Stitch Fix, Inc.

Good day, everyone, and welcome to the Stitch Fix second 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.

Thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2021. Joining me on today's call are Katrina Lakes, founder and CEO of Stitch Fix, Elizabeth Spaulding, President, and Dan Jetta, CFO. I would also like to mention that we are joining you remotely today from our home offices. We have posted complete Q2 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 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. On today's call, we'll focus on three themes that demonstrate the momentum we're seeing in our business. First, we are continuing to see clients migrating to our offering at the highest rates we've seen in years, and we're excited about the opportunity to accelerate our share gains over time. Second, we continue to evolve our fixed offering to enhance conversion and retention of new and existing clients. And third, direct buy is resonating with our existing clients, and we're preparing to roll it out to first-time clients at the end of fiscal Q4. Combined, our demand strength, product innovation, and planned launch of direct buy to new clients give us confidence as we look to the quarters ahead. As I'll discuss in a moment, we also see near-term factors that we expect will impact the back half of this fiscal year, and as a result, we've updated our full-year outlook. Before I dive into these themes, let me first review our results from the quarter. In Q2, we generated net revenue of $504 million. reflecting 12% growth year over year. Within our fixed offering, first fixed shipments in the quarter increased to their highest growth level in five years. However, due to the pandemic, carriers faced unprecedented volume during the holidays and we saw increased cycle time. This resulted in us not being able to recognize all the revenue from fixes we shipped during the quarter. We define cycle time as the duration between when we file items for a fix and when we receive and process any items back from the client in our warehouse. And unlike other e-commerce companies, we recognize revenue for fixes at client checkout, not at the point of shipment. Adjusting for the impact of these increased cycle times, we believe Q2 revenue would have been within our guidance range. In response to these delays, We've made adjustments in our ship planning process to ensure we meet our promised delivery dates. We are taking steps to diversify our outbound carrier mix, and we are partnering with our primary carrier, the United States Postal Service, to process our returns more efficiently. In January of Q2, DirectBuy helped us achieve our strongest month-over-month revenue growth of any January on record and demonstrated the power of our new offering to complement our core fixed form factor. That said, we also learned more during the holiday period about seasonality of direct buy. We saw a softer holiday performance than we anticipated and believe that self-purchase behavior subsides in this window similar to what we've historically seen in our fixed offering and is replaced with a gifting mindset. In Q2, we also grew our active client count to nearly 3.9 million, representing a year-over-year increase of 408,000 clients or 12% growth. It also reflected a quarter-over-quarter increase of 110,000 clients, which is more than twice what we delivered last holiday quarter. With this growth, we've generated more net client additions in the last two quarters than we did in all of fiscal 2020, and we plan to continue expanding our client base in the remainder of the year. Dan will review our results in more detail later on this call. Now I'll share more on how we continue to capture share amidst the ongoing shift in the retail landscape and why this gives us confidence in our long-term opportunities. The first COVID-19 stay-at-home government mandates were enacted nearly a year ago. This resulted in a massive share shift acceleration online, as consumers increasingly moved away from predominantly shopping for apparel in physical stores. Industry observers estimate that approximately five years' worth of online share shifts occurred in the past year alone. And forecasts now call for nearly half of U.S. apparel spend to have moved online by 2025. As a result, we believe that consumers' embrace of our offering is here to stay. And the demand trends and client growth we're seeing demonstrate that our model of personalized discovery and radical convenience position us well to capture more than our fair share. As the country begins to reopen and the broader environment normalizes, We believe overall demand for apparel will increase and will be incredibly well positioned to win. In the second quarter, growth in first fixed shipments accelerated to nearly 50% year-over-year, which is our highest growth rate since 2016 and was up from over 25% growth last quarter. This growth was driven primarily by strength in our women's category, which delivered its highest year-over-year first fixed growth in the past five years. Given that our women's category comprises the large majority of our business and addressable markets, this acceleration is particularly exciting and highlights our strong product market fit and the migration that is underway. As we look to the back half of our fiscal year, we continue to see significant opportunity, but there are also factors that have emerged that are important to consider. From a demand standpoint, we're seeing first-time clients migrating to Stitch Fix at multi-year highs and to support this demand, We are investing across inventory, styling, and operations to have the product and throughput to serve these clients well for the quarters ahead. But we're also seeing longer cycle times, mainly comprising carrier and client delays, which continued in February. These longer cycle times impact in-period revenue recognition and delay subsequent fixed orders, both of which can dampen our top line. We saw this in Q2. In addition, We expect some product feature rollouts tied to the DirectBuy launch to first-time clients to move to later in this fiscal year, which would push out some of the anticipated revenue growth. As Elizabeth will discuss in a moment, DirectBuy performance remains strong and we're investing the time and effort to enhance the product experience before our plan launch to first-time clients at the end of fiscal Q4. Given these moving parts, we believe it's prudent to adjust our revenue outlook for the fiscal year. Dan will discuss this in more detail later in the call, but our confidence and excitement around the products we're building and the demand we're seeing remains unchanged. Now I'll hand it over to Elizabeth, who will share more on some of the enhancements we're delivering across our offerings.