection that has strengthened our algorithms and allowed us to build enhanced features that improve client outcomes. We think these elevated levels of engagement showcase the opportunity that we have to create a powerful feed-based commerce experience. that allows clients to become a partner and co-creator in designing their personalized Stitch Fix storefront. As such, in November, we expanded our direct buy capabilities with the beta launch of Shop by Categories, which leverages our rich style shuffle data as well as the valuable insights we've learned about our clients over time to create a highly personalized shopping feed for each client. Underlying these distinctive data assets is a proprietary style graph that we leverage for each individual client feed. Each category shop is built around specific themes, like athleisure, sweaters, or seasonal staples, which are curated using each client's real-time style shuffle likes, along with algorithmically generated recommendations inspired by these likes. Through this item-based format, clients now have the ability to purchase specific items that they see in StyleShuffle. Over time, we intend to algorithmically generate a wide array of categories relevant to each individual client based on signals we gather from them across various facets of our experience. While still early and available to a limited number of clients, we have seen strong traction with Shop by Category to date. with approximately 80% of clients who have engaged with the offering, completing at least one style quiz, demonstrating how fun and relevant this personalized shopping experience can be. It also complements Trending for You, our outfit-based recommendation feed, enabling higher-intent purchase occasions for specific items. Shop by category is just one example of how we're leveraging our data flywheel to create a differentiated, engaging, and personalized shopping experience. The offering addresses a broader range of client shopping needs and marks an important step in our evolution of direct buy as we move closer to using it as a vehicle for client acquisition in the quarters ahead. Specifically, we believe this new category-based experience will provide a compelling gateway for the cold start experience where we can provide relevant, personalized recommendations to clients as they enter Stitch Fix for the first time. With our fixed form factor, we're enhancing the client experience to leverage our styling team to deliver stronger outcomes. From a survey of our prospective clients, those who have completed our style profile but not yet converted to ordering a fix, approximately 45% responded that they would convert if they had the ability to preview what they might receive from our stylist-based experience. Based on this insight, and the magnitude and potential that this prospect base represents, we recently rolled out an initiative in the UK called Fix Preview, where we show clients proposed items for their next fix. This new experience enables clients to engage more directly with their fix before it ships and have more agency in selecting the items they receive. We began testing this feature in August and recently introduced it to 50% of UK clients based on strong early results that demonstrated higher client satisfaction and retention, as well as improvements in keep rate and average order value. Based on this early success, we plan to roll out this fixed preview capability to 100% of UK clients, and we have begun testing it with US clients with the intent to learn and scale in the quarters ahead. We believe fixed preview appeals to an even broader set of clients and allows us to drive customer confidence by efficiently showcasing our ability to pair them with the products they will love. As a result, we believe that fixed preview, along with our ongoing momentum in direct buy, will allow us not only to attract high-quality clients, but also to convert our large prospect population that we estimate is in the millions, clients who are at the precipice that have not yet converted to Stitch Fix. As we continue to focus on accelerating our penetration of a redefined apparel retail market with our superior personalized offering, I'd like to briefly touch on some of the marketing innovation that is allowing us to capture share. Given ongoing dislocation in the brick and mortar retail space and our belief in the increasing relevance of our personalization model, we're investing in marketing and leveraging our predictive modeling capabilities to capitalize on the share shift underway. One of these exciting new initiatives is feed-based product ads. Beginning in June, we began to roll out ads which dynamically matched creative selections based on algorithmic recommendations of what will most resonate with each individual user. To date, we have seen meaningful improvements in these CPAs, with more than double-digit decreases compared to other ad formats, and we expect increased spend in this medium given the efficiencies. To capitalize on significant store closures as well as an influx of clients migrating to online shopping, we're also launching highly targeted campaigns across specific geographies to highlight our value proposition versus peers and attract customers whose spend is more likely to be up for grabs. While new, we're continuing to test this highly targeted initiative and we plan to share more on our progress in the quarters ahead. As you can see, we remain very excited about the opportunity that lies ahead and our ability to capitalize on a forever changed apparel retail landscape. Our time is now to connect with new customers, understand their individual needs, and help them discover relevant, radically convenient, and fun ways to shop and find what they love. With that, I'll hand it over to Mike to provide more on our financial performance and our outlook.
spk02: Thanks, Elizabeth, and hello to everyone on today's call. We're pleased with our first quarter results and have continued to see strong momentum across our business that gives us confidence in our Q2 and full year outlook, which I'll share in a moment. But first, I'll provide more color on our Q1 results. In Q1, we generated net revenue of $490 million, representing 10% growth year-over-year and 11% growth quarter-over-quarter. In the quarter, we grew active clients to nearly 3.8 million, an increase of 347,000 clients and 10% year-over-year, and over 240,000 net active clients quarter-over-quarter. Net revenue per active client of 467 declined 3.7% year-over-year. As Katrina referenced earlier, this is driven primarily by our recent surge in new client growth. During periods of elevated growth from clients who are early in their spending journey with us, revenue per client may temporarily lower until these new cohorts of clients have more time on our platform. In addition, the trailing four-quarter calculation includes the impact of our Q3 2020 COVID draft, which will be lapped later this year. Q1 gross margin was 44.7%, representing a 60 basis point decline from the same quarter last year, driven by higher shipping expense partially offset by lower inventory reserves and clearance rates. Advertising was 10.5% of net revenue in Q1 compared to 11.4% in Q1 of 20 as we capitalized on efficiency gains in the quarter. Other SG&A excluding advertising was 38.2% in net revenue in Q1 compared to 33.8% in Q1 of 20 driven by ongoing investments in technology talent and the associated stock-based compensation, or SBC, expense, as well as higher marketing expenses year-over-year. Q1 adjusted EBITDA, which excludes SBC, was $6.9 million, reflecting solid revenue growth and lower inventory reserves and clearance rates, offset by higher shipping and marketing expense. Q1 net income was $9.5 million, and diluted earnings per share was 9 cents. Our net income this quarter included a tax benefit from the net operating loss carryback provisions of the CARES Act. And finally, in Q1, we delivered free cash flow of $51.4 million, reflecting our strong sales and margin performance, timing of payments, and our capital light model. We ended the quarter with no debt and $429.9 million in cash, cash equivalents, and highly rated securities. Now on to our outlook. Our robust demand trends along with our improved supply side position give us greater visibility and confidence to reinstate our quarterly guidance and share our first quarter outlook. While we have planned for a wide range of scenarios, one note of caution. Our guidance today does reflect that our fulfillment centers will continue to remain fully operational and won't face any significant disruption from potential government-related COVID mandates. First, on Q2, we've seen improving growth trends across our business since the Q3-20 COVID trough, and we expect further acceleration in Q2 and throughout the back half of fiscal 2021. In Q2, we plan to deliver net revenue of $506 to $515 million, reflecting 12% to 14% growth year-over-year, which we expect will be fueled by active client growth. In past Q2 periods, we traditionally pulled back on advertising during the holiday season, given that clients tend to be focused more on intent-based purchases and gifting to others, and as a result, we saw lower marketing efficiencies. However, with our direct-buy offering, we can now play a greater role with clients in tent-based shopping during the holiday season. As such, we plan to lean in and anticipate that advertising as a percentage of revenue will be between 11% and 13% in the quarter. We will continue to take a disciplined approach to our marketing strategy, focused on positive ROI across a diverse mix of channels, and believe that this investment will attract more active clients to our offering in Q2 and also be accretive to our additions in the back half of the year. Factoring in this investment, we expect Q2 adjusted EBITDA loss in the range of $6 million to $3 million. Now I'll turn to our full-year outlook. With the momentum we've seen in our new client sign-ups and the expected expansion of our direct buy experience, we see further opportunity to take share and drive growth in 2021. Specifically, we expect our year-over-year active client growth to continue to accelerate and allow us to deliver net revenue of $2.05 to $2.14 billion, or 20% to 25% growth year-over-year. This implies growth This implied growth between 29% and 40% year-over-year in the back half of this year. Given our opportunity to invest to drive growth over the course of this year, we will hold off on providing a specific adjusted EBITDA range at this time. We plan to revisit it in future quarters. In summary, we're very pleased with the start of our year and remain confident in our fixed and direct buy momentum paired with accelerated active client growth will position us well for the remainder of fiscal 2021. Before we turn to questions, I'll pass it back to Katrina to share more on our exciting CFO announcement.
spk10: Thanks, Mike.
spk05: Following a very thoughtful and extensive search, we're thrilled to be welcoming our new CFO, Dan Jetta. Dan joins us from Amazon, where he spent the last 15 years. His background and experience is an ideal fit to help us to continue to scale and drive the next phase of Stitch Fix's growth. Dan officially started today, and we are excited for you to have a chance to meet with Dan in future investor meetings and to hear from him on our second quarter earnings call in March. I would also like to thank Mike for his nearly nine years of leadership and partnership at Stitch Fix. Most recently as our interim CFO and COO, he also launched and ran our men's business, had a critical role in launching the UK, kids, and so many other milestones along the way. Not only has Mike achieved a lot, but he's done it in a way that has inspired, challenged, and enabled our business and our people to grow. Thank you, Mike, for everything you've done for Stitch Fix. We're excited that you've now joined our board and will continue to be part of our journey. With that, we're ready to open up for questions. Operator, over to you.
spk11: 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 Ross Sandler with Barclays.
spk03: Hey, congrats on the quarter, guys, and Mike, congrats on the future plans. My first question is just on the advertising expense guidance. So you guys normally don't ramp up the marketing in the holiday quarter for obvious reasons that you just mentioned, but if we use that range that you provided, it looks pretty massive year on year, like 70%-ish. or thereabouts. So what are you seeing in terms of CAC relative to that expense ramp? And are you going to see the, I know you report clients on a TTM basis, but is the current quarter client growth going to reflect something closer to that ad spend growth? Any color there would be helpful. And then if I can squeeze one more in. Sorry for the long question. the 80% conversion on, on first fixes. That looks great. Um, and can you guys parse out how much of that is coming from all the different things you're doing around personalization versus, uh, some of your customers probably have more disposable income right now, uh, going towards retail and going towards e-commerce than they are, uh, other, uh,
spk05: discretionary spending category so that macro or that stuff that you're seeing in terms of the personalization thanks a lot yeah why don't and thank you very much for the questions Ross why don't I actually just take your question on successful first fix on the 80% number and then and on the advertising side I think Elizabeth and Elizabeth and potentially might can weigh in as well On the 80% successful first fix metric, I think it's probably a little bit of both honestly. I think there is no question that the macro environment right now is kind of enhancing and increasing our product market fit. I think as more and more people are looking for e-commerce solutions, and as more and more people who may never have bought jeans as an example online are trying to figure out what are the best tools out there to help me to find jeans, I think there's no question that the macro environment and the drive towards e-commerce is definitely a contributor. That being said, we are always A-B testing improvements in our algorithm. You know, we definitely really believe, especially in women's and in kids, that the speed with which we shifted the assortment to be able to meet our client where we were, we've talked about this for the last couple of quarters, but being able to get out of the categories like workwear and the things that are less relevant and be able to be in the categories like athleisure and and even to some extent sport, like those are definitely changes that really helped our business to kind of not just survive, but really thrive during this time. And so, you know, I think it's a combination of both the macro environment as well as kind of things that we've done to be able to improve those client outcomes. And then I'll pass it over to Elizabeth to answer your question on marketing.
spk07: Yeah, thanks for the question, Ross. You know, I think a couple things to point out. One is just we've overall seen this really significant sign-up rate of first fixes, which we talked about in Q1. And I think we're like the shoulders of Q2, not sort of the peak of what we just were in in terms of Black Friday and Cyber Monday, which really is somewhat counter-cyclical to our model, but more just the ability that we're seeing with consumer shifting so dramatically online right now. We're anticipating to have opportunity there in kind of the later weeks of December and into January, and January tends to be a very good month for us overall. And just the kind of efficiencies that we've seen in CPAs have been really significant, albeit typically not during these peak holiday weeks. And so that's a big part of it is that first fixed opportunity. The other is just the opportunity to reactivate both dormant clients. as well as beginning to experiment with our prospective client base with our direct buy offering. And so all of those things are providing opportunity. And, you know, it is a range that we're giving on that marketing spend, and we, of course, make dynamic decisions as we go. We share that 11% to 13% range, and it will depend on what we see in the weeks to come over the course of the quarter. But, you know, we're basing it on the optimism of what we've seen in terms of clients really migrating to our model over the course of the last several months.
spk08: We'll hear next today from Yusuf Squally with Tourist Securities.
spk14: Hello. Hi. Sorry about that. I had you on mute for a sec. Congrats from me as well, and Mike, best of luck. Two quick questions. First, can you maybe speak to the promotional pricing environment, activities going on there? How are you guys able to hold the line, which is pretty impressive, I saw. the 4% decline in our pool, but it seems like, again, that may not have anything to do with the promotional environment, but it would be great if you guys could comment on it. And then on the one particular category which you highlighted last quarter, and that's the plus category, can you just kind of speak to the opportunities there? We've seen some pretty big announcements around store closings for some large players like Colleen Bryant and other offline players. So how big is it for you guys today, and how big is it of a needle mover for you over the next several quarters? Thank you.
spk05: Yeah, thanks for the questions. On the first thing around promotional environment, I mean, look, we can certainly see it. I think we talked about it at one point over the summer. Obviously right now is a time when we see a lot of promotional activity. But the reality is because Stitch Fix is a place where people really are buying and investing in clothes that they want for the long haul, I think that the thing that we win on is fit, on relevance. Those are things that I think a lot of other retailers are not as good at delivering and, frankly, probably aren't as relevant for some of the categories that do really well in Stitch Fix. I think if you're thinking about a pair of jeans or even a pair of sweatpants that are going to be the sweatpants that you wear every single day, You're not necessarily looking for the sweatpants that's 80% off. You're looking for the one that fits you really well, that feels really good on your body. And so, you know, I think that, you know, those, the kind of the capability of being able to personalize has actually never been more relevant in the kind of crowded environment that we have today. And so, you know, I think that, and the other thing that I would mention is just, we did mention in the call that, you know, we have, you know, of course, during this kind of time of economic challenge, We certainly are seeing success in some of those lower-priced products. I think especially in our men's and women's businesses, we have reacted to the macro environment in that way and seen a lot of success there. On the question around plus size, it's absolutely a significant opportunity. I think the store closures that we're seeing in plus size, frankly, I think that we're seeing store closures really across the board in apparel retail. And, you know, I think Plus Size is certainly a place where there's been a ton of acute opportunity for a while. And that's a business that we've seen be enormously successful leading into COVID, certainly into COVID right now. And we've continued to invest in making sure that we have the best product, that we have the right, that we have the best fit. And it's a category that, you know, I think is definitely one that will drive a lot of growth for us in the future.
spk10: And I think, you know, we'll be there to be able to capitalize on the trends that come.
spk08: We'll move next to Heath Terry with Goldman Sachs.
spk02: Great. Thank you very much. Katrina, when you look at the combination of direct buy and the trends that you're seeing in keep rate, how would you characterize what's going on in terms of spend per customer, and particularly to the extent that you're seeing segmentation within your your customer base. Is there anything notable that you would say is happening, whether it's regional, whether it's time your customers have been on the platform, new customers versus old customers, in terms of trends that you're seeing within that spend now that you have multiple options for your customers to be able to spend with you?
spk10: Yeah, I can... I can kick off and Elizabeth may have something to add.
spk05: You know, at a high level, honestly, I mean, what we're seeing is that the two experiences are really additive. And I think some of what's really exciting about what Elizabeth shared in the category look and direct buy is that, you know, there are times when you are generally looking for ways to refresh your wardrobe. And then there are also times when you are looking pretty specifically for things And you still want a personalized view, but that, you know, you have kind of a category or a look or an aesthetic that you're specifically looking into. And so, you know, what we're finding is that these are actually, you know, I think there is a broader hypothesis that like, you know, direct buy and fixes will allow us the kind of combination of those two things will allow us to address, you know, many more types of clients. And what we are also realizing and it's really also unlocking I think both client opportunity, but also pretty significantly on the wallet share opportunity side where if you are looking for a down jacket to eat outside as an example, you would actually love to buy that through Stitch Fix in a more frictionless way. And Direct Buy is going to be a great way to do that. And Elizabeth if you have anything to add.
spk07: Yeah, I mean, I think what we're overall seeing is just we're fulfilling more occasions for the consumer and really believe that we are providing the best browse-based and discovery-based shopping in a world that for online has been more characterized by search. And so what we're seeing right now in the marketplace with so much structurally shifting from offline to online, you know, we believe something like 10 points of share might shift in the next several months, but it usually was around one or two points a year. is those purchase occasions that used to be in a store when you were looking around. We're now making those more easily available through our experience and that notion of the shopping feed and especially what Katrina was alluding to with the categories where people can input their preferences and immediately see recommendations on categories they're looking for. That is highly additive to the surprise and delight of our fixed experience for those occasions that you might have gone into the store to look for something. And so there's a real complementarity, and it does show up very much in the penetration of the categories we're seeing. There are meaningful differences of, you know, more accessories, more footwear, you know, more men's pants than we would see in our fixes, as well as some interesting trends that we're seeing in price points. The people, you know, leaning into things that they really want to get. We have seen kind of a deepening of higher price points with consumers. We usually think of being a little bit more price sensitive. which we think is just a great signal that we're curating and surfacing items that are relevant to the consumer.
spk09: Great. Thank you both.
spk08: From RBC, we'll move next to Mark Mahaney.
spk01: Okay. Thanks. Mike Smith, congrats. That's a heck of an exit. Congrats on what you've been able to succeed. Wishing you all the best going forwards. A couple of questions. I really like this idea of the fixed preview. I would also think that that would improve success rates. So did you also see that in the UK? I can't imagine that it would do anything but elevate those when you roll them out in the US. So just maybe talk about how long you plan to test before if you get good results, you would actually roll it out into all of the US. And then on these record number of customer ads that you had, could you just peel that back a little bit. How much of that was due to gross ads versus reduced churn or increased customer retention? All of these new, this functionality, the improved, you know, the relevance of personalization. I would imagine the bigger impact has been on customer retention, reducing churn, but any more color on that would be really helpful. Thank you.
spk05: Thanks for the great question, Mark. Why don't I start with actually the client ad side, and then we'll have Elizabeth who can generally talk a little bit more about fixed preview. So, I mean, it's probably a little bit of both, but the bigger driver is actually first fix. And so what we've been seeing is that we've seen great efficiency. We've seen really strong product market fit. So new client ads are really the most significant driver on that 240,000. And, of course, we still see really strong retention trends. So that, of course, to your point, that contributes as well. But we've seen strong retention trends for a while, and so the bigger move on the dial is definitely the new client kind of goodness that we've been seeing. Of course, we still see opportunity for those to get better, and we've signaled a little bit of that, especially on the new client ad side. But definitely a lot of good trends we've seen on that side of the business. Elizabeth, do you want to talk about fixed preview?
spk07: Yeah, thanks so much for the question mark and I think you really are spot on in terms of the intuition of that being able to drive higher success rates in AOV and we absolutely have seen that in the UK. We're weeks into beginning to roll it out in the US and really in testing mode right now to make sure it's a great experience and obviously we have a more established client base here and some differences that we want to understand better. But overall, the early signals are positive here as well. And so, you know, we're actively working on, you know, how can we scale this up? How can we make it a better and better experience? And, you know, it's both for the clients that are already in our pipeline, but also making people aware that they can preview things before they buy it, which we think will have an impact on our conversion funnel as well. So we're really excited about it. And just in general, I think what gets us excited is just our clients' happiness is absolutely going up and just being able to create the right experience, it's great. And the other thing is, you know, the way we've been testing it is you can opt into it. We're making it available. And, you know, what's interesting is not everybody opts in. A lot of people are. But some people do love surprise and delight, and so we want to make sure we continue with that. And for those who want to have more of that peek into what they're getting and some engagement with the stylist ahead of time, we think this is going to be a great offering, particularly for those prospects that are the ones that I think in particular have been looking for this. So, yes, it's really a positive set of signs that we've been excited to more fully roll it out.
spk01: Thank you, Elizabeth. Thank you, Katrina.
spk11: We'll move next to Corey Carpenter with JPMorgan.
spk13: Great. Thank you. I had two. Maybe starting on direct buy, customers have a number of ways to interact with the product today from shop by category to shop new colors, just to name a few. So I guess my question is curious, Which of these direct buy initiatives have had a base impact? Where are you seeing clients engage with the most thus far? And looking forward, where do you still see the most opportunity from a product perspective? And then as a follow-up, maybe for Mike, understanding you're not providing specific guidance, but curious if you still expect to see leverage the other year. And if not, maybe some of the puts and takes there. Thank you.
spk05: Great, thanks. I'll probably have Elizabeth talk to your first question here, and then Mike can talk a little bit more about your leverage question.
spk07: Yeah, hi. Thank you, Corey, for the question. You know, the number of ways that we're beginning to roll out the experience, maybe just to step back for a second, we launched first with Shop Your Looks, which were curated outfit feeds based on showing outfits based on items you purchased in the past, which made a ton of sense for our embedded customers who had already bought items. Then we watch Trending for You, which is the output-based feed that is generating recommendations just based on anything that we know about you. And that's been very successful. And that's really been the bread and butter so far of this nascent direct by offering. The category offering, we just began in an allocation of a beta in November. So it's a little too early to tell, you know, which are people using the most so far. We really see them as complementary because The outfit feed is very much surprise and delight and just sort of getting a sense of really browsing and seeing what you might be interested in, whereas categories is a little bit more like, oh, great, there's sweaters. I'm going to go find a sweater, and I was looking for that, or a leisure, and we'll be expanding those categories over time. So I think each lends themselves to browsing, but probably the categories are more indicative of things that are closer to search or that you might be looking for a particular item. So we see them as reasonably complimentary, and also the outfit feeds we're finding are really inspiring to people because they can recognize and understand how to use that item. So I'm sure we'll share more in the quarters to come as we begin to scale the full experience up and offer more features, but the intent is really to be able to address all of the different purchase occasion needs that our customers have.
spk02: Hey, Corey, this is Mike. I can take the leverage question. As I said in Q4, when we see these opportunities to invest and given the macro environment that we feel like there's plenty of opportunity to take share and we're seeing really healthy returns on marketing, we're going to invest. While we didn't provide any specific adjusted EBITDA guidance, I would expect us to continue to invest in the back half of the year when we see those opportunities. I think more to share in future quarters to give kind of a better answer on actual leverage versus no leverage. But, you know, we're pleased with what we're seeing kind of in the marketplace and kind of returns on investments that we're making.
spk09: Great. Thank you.
spk11: We'll hear now from Erin Murphy, Piper Sandler.
spk06: Great. Thanks. Good afternoon. I have two questions for me as well. First on the sales guidance, if we were just to take the midpoint, implying to the back half, that would be the highest dollar growth that we've seen on you guys. Are there other new initiatives baked in, or is this just the benefit of scaling some of these opportunities like direct buy, fixed preview? And then my second question is, just in the shareholder letter, you talk about chasing inventory. I guess I would love to have an update on what you're seeing from the vendor community and how you're seeing the balance between vendor brands versus your own private label. Thank you.
spk10: Thanks for the question, Erin. I will try to take those.
spk05: I think on the sales guidance, the way that you can really think about it is as we acquire new clients, those clients generate some revenue in that quarter, but they also just generate kind of continued compounded revenue in the quarters to come. And so when we see a quarter like this last one, where we added 240,000 clients, and we actually, just to step back, since COVID, we've kind of been building momentum, both on the revenue side, but also in the building of the client-based side. So that momentum that we see in clients benefits us now, but actually really benefits us as we look out to the year. And so it is the new client growth that we're seeing. It's the new client growth that we've already had. It's also new client growth that we are anticipating as we are I'm looking into the months ahead. It is the goodness that we've been seeing in the business around success rate around retention rates. So all of that is slowed in. There is some initiative work in there. I mean, direct buy certainly has been a significant contributor. And we believe that as we continue to innovate and direct buy that can continue to contribute. You know, things like fixed preview, honestly, are a little bit kind of, you know, too early to really know exactly what that's going to deliver to the business. But, you know, I think there's a lot of, at any given time, you know, we share in these earnings calls a few of the exciting things that we're working on, but we're running A-B tests all the time. And, you know, we're always including kind of a balance of those kind of initiatives and hypotheses into our model. But really, you know, a lot of the A lot of the growth is really around just our existing client base and what we've seen, and also what we're anticipating as we look out into the quarters to come. On your second question around chasing inventory, it probably depends a little bit on business line also. In a place like Kids as an example, we've really been able to leverage our exclusive brands to be able to deliver that quick turn product, to be able to grow that business as we've seen really great demand on that side. And, you know, I think in a place like women, you know, we're still very reliant on our vendor base. And, you know, on the women's side, I think what we found is that, you know, our vendors are in a point now where they are really having to choose who do I believe is going to be a partner with me for the long term. And, you know, we are really happy that we are basically always at the top of that list. And so, you know, while it's definitely been a challenging time for everybody as, you know, demand has been up and down and preferences have been all over the place, At the same time, I think it's actually helping our vendor community stronger and to be better partners with us. I think they've been really excited that we've been able to deliver growth for their businesses during this time, and they see us as really valued partners. And so as we are doing things like exploring new inventory models and trying to figure out ways that we can be more flexible on the inventory side, we are finding that those relationships with our vendors are stronger than ever. um so it's you know it's definitely a balance and business by business it changes but um that you know we feel really really fortunate to be that to be that vendor of choice but be that retailer of choice for our vendors great thank you and from key bank capital markets we're here here from edward roma hey guys thanks for taking the question mike best of luck going forward um i guess just uh two quick ones for me i guess first
spk15: You know, obviously some exciting data points on direct buy. From a logistics perspective, I guess how much more investment is necessary as you continue to scale that business? You know, can you deliver or do you need to kind of moderate growth there? And then second, as a bigger picture question, you know, hopefully we all start to live life again sometime in calendar 21. Do you anticipate a big fashion shift? And I guess how do you start to position your inventory or your buying around a potential resurgence in apparel demand? Thank you.
spk05: Thanks, Ed. Why don't I answer the bigger picture question, and then I'll have Mike talk a little bit about logistics. On the big picture question, I mean, it's a great, you know, I mean, all of these, I think this last nine months has been a real test of everybody's resilience and flexibility. And I mean, you know, I think at this point we all acknowledge that we don't have a crystal ball. But we, of course, you know, I think the thing that has been our biggest asset has been flexibility and the ability to be able to learn really quickly what changed and react. And so rather than trying to predict the future, I would say that our efforts are really channeled towards how can we make sure that we are the most flexible that we can be, and how can we make sure that as behavior changes or as we see things that are different that we can see it first and we can react quickly. And so kind of the reference point that we made to the kids' inventory and being able to use a rapid sourcing model And that's kind of an example of something that we're doing there. And so, you know, I think, you know, we do expect that there will be a shift. I mean, how things will shift, at what rate things will shift, like when will things shift? I mean, these are still, you know, questions we don't have the answers to, but we want to be really prepared when those things start to change that we can really react to it. Mike, why don't you take the question on logistics?
spk02: Yeah, I mean, I'll start with more generally, and then I'll get to a specific question that I mean, generally, I'm so proud of our team kind of on the supply side with warehouses and styling. Katrina mentioned kind of being able to hire into the stylist need that we had and sort of exceeding our expectations for how quickly we got back up to speed and styling. But warehouse is the same thing. I mean, they're really, really resilient kind of during a very tough period. So specifically on direct buy, you know, it helps to have a couple quarters kind of, you know, in the past of having done direct buy. But we're super well positioned to handle direct buy from a logistics perspective. And, you know, it's the same inventory. It's within the same four walls. So it's no different.
spk09: So we're ready. Great. Thanks, guys.
spk11: And Rick Patel with Needham & Company has our next question.
spk09: Thank you. Good afternoon.
spk13: And best wishes to Mike as well. I was hoping you can expand upon the offering of more affordable price products across women's and men's. Any particular categories or brands that call out as you think about the evolving assortment? And should we expect this to have a negative impact on AOV going forward?
spk09: Or would you expect success from fixed preview to offset that potential pressure?
spk05: Yeah, it's a great question and I probably will only be able to answer directionally for you just because I think some of these things we are also curious to see how it shakes out. So, you know, I think what we're seeing is we are seeing more success at kind of the lower end of our price ranges as you would expect. I think, you know, you've heard this in other retailers' calls that, you know, I think there definitely has been some economic pressure on wallets. And so what we've really been doing is it is kind of similar inventory to what we've already had, but making sure that we have the right depth, making sure that we have the appropriate amounts of it. And that has resulted in higher success rates. And so we share that we are having the highest success rates ever in the business, and this is one contributor to that. And so when we see those really high success rates, then we see there's kind of pro and there's also an uptick in, well, there's a little bit of washing out effect in AOV because as people are keeping more things in their fixes, that, of course, contributes to higher AOV, even though we have, you know, we also have, like, I guess it's both sides of the coin, right? And then, of course, as we think about future initiative work and also, you know, I think there's a little bit of a hypothesis that this is temporal, right? And Elizabeth spoke a little bit about like what we're seeing in direct buy as an example is that we're seeing people who might be more price sensitive and fixes actually be excited to splurge in direct buy. And so, you know, I think we're not quite at a point that we're going to know where all these numbers land right now. But, you know, we're seeing great success rates. We're seeing the product resonate really well. I think we have some hypothesis that there's a temporal nature, I think, of just the economic pressure that we're seeing right now and us being able to meet the client where they are. And that's, of course, a good thing now, but may not be a permanent trend. And then things like fixed preview, to your point, those we would believe would have some pretty meaningful impacts on things like success rates and AOV in the future. You know, I think there's a lot of kind of puts and takes, but like directionally, I think you, you know, you're seeing which direction the arrows go. And I think the question for us is just like, you know, where does everything net out in the next, you know, six months or a year?
spk15: And I'm hoping we can get more insight into the plan to introduce direct buy to prospective clients later this year.
spk02: I'm just curious what that's going to look like from a consumer perspective. We still need data, you know, from their style profile.
spk09: The goal here is to use predictive analytics to attract customers that aren't in your database right now.
spk10: I think Oscar will jump in on this one.
spk07: Yeah, thanks, Rick, for the question. We're very excited about this. And you kind of hit the nail on the head of one of the questions, which is what we call from an algorithmic standpoint, like how do you make a great cold start experience and make it very low friction at the same time? And so part of what I described with the category-based shopping and the fun, engaging way of leveraging something like StyleShuffle, we absolutely think could be a part of that new entrance. We also have you know, this very significant base of prospective clients who actually already have their style profile and they probably would be very interested in this offering. And so that kind of gives us the benefit of both. And then, of course, just beginning to experiment with a new, you know, sort of introduction and onboarding flow into Stitch Fix that's probably quite a bit simpler than our typical profile for the style of flood experience. So all of those things are what we're in the flight of building and testing right now. But with a lot of confidence and optimism that we can create pretty solid recommendations, even with limited information, because we're not just using the information of that individual. We're using the information of individuals that have a lot of similar preferences like them, of which we have, you know, with 3.8 million active clients, we have a lot of benefit of being able to understand those style preferences leveraging our style graph. And so we are, you know, kind of in the early days of doing a number of tests, and to Katrina's point, we're always testing things. And so we're confident that this will be part of FY21. The exact timing of really scaling it up is yet to be seen, just to make sure that it's a terrific experience for new customers.
spk09: Very helpful. Thanks very much.
spk08: And from Deutsche Bank, we'll move to Kanaal Mehakar.
spk09: Thanks for taking the question.
spk04: Just a quick follow-up on the direct buy and rolling it out to non-subscribers. In terms of timing, and you mentioned you're doing some testing, what is the key factor that you're looking for or you're waiting for before you actually make that final go-no-go kind of a decision? And would maybe a reopening of the market kind of be a decision that plays into it.
spk09: I have a follow up.
spk05: Sure, why don't I start and I might have missed, so your first question, the first part of your question, just so I'm clear, is just what are we waiting for before we roll out the direct buy to non-clients, is that right? Yeah. And then the second part of that was?
spk04: Second part of that was, as you look at marketing, and Mike just talked about how you will invest for growth, but you will be doing it in a disciplined manner. One is, how do you intend to spend on brand versus performance around this direct buy rollout?
spk05: Got it, got it. Okay. Yeah, let me take a pass at that, and Elizabeth can certainly jump in if I missed anything. I mean, firstly, what we're really trying to optimize for is converting people into the right experience in Stitch Fix. And so we've been doing some testing around what is the best way to introduce direct buy, and what is the best way for us to actually figure out this is somebody who should be on a conversion path to fixes versus this is somebody that we actually should have into direct buy first. And so that's actually, so right now we're kind of testing to make sure we're looking at everything from an LTV perspective. And so just to be like, just to put out a real, a very real example, like if we go and acquire a thousand clients who like actually really would benefit from fixes, throwing them into a direct buy first experience actually might be degraded to their LTV. And so, you know, there's of course all of the cold start challenges that Elizabeth spoke to, but there's also this onboarding question around just how do we make sure that we get the right people into the right conversion paths and how can we make sure that we're getting that right optimization. And so, you know, we want to do some more continued testing to make sure that we are really maximizing for LTV at that very first juncture of making sure that we are kind of getting people into the first step of the right experience. And then on the second question around just how we're thinking about We've always been very disciplined with our marketing spend. We've always been optimizing for really good ROIs on that. And that won't change with DirectBuy. And I think what's really exciting about having DirectBuy be separate is that it actually opens up all of these additional marketing channels to us that weren't actually available before. And so there are some SEO channels as an example that weren't available before. like suddenly you can actually compete in some of the item-based marketing that a lot of retailers compete in. And so, you know, we view those as likely to be lower CPA channels that actually can allow us to have, you know, kind of incremental paths into Stitch Fix. And, you know, to date, we haven't spent – we shared, I guess, now, I guess maybe a year, two years ago when we did some brand spend. And, you know, as we look into the future, I think there's definitely – opportunity for us to be exercising more of that brand muscle. You know, we, I think today we have so much opportunity just in the low hanging fruit of introducing people to Stitch Fix and to introducing people, you know, originally to the direct buy experience that I would not anticipate having a lot of brand spend connected to that. But I certainly think that's a big opportunity for the business. I think especially once kind of the, you know, the clouds lift a little bit and the kind of tumult that is apparel retail right now, I think there's really going to be an opportunity for us to establish ourselves as,
spk10: as the preeminent brand.
spk09: Great. Thank you so much.
spk11: And our final question today will be from Mark Alswager with Baird.
spk02: Good afternoon. Thanks for taking that question, Mike. Best of luck to you with your next chapter. So, Mike, starting out, I want to ask about gross margin. Could you maybe speak to some of the puts and takes? as we think about the second quarter and back half and how we should think about potential scale benefits on the gross margin line as the revenue growth accelerates to the levels that you're anticipating. And then, Katrina, just separately, really remarkable progress with the new stylist hires. Could you maybe talk about your early learnings here? Really a pretty significant shift in the stylist space in a relatively short period.
spk05: and looking ahead you know how should we be thinking about the opportunities from a productivity standpoint as these new stylists ramp in the coming quarters thanks yeah thanks for the questions mark um i'll start out with your question around silos and hiring and i'll have mike speak to gross margin um on the stylist side um you know we're just like i think Stylist Hiring is a place where we've really just gotten better over the years. This is a really unique job. This is a job where you can work from home. I guess that's maybe not so unique these days, but this is a job where you can sustainably, you have been able to and will in the future be able to work from home. and work from home in a pretty flexible way. And so this has always been a really attractive job. And while we were optimistic that we'd be able to have these kind of aggressive hiring plans met quickly, it's just a big testament to the team that we were able to do that as quickly as we were. And I think some of it is that we've been able to improve the way that we market the role. I think there's definitely ways that we've been able to we've been able to kind of leverage what we know about what makes the stylist successful today and make sure that we're bringing the right people in and so you know this is a muscle that we've been exercising for the last eight years or so um and one that we've just gotten better and better at um in terms of you know leverage on the styling side i mean the way i think about it is that these stylists like it's such an incredible asset that we have these thousands of people who are spending high quality time um thoughtfully um you know delivering fixes for our clients and so Over time, I think that the real thesis is more how can the algorithm do more and more of the things that we know that the stylist doesn't need to do? And then at the same time, how can we actually use that stylist's capability in a more powerful way? And so there's a couple of tests that I would point to. We have done some live styling tests in the UK where we have stylists who are doing a more hands-on experience with clients, and that's certainly been something that's been super exciting to see. In the UK also we've had some stylists who are actually helping to create content for us. And so that's another really high value add way that the stylist can be adding value. And so I think we're really excited about the trajectory that we've seen for hiring on a stylist. And I think we're really excited as we look into the years in the future of just being able to be more creative with the ways that stylists add value to our business.
spk02: And hey, Mark, I mean, one of the things I'm really proud of also is just kind of the rebound that we saw in gross margin, as we talked about with you guys before, from the Q3 COVID trial to where we are today. As I look out in future quarters while we don't guide the gross margin, I feel like you should see consistent performance from us on gross margin. To your question about puts and takes, obviously there's a little bit of headwind in shipping. We experience it less than most because we have less of a peaky kind of holiday business. But the things that kind of help us how to be consistent is the scale you mentioned. It's the increase in exclusive brand. And it's actually just the success of businesses like Kids in the U.K. as they grow and they get closer to kind of where men's and women's are. So I think we have more tailwinds than headwinds, but I would expect that you'll see more pretty consistent performance from a gross margin perspective throughout the fiscal year.
spk08: And at this time, I'd like to turn things back to Katrina for any closing remarks.
spk05: Thank you. Thank you very much. Thank you all for joining us. We look forward to seeing you virtually or maybe even in person in the coming quarters. Thank you.
spk11: And that does conclude today's conference. Again, thank you all for joining us.
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