Stitch Fix, Inc.

Please stand by. We're about to begin. Good day, everyone. Welcome to the Stitch Fix earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Will Lecter-Mindell, Interim Head of IR.

Please go ahead.

Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year 2021. Joining me on today's call are Elizabeth Spalding, CEO of Stitch Fix, and Dan Jetta, CFO. We have posted complete fourth quarter and full fiscal year 2021 financial results in a press release 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 our 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 press release 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 Elizabeth.

Thanks, Will, and thank you all for joining us. After the market closed today, we issued a press release with details on our quarterly performance and outlook. We delivered strong fourth quarter results to close out a successful fiscal year with Q4 net revenue growing 29% over last year's fourth quarter and helping us cross $2.1 billion in annual net revenue for the first time. We're excited to share both the highlights of our full year business results as well as our vision looking forward. As I step into the CEO role, I'm incredibly honored to be leading this team. We have an exceptional organization full of leaders and innovators who share my passion for Stitch Fix and the bright future ahead. The last 10 years of Stitch Fix's journey set the stage for our future with our highly differentiated approach to marrying data science and creative human judgment. This differentiation has enabled us to build a deep understanding of the apparel vertical and the engine to power our expansion. We see our future propelled by this incredible strength, and it is only the beginning. We are uniquely positioned to deliver the most personalized shopping experience for both our current and future clients. Today, we'll focus on three main chapters. First, We'll share our fourth quarter results where we saw strong demand trends and positive momentum in our fundamentals. Second, we'll discuss the closing out of a successful fiscal year 2021, where we embarked on a meaningful transformation in our business on a number of fronts, including the expansion of shop to our current client base, the launch and scale of fixed preview, and foundational investments in our systems and people. And lastly, we'll look ahead to our future, discussing our overarching vision as well as plans in the fiscal year 2022 ahead, as we expand our offering to serve more clients across shopping occasions in a uniquely personalized way. For our first topic of our Q4 FY21 results, we delivered strength in our top line business through both our fixed and direct by offering. Overall in Q4, we delivered 571 million in net revenue representing 29% growth over Q4 2020, along with $55 million in adjusted EBITDA. We ended the quarter with 4.165 million active clients and closed out the second half of the year with nearly 300,000 total net ads. Dan will provide some additional context on both adjusted EBITDA and active client trends later on. Now shifting to our second topic. fiscal 21 in review. As we look back on the last 18 months, this time period ushered in a new era for apparel and footwear retail, shifting our category from roughly 25% of sales online to nearly 40% online with a meaningful and we believe permanent shift in consumer behavior. As a result of this shift and our proactive focus on innovation, this period has been a galvanizing moment for Stitch Fix. As consumers adapted, we intentionally and successfully captured an outsized piece of the disrupted apparel market by leveraging new product innovations, evolving our assortment, and using our personalized experience to migrate more clients into our ecosystem. Most notable in our evolution is our expansion into personalized direct purchases for our clients. Formerly known as Shop and what we have often referred to as Direct Buy, we have now branded this channel Stitch Fix Freestyle. Going forward, we'll refer to Freestyle when referencing our Direct Buy experience. It's a change that reflects the philosophy driving this product. Clients have agency, flexibility, and choice while also experiencing a highly personalized shopping experience. We've achieved numerous milestones in building this zero-to-one product of freestyle over the last year. In fiscal year 21, we've grown top-line net revenue for freestyle more than 100%, reaching almost 30% penetration of our women's client base. We also saw success in product categories in which we see significant long-term opportunities. Footwear, for example, comprised a bigger percentage of Q4 revenue for freestyle than for fix in both women's and men's. And overall, early indications are that Freestyle is meaningfully accretive to revenue per active client metrics, which reached an all-time high in Q4. In fact, our revenue per active client closed the year over $500 for the first time ever. And recently, we've opened up Freestyle to new to Stitch Fix customers, unlocking the channel to the entire marketplace and marking the beginning of a tremendous opportunity for our business. Freestyle was only part of the story. We simultaneously innovated in our fixed offering and doubled our UK business. We used insights from our signed-up prospects as well as existing clients to identify the opportunities for greater client engagement in the fixed experience. We recently rolled out fixed preview to 100% of our women's and men's clients across both the US and UK markets. Now, All clients can preview 10 personalized items before their fix is completed and shipped. We are also now leveraging algorithmically generated recommendations to continuously improve the efficacy of fixed preview as we continue to refine our data-driven approach to better meet client preferences. The impact is clear, with conversion and average order value both growing. Keep rates have achieved all-time highs while client sentiment and retention have continuously increased. We also evolved our assortment in breadth and depth, supporting our clients through their shifting apparel needs. In a year where much of the world embraced a work-from-home model, we rapidly expanded women's active, athleisure, and lounge to meet the demand, growing revenue in these product categories more than four times in Q4 over the prior years. and establishing this part of our assortment as a true engine of growth that we expect to power us going forward. As consumers started to get back to travel, socializing, and leisure activities, we saw acceleration in going out and dressier items in women's as well, with 51% growth in these categories in the fourth quarter as compared to the fourth quarter 2020. These accomplishments have generated success across our business. our PLUS offering delivered 51% growth in net revenue in fiscal year 21, demonstrating the strong potential in serving these clients. We also see strong runway ahead given that our PLUS penetration today represents roughly half the penetration of the overall women's market. On the international front, the UK achieved triple-digit revenue growth in fiscal year 21 with a rapidly growing client base and significantly improved unit economics that has validated our international opportunity and have us excited for what's to come. Kids has similarly been on a rapid growth clip, growing revenue more than 75% in fiscal year 21. And men's continues to grow, though more slowly, as we've reshaped our assortment strategy to onboard new brands and are excited about the availability of freestyle for all our male clients. I would also like to give some additional context on recent changes we implemented around how we schedule stylist labor hours. As we continue to drive innovation across our experience, leveraging both our data-driven models and unique stylist engagement will remain critical to driving the best client experience. To accommodate our customer experience evolution, we made some recent changes to our scheduling practices with our styling field to better align with when and how we see clients wanting to connect with stylists. We knew this approach wouldn't work for all of our stylists, so we offered an opt-out accommodation with this change, and we were well prepared for the expected opt-out. That said, we realized we removed certain aspects of flexibility that mattered more to folks than we appreciated, and we intend to continue to evaluate our practices with an eye towards increased flexibility. Overall, we are confident in our path to the future for an exceptional client experience as we continue to expand our styling services as well as freestyle. Now, our third topic, looking ahead to our future. Our vision is to become the global destination for personalized shopping, styling, and inspiration, supporting clients across all categories and occasions. In a world where authentic human touch and the ability to know me matters more than ever, we help clients to build confidence in discovering items and looks that they otherwise would not have considered. Our continued success serving clients in the US as well as the UK also gives us conviction in our opportunity to build this ecosystem on a global scale. To achieve this vision of personalized shopping, we will invest in our biggest sources of differentiation. algorithms powered by consumer preferences, understanding of the drivers of fit, relationships with stylists, and vendor insights. We intend to accelerate our penetration in categories and with consumers where we have meaningful white space for growth. Today, we are a largely U.S.-based business with a heavy focus on tops and bottoms, representing over 75% of our sales, yet only 30% of our relevant apparel categories. We are currently focused at affordable and mid-tier price points sold through a strong assortment of exclusive and national brands. We are now expanding into a broader range of brands and price points, as well as investing further in product categories where we are seeing promising success through feast pre-sale and fixed preview, namely footwear, dresses, outerwear, accessories, and sleep and loungewear. These product categories represent $90 billion in the U.S. women's market alone, and we have already started to see higher growth rates in categories like dresses through our freestyle experience relative to fixes. To enable this category expansion, we will broaden our partnerships with notable brands as well as create and empower a set of new exclusive brands. Our Elevate program, focused on entrepreneurs of color and their brands, is also an example of how we plan to help showcase and grow emerging brands on our platform. Our strategies of innovating through freestyle, expanding into new categories and price tiers, and eventual geographic growth into new markets gives us a significant runway for growth ahead. Specifically in fiscal year 22, we will enhance and broaden our freestyle offering in numerous ways. For example, We plan to test and incorporate distinctive client-facing features such as enhanced outfit capabilities, curated search, and stylist-led nudges to further support our algorithmically generated recommendations. Imagine stylists supporting clients to take what is in their freestyle basket to create a fix. And with our assortment, we plan to scale to 200-plus available branded shops over the course of the year across women's and men's. To increase consumer awareness of our evolution, we will invest in an updated brand story, as well as open up new channels of the marketing mix, such as product listing ads as we expose our product catalog for consumer search. We will also continue to experiment with influencer and affiliate partnerships, both effective channels to broaden awareness and appeal of our growing offering. Finally, we will continue to invest significantly in our infrastructure to enable new inventory models, both network capacity, as well as the automation required to deliver on various modes with our vendors, such as consignment-like inventory and dropship. These investments will allow us, over time, to maximize our working capital efficiency. Overall, fiscal year 22 will set us up to scale beyond where we are today, with new consumer populations, expansion in critical growth categories, as well as prepare us for geographic expansion, building on our success in the U.S. and U.K. The coming year ahead will be an exciting time for Stitch Fix. With that, I'd like to turn it over to Dan.

Thanks, Elizabeth, and hello to everyone joining us on today's call. In Q4, we generated net revenue of $571 million, representing 29% year-over-year growth. We saw overall strength in both our fix and freestyle channels, with strong demand in our women's fix offering and outsized growth in kids as well as in the U.K., We saw increased order volume in freestyle, driven by several factors, including our increased focus on engagement of freestyle with existing clients and improved product features, such as expanding branded shops. Full-year net revenue was $2.1 billion, representing 23% year-over-year growth. We ended the year with active clients of 4.165 million, an increase of 58,000 clients quarter-over-quarter, and 643,000 clients, or 18%, year-over-year. Q4 net ads were impacted by our typical summer season, where we normally see a slowdown in new active clients. We also pulled back on advertising spend in anticipation of the launch of PreStyle to new to Stitch Fix clients in early August. Overall, net ads for the second half of the year remain largely in line with those in the first half, and we see strong productivity signals from our newest client cohorts, which gives us confidence in our acquisition strategies. Advertising with 6% of net revenue in Q4, a sequential decrease of 340 basis points from Q3 and 420 basis points decreased from the same quarter last year. As noted earlier, we made the decision to launch Freestyle to new to Stitch Fix customers in early fiscal Q1 of this year. This did result in pushing Q4 advertising spend to Q1 fiscal 2022. Since our Freestyle launch, we have already begun increasing advertising spend relative to Q4 FY21, and we expect to continue this elevated investment going forward. This will include our existing acquisition-based advertising channels, as well as new advertising channels such as SEO, SEM, and brand-based marketing specific to Freestyle. Many of these channels were not available to us with a fixed-only business when inventory was not accessible outside our existing client base and shopping ecosystem. With the launch of Freestyle, we expect this increased investment in marketing will pay off in future quarters to come as we work to build increased awareness of Freestyle. Revenue per active client reached an all-time high of $505 in Q4, a sequential increase of 5% compared to 481 in Q3 2021, and 4% year-over-year growth. Q4 gross margin was 46.5%, representing a sequential increase of 50 basis points from Q3 and a 160 basis point increase from the same period last year. Despite the supply chain issues and increased carrier freight rates that many companies are experiencing, we reported our highest quarterly gross margin ever. Quarter over quarter, these gains were largely driven by higher product margins. Year over year, these gains were driven primarily by higher product margins and lower transportation costs through efficiency gains. Full year gross margin was 45.1%, or 100 basis points higher than last year. Other SG&A excluding advertising was 37.2% of net revenue in Q4, a sequential decrease of 420 basis points from Q3, and a 110 basis point decrease from the same period last year. While we continue to experience higher wages for our warehouse associates, where our average hourly rate is over $17 an hour, this was more than offset by variable and fixed productivity gains. While we continue to focus on operational efficiencies, We'll also continue to invest in hiring more tech and product personnel as we continue to invest and expand both fix and freestyle. Q4 adjusted EBITDA was $55 million and reflected the flow through of higher net revenue, improved gross margins, and lower marketing spend that I've already touched on. Full year 2021 adjusted EBITDA was $65 million. Q4 net income was $21 million and diluted earnings per share was $0.19. Before year 2021, net loss was $9 million and diluted loss per share was negative $0.08. We delivered free cash flow of $8 million in the quarter and ended the quarter with no debt and $290 million in cash, cash equivalents, and highly rated securities. Now looking ahead, it's important to acknowledge a number of factors that are impacting how we forecast our business throughout the coming fiscal year. First, there are many unknowns related to the macro environment driven by the Delta variant and the ongoing impacts of the pandemic. While we feel confident that consumers will continue to migrate online and that we're well positioned to take more than our share of this channel shift, a great deal of short-term volatility remains. Additionally, within our own business, we are focused on unlocking this long-term opportunity represented by Freestyle, and we are just getting started in this journey. We see huge upside in the expansion of our TAM as we continue to expand our selection, improve the client experience, and activate marketing campaigns that drive awareness. We believe we're setting our business on a trajectory of strong long-term growth. At the same time, we're very early in building this new business. We've only recently opened up Freestyle to new to Stitch Fix customers, and we'll continue to learn from and optimize our Freestyle experience over the next several months and quarters. Given these realities, we are providing guidance for Q1 while providing some more directional signals on our full-year expectations. As we learn more about both the external environment and internal business trends, we'll refine this outlook and share additional detail in quarters to come. Looking forward, for Q1, we expect net revenue in the range of $560 to $575 million, representing growth of 14% to 17% year-over-year. We expect to generate positive adjusted EBITDA in the range of 15 million to 20 million, or 2.7 to 3.5% of net revenue, all while investing aggressively in our future. For the rest of FY22, we expect continued top-line revenue growth in the range of 15% or above, while maintaining EBITDA at 2% or higher of net revenue. We are optimistic and believe we can drive acceleration in our business looking forward. I do want to call out that the back half of this fiscal year lapsed a strong net revenue growth we achieved in Q3 and Q4 of FY21. Our long-term growth opportunity is greater than ever, especially now that we've launched Freestyle. We're building the most personalized shopping experience in the marketplace. And as we invest to transform our business, we are well-positioned to gain market share and accelerate growth over time. With that, we're now ready for your questions.

Operator, I'll turn it over to you. Thank you.

Once again, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 to ask a question. Pause for just a moment to allow everyone an opportunity to signal. And we'll take our first question from Ross Sandler from Barclays. Please go ahead.

Hey, guys. I know it's only been a couple weeks, but just any initial learnings on both the freestyle uptake since the public launch and how the marketing on new customers is going, like how the efficiency compares to what you guys were doing in the past. And yeah, I'll just start with that, I guess.

Yeah, thanks, Ross. This is Elizabeth. I can start on that one and Dan should feel free to add on. Yeah, I think we're really pleased with what we're seeing so far. I think overall, you know, if you look back on Q4, one of the things that got us very excited is just the strength across our ecosystem and having consumers participating in both of these channels as demonstrated by our revenue proactive client crossing that $500 mark and really speaks to the continued enhancement of what we're doing with Freestyle. In terms of marketing, we really are just turning on our brand campaign. You'll see it go live actually this week, and that's really beginning to tell the story on really the top of the funnel awareness building for the business, which is quite exciting. And then as we've launched, we've begun experimenting with things that Dan and I mentioned on the call, like product listing ads and being able to expose consumers into a new way to start entering Stitch Fix for the first time. So no data to share yet, but I think early momentum we're really pleased with. And, you know, in addition, I think just the new brands, the new offerings that we're unveiling through the experience, I think gets us really excited because we know we've seen traction and some of these you know, less penetrated product categories with fixes already through our current base. And so the coming quarters will really be the focus of building this brand awareness.

Got it. And then the other one I want to ask is on the comment about the lowest churn in company history, kind of at the, I guess, end of 2021. So just any additional color, there's a lot going on in the business in terms of new products, expanded selection, and then like improving keep rates. What's driving the higher retention versus previous periods of all these different things that you guys are doing?

Yeah, I can share a few thoughts on that. You know, I think one of the things we're really excited about is the scaling up of fixed preview, which we believe is one driver that increased performance both on success rate, but overall we know it's impacting client happiness, which tends to impact ultimately, of course, things like retention and churn. And so we've been really happy to see the continued gains both on keep rate as well as on retention. And then of course, just having more ways to engage with us. We know that there were use cases that we were unable to satisfy with consumers in a fixed only model. So we would anticipate just our ability to serve more user needs, more occasions, being a bigger part of our consumers lives is also kind of increasing loyalty, driving higher reactivations, all those good things by just enhancing the value out of our offering.

Great. Congrats on the results.

Thank you.

Thank you.

We'll take our next question from Edward Yerma from QBank Capital Market.

Hey, good afternoon, guys. Thanks for taking the questions. I guess first, You know, I think you mentioned one of the previous calls that at that moment what you were then calling direct buy and now calling freestyle was kind of gross margin neutral. As we think about your medium-term view, or at least what's assumed in the guidance, kind of what is the margin implication from freestyle? And then just as a bigger picture question for Elizabeth, you know, I know Kat had made her North Star kind of 20% growth and felt like that was a good kind of exciting growth rate but wouldn't stretch your organization. You're pretty close at, you know, in and around 15. What do you think the longer-term growth rate of your business should be? Thanks. Thanks.

Yeah, thanks for the questions, Ed. How about I start on the longer-term view and then I'll hand it over to Dan to talk about the growth margin question related to freestyle. And we had a very strong growth margin this quarter that we can share more on as well. I think that that long-term growth vision, I think we'll have more to share in the quarters to come. What we do know is that by opening up freestyle, we are opening up so much potential on consumer expansion, use case of shopping occasions, category growth potential in many categories that were very under penetrated in today. All of those present opportunities for frankly accelerated growth. You know, this fiscal 22 is going to be very heavily focused on building awareness, building that foundation of more brands, more categories, some of the new marketing channels that we talked about. And so, you know, opening up and now having built this, you know, foundation of a $2 billion business, we actually see so much potential, especially with a category that is shifting so meaningfully from a consumer standpoint. So no updates on the long-term guide, but we absolutely think what we're doing today sets us up to achieve a very different scale because of the expansion of our platform. Let me hand it to Dan to talk about gross margins.

Yeah, thanks, Elizabeth. To your question on gross margins, we did talk about this at prior calls, that on a gross margin basis, the economics of freestyle versus fixed are fairly comparable. What we love about freestyle is the average order value is actually high. It's a very strong average order value, and therefore the economics on the gross margin side are comparable. And we've also said, and I'll continue to reiterate that, The contribution profit on Freestyle is higher than fixed business, which is also something we're very excited about. We love the economics of it. It is materially higher than fixed. And a lot of that is due to just efficiencies on the variable side. And we have a lot of room to improve on that, such as reducing our split shipments and other operational efficiencies that we feel we can get from Freestyle. So the economics are very favorable for us on Freestyle.

Thank you. Thank you. We'll take our next question from Mark Mahaney with ISI.

Okay, thanks. I want to ask about gross customer ads and if you had record low churn given the number of net ads you had, that would suggest that gross ads were very low, maybe record low gross ads. Could you address that?

Yeah, thanks, Mark. I can start on that. And Dan, feel free to add on. Yeah, maybe I'll share a few things. You know, I think we look a little bit at the back half of the year just because Q4 tends to be a seasonal trough for us. So on that full second half basis, we added nearly 300,000 net ads, which we feel very good about. I would say a couple things impacted this quarter in particular, it being a Q4 that tends to be a lower period of ads, just that summer period. for consumers with both our model, but just in retail in general. Dan mentioned one of them on the call, which is just our investment and marketing spend. We definitely spent less than we were initially anticipating in anticipation for really being able to start to build the brand, build the offering of Freestyle this quarter and beyond. The second thing that we did see some headwind with, which I think everybody experienced, which was the transition to iOS 14, You know, we are still more heavily mobile web versus app-based, so it didn't affect us that materially, but I think that adapting to being able to optimize our campaigns, understand users, which we feel very good about going forward, but that was something we experienced a bit in Q4 as well. But overall, to some extent, we're where we thought we would be in terms of delaying some of that marketing spend, and just that tends to be a quarter where we have fewer net ad spend in periods like Q1 and Q3. Okay.

And then I want to follow up on Ed's question about the potential for recovering to that 20% plus growth rate that the company really did consistently, I don't know, 10 or 11 quarters prior to COVID at a reasonable scale, too. That was pretty impressive. And your guidance here is for kind of mid-teens, maybe high-teens growth. But you talk about acceleration. So what would be the potential biggest drivers of acceleration? And could I throw out a few? Is it Is it categories like kids? Is it geographies like the U.K.? And are there any others that you would think about there? Or is it just simply the successful rollout of freestyle? So if there is material acceleration and you are able to recover it above 20% revenue growth and we look back on it, what do you think is most likely to have caused that?

Yeah, I think it's really a combination of things that we believe can translate into that type of growth. You know, first is if you think about it from a share of wallet standpoint, which is one way of looking at it, there are purchase occasions as well as categories to the mentioning of top bottoms is a big focus relative to many other very large product categories that consumers are buying into. So that in and of itself is obviously a big opportunity for both new customers and existing customers. Then if we look at just broadly consumers, we know there are a lot of consumers that would prefer to start with personalized shopping and in general are maybe a bit more of a lean forward consumer segments that have an appetite for fashion. They really enjoy being engaged in the experience. And we've seen that actually within our core segmentation of our user base. We know that comprises double digit percentage of our consumer base today. But we know we're under indexed relative to that consumer spending capacity and just the overall size of those segments. And so we believe with this expansion into an experience that really has fluidity across us doing more of the work for you, providing guidance and discovery together with consumers having more agency, being able to have that one click shopping experience, we believe really just expands our addressable market and penetrating consumer groups that were less penetrated in today. And then, of course, to your point, moving into additional geographies over time, you know, we shared some of those growth rates of more early-stage businesses, and you can just see the kind of ramps that we're on as we enter, you know, a combination of new user experiences, new categories, new geographies. You know, all of those things together, we think, contribute to that accelerated picture going forward.

Okay. Thank you very much.

I think I'll just add to that. If I could just add to that real quick, too, I think it's important to know that – Well, freestyle awareness within our fixed customer base is relatively high. Outside of our fixed customer base, it's really low. And as we said, that we're going to invest in building the awareness of freestyle throughout this year. We have a heavy investment in marketing to do that. And we feel that that will also bring the accelerated growth in the back half as we build that awareness. And as I said earlier, the economics of freestyle are very favorable for us. So I just reiterate what Elizabeth said and the categories and the geographic. But first and foremost, we simply got to get the word out there. We could not obviously market Freestyle to new to Stitch Fix customers until we launched it and built the onboarding experience that is now out there. So we're very excited about building the awareness of the Freestyle business throughout this fiscal year. Okay.

Thank you, Dan.

Thank you. We'll now take our next question from Erin Murphy from Piper Sandler.

Great. Thanks. Good afternoon. A couple questions for me. First, I was hoping you could talk a little bit more about the men's business. It seems that you guys have been driving a little bit more promotional activity with the 25 Off. If you refer a male customer, can you talk about how successful that's been and what kind of you're looking at to maybe improve that area of the business? And then Second question around supply chain. Could you just talk about what you're seeing in the supply chain? What percent of your private label product is sourced from Vietnam or other regions in Southeast Asia that have been impacted by factory shut-ins? And then how are you compensating on freight, be it air freight, or are you seeing kind of logistical challenges with ocean at this point? Thank you.

Thanks, Erin. I can start on the men's question, then I can hand it to Dan on the supply chain topic. Yeah, our men's business, you know, one source of growth in that business has always been, and similar for women's and kids, client referrals. And one thing that we know has been effective is bringing in clients, you know, both new to Stitch Fix prospects, but also adding family member accounts, both in kids and men's has been very effective for us. And so we episodically are doing things like taking our user base and offering credit referrals to engage those client base, typically a $25 referral and those tend to be very high ROI. And so as we've been expanding our inventory, our offering, that is an area that tends to be very ROI positive for us. And especially as we know, we've improved and added some great brands to our assortment. We have been activating that as a channel. It's actually something we've had activated on a historic basis. You may have seen some of those emails this summer, especially in gearing up for the fall time period, but that tends to be a very effective vehicle and is part of our historic marketing mix and will be a part of it going forward. I can hand it to Dan for the supply chain topic.

Yeah, to your question on supply chain, we are seeing some impact, but they're not material for us yet. We do not source any material amount out of Vietnam. Matter of fact, it's It's in the single digits of our sourcing. So that's helpful. I know Vietnam has had some impacts due to COVID. But we are seeing some small impacts on supply chain, not that are going to impact our fall or winter. We feel very good about our selection entering fall and winter. So we're covered on H1. We're watching very closely for H2. And the reason, by the way, is we bought, of course, we bought that product for fall and winter several months ago. We are not typically using air freight. We're not in a position where we need to do that. So that's a positive for us as well. But to finish the thought on that, H1, we're covered. We're watching H2 very closely. We're very proactive in managing what we see on the supply chain side. And so far, we don't see an impact for us, just given how we bought for H1. And we're ahead of this on H2 and watching it very closely.

Got it. And then just to follow up there, the inventory at the end of the year was up 70%. Is that just kind of covering what you think the demand will be in the first half and just trying to get ahead of maybe any potential challenges in the supply chain? Or is there anything else that is driving that inventory up so substantially?

Yeah, it's a great question. Quarter on quarter, we're flat. And you're right, year on year. Of course, a year ago, inventory was in a precarious position for us simply due to COVID. So That's probably not the right comparable. We did buy in advance of supply chain to some extent. We're also increasing selection, as Elizabeth said, and we're going to continue to increase that selection going forward. And looking for the rest of the year, we probably won't be back to historical turns that we normally would see. And that's, again, because we're very focused on increasing the selection for freestyle. That being said, I think by the time, in the back half of the year, we're targeting more that four to five on a turns basis. But again, it's very dependent on the selection we bring in for our freestyle experience, which is our number one priority.

Thank you so much.

Thank you.

We'll now move on to our next question from Corey Carpenter with JP Morgan.

Hey, thanks for the question. On gross margins, how do you think about the runway from here, just given you exceeded the high end of what has typically been your long-term guide? for the first time this quarter. And then for Dan, maybe specifically on the one-two guide, the midpoint, it implies a slight step down in revenue sequentially despite ramping marketing spend. So I was hoping you could talk about the trends you're seeing so far this quarter and what could be impacting that. Thanks.

Great. Thanks for the question, Corey. I can start on both of those and then I'll hand it over to Dan. On the growth margin side, we're very pleased with what we've seen. I think there's some real positive drivers there in terms of our product margins, both favorable mix shifts, but also some of the programs we have with our vendors that are providing really nice tailwind. And we do think there's good sustainability there. I can let Dan speak more to that. And then in terms of the marketing relative to growth guide that we are investing more in dollars in marketing, You know, we're really in this period, as Dan mentioned earlier, of really building brand awareness of what Stitch Fix is becoming. You know, people who have awareness of Stitch Fix have known us for a very specific offering. And we've now really opened the door to this whole new ecosystem, this ability to shop in a personalized way. And we know that's going to take some time for people to build awareness. Like the awareness of Stitch Fix Freestyle is obviously high in our current user base, but very, very low for the market as a whole. And some of the spend we're making we anticipate will pay off in future quarters versus the current quarter. And so that's part of what you're seeing there probably in terms of just the anticipation and the build that we're investing in terms of building that awareness. Dan, do you want to add on on the gross margin or either of those?

Yeah, just again, I'll reiterate. We feel very good about gross margins going forward. Our product margins remain at record levels for us. And again, You know, we're very focused on transportation, being very efficient on transportation, making sure we're balancing the right client experience with the right operational efficiency. So we feel good about gross margins. As you know, we've always been a full price business with FIX. Opening up shop does lead to the possibility for clearance, although that's nothing that we're focused on in any big way. That could eventually drive some impact on gross margin, but that's simply getting rid of of clearance-based inventory in the most economically efficient way possible. So more to come on that going forward. But gross margins, we think that they'll maintain this level going forward. And to your question on guidance, I'll just reiterate what Elizabeth said. As we go forward and look at H1, we are very focused on building the awareness for freestyle and increasing the selection for freestyle and launching new product features for freestyle. And we feel that that will take some time. That will take a little bit of time to build that awareness, to get the actives going. So we felt our guidance appropriately reflects that in the first half of the year. And as I mentioned in the call, in the back half of the year, we're simply comping some very aggressive revenue achievement that we received in H2 of FY21.

Thank you both.

Thank you.

We'll hear next from Mark Altschweiger with Baird.

Good afternoon. Thanks for taking the question. Wanted to dig into the branded shop initiative a little bit more. I guess first, how do you see that scaling over the next year or two? And how should we be thinking about the investment behind that from a marketing perspective? As you pursue some new channels, would you be at the higher end or above the historical kind of 9% to 11% target from a marketing perspective? And then, you know, relatedly, Dan, as you mentioned, Citrix has historically been a full price channel for brands. I guess, do you see any change to that, I guess, to the promotionality of the offering as the brand shops roll out and consumers have the ability to more effectively compare pricing across other retailers? Thank you.

Thanks, Mark. I can start on that. I appreciate the questions. So on the branded shops, Stitch Fix has always carried several hundred, if not low thousand number of brands, both a combination of national brands, our own exclusive brands, unique to Stitch Fix offerings that we partner on with third parties. And that really isn't changing. I think what's happening is really more of an expansion to deepening our portfolio of some of those brands that we already have, extending into some new brands that we know some of the newer clients that we're bringing out to our platform will appreciate. And it's also just a really natural entry point for many consumers who typically have a few brands that they tend to really love. And it's a great way to experience Stitch Fix for the first time. It might be something they're searching for, something that they know fits them well. And that creates just a really amazing jumping off point for us to show them outfits that go with that. Have our stylist assist them with other looks that they might like with it. Helps us identify goods that are likely to fit them incredibly well and match their personal style. And so from a marketing investment standpoint, it's actually, you know, represents some efficiencies for us because it's part of what will allow us to participate in some of product listing ads and search or allow us to have, you know, influencer partners talk about specific product on our platform, whether it's our own brands, like the elevate program that we're expanding into our, or our own exclusive brands, as well as well known brands. Dan can touch more on the percentage expectation of how that apps to historic. We are making investments in brand at a more global basis that I do think we'll see some increased investments, but we always are very focused on real efficiencies at that customer acquisition level. And then on the full price front, you know, our differentiation is really around helping clients discover things that they otherwise would not have on their own. And so, you know, it's fit, it's discovery, it's convenience that has historically characterized the real value proposition of Stitch Fix and that eye towards personalization. versus promotions. And so I would expect that set of characteristics to absolutely continue. I would view a lot of this brand expansion as making sure we're matching consumers with what they love. And some of those brands may be brands that they've never discovered before. But of course, ensuring we've always put a lot of focus into price comparing and making sure that our price points are competitive in the marketplace.

I'll just add to the question on marketing. So we're very focused on acquiring healthy customers. And we do that in our customer acquisition strategy. And of course, as we mentioned, we're investing in many new channels of marketing, inclusive of SEM and brand-based marketing. And we're also going to invest in influencer marketing. But in total, we expect that marketing to still be in that 9% to 11% of revenue going forward. It's just making sure that we're very efficient in the channels that we do have. And so that's something that we look at every week to make sure our marketing investments are efficient and we're bringing in the right clients for us. And so going forward, you should expect that to be more in line with historical of the 9% to 11% on revenue.

Thank you. Thank you.

We'll now take our next question from Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone, and so nice to see the progress. As you think of the average order value in excess of $500, how much of that would you say was freestyle? How much of it came from fixed? And was there any different categories that added to that? And then can you expand any further on the improvement in the UK and what you're seeing there? Thank you.

Thank you, Dana. Great questions. I can start. On the AOV front, yeah, I think we're excited both for the impact we're seeing from a fixed preview, clients being able to really find what they love there and having really that two-step process we know has had a positive impact. And then secondarily, we know our cohorts continue to improve in the penetration, especially in early life cycle and the adoption of freestyle. So I would say it's definitely a combination of those. Dan can add more if there are other drivers we want to touch on. And then in the UK, you know, I think just our value proposition is absolutely resonating. We've seen real strength in our marketing. We've seen real strength in the unit economics continuing to improve. That is the market where we first incubated fixed preview and scaled even earlier in its life cycle to get to the full market. And that's had a positive benefit. And then we just continue to get to know that market better and better. Our brand awareness is building. Our understanding is that UK consumer base continues to get sharpened in terms of our merchandise and assortment, which over the first year was a big learning opportunity for us. And so we're really, really pleased with what we're seeing and just the continued momentum there.

Yeah, and I'll just add the question on RPAC. I think I mentioned earlier that the AOVs that we see are comparable between freestyle and fix. And I think Elizabeth mentioned that roughly 30%, over 30% of our women's fixed customers do engage in freestyle. And while that doesn't answer your question directly, it does give you an indication of the meaningful driver that freestyle is of our revenue per active customers. We'll give more data points on that as we get more freestyle new clients in and we look at what their trends are. It's obviously very early in our journey for new to Stitch Fix customers for freestyle.

Thank you.

Thank you. We'll now take our next question from Yusef Squally from Truist Securities.

Great. Thank you for taking the questions too, if I may. First, maybe, Elizabeth, where are you guys in your inventory imagination between 1P, consignment, dropship, et cetera? You had talked about making some strides there, trying to understand how quickly you guys are able to layer that in and how much of your 2022 growth expectations are baking in maybe a mix of different inventory sources. And then... I don't know if you addressed this question, Dan, but maybe can you just speak to the linearity of demand in last quarter and what you're kind of seeing so far the first, I guess, three weeks of the quarter? Thanks.

Great. Thank you, Yusuf. I can start on the inventory one and then pass it over to Dan on the demand trends. Yeah, we continue to be very optimistic and are investing in our new inventory models, both consignment-like inventory as well as dropship. And we've had multiple beta programs across both of those. And we're really in build mode of the infrastructure, the vendor tools, the ability to automate the capabilities to be able to bring that fully to life. And so that will be a big focus of FY22. In terms of the materiality to the business and really impacting working capital and that expansion, we'd expect to see those more in FY23 as we start to truly scale them. But we're absolutely in build mode and teaming very closely with our vendor community and vendor council and have been really pleased with the success that we've seen in these early test phases. So more to come on that. We are definitely very focused on the build out. and we'll see more of the impact in the next fiscal year. I'll pass it over to Dan for your second question. Actually, I think Dan might have actually had the phone drop. I just saw a text from him. So let me take use of your second question. You were asking about the linearity. Just to clarify the question, are you just asking about quarter-on-quarter growth or could you just clarify exactly what you're asking there?

Yeah, of course. No, just trying to understand how the demand progressed throughout the quarter. And because we've seen some data points that would suggest that the quarter, the demand accelerated coming out of the quarter and remains at a pretty high level. Just wanted to kind of see how you guys are seeing it from the inside.

Got it. Okay. Yeah, I think Q4 tends, I guess you're asking a little bit insight into like what we're seeing now, which, you know, we're not reporting yet on Q1. But I will say just historically, That, you know, that May time period tends to be a real strength in our business. And as we get further into the summer months, we kind of internally think of it. And I think a lot of folks in our category is a bit of a summer slump. And we know consumers this year were back to vacationing again and being out more than they were a year ago. But in general, you know, all good things like the revenue proactive, et cetera. But that tends to be a quieter period. And then the fall season tends to be a period of consumers really shopping again with change in season, back to school, back to work. And so I think consistent with that, you know, this is typically kind of an uptick time period that we see in our business. I think Dan is back. So, Dan, feel free to add on if you have anything on top of that.

Yeah, sorry about that. My phone dropped. No, I think our guidance does take into account what we're seeing on trends. And, you know, that's all we have for now.

Got it. Okay. Well, that's helpful. Thank you both.

Thank you. We'll take our next question from Lauren Shank with Morgan Stanley.

Hi, this is Nathan Feather on for Lauren. Can you just talk through a bit the drivers of the higher product margin within the quarter and any potential impact from exclusive brands, etc.? And then are you able to potentially size or talk about how we should think about the impact of marketing shifting from 4Q into 1Q with the Freestyle Launch? Thank you.

Great. Thanks, Nathan. Dan, do you want to take both of these? I can add on if needed.

Yeah, on the product margin side, we are seeing improved product margins for a couple of different reasons. We are seeing a big shift. We do continue to have very strong private label, especially within our fixed business and our freestyle business, and that does help product margins. I think going forward, as we bring on national brands, we'll watch that closely. But we also have a lot of opportunity in product margins to keep them where they're at. So we feel very good about the product margins in terms of both the mix and what we see from our clients engaging with our private label. And can you repeat the second part of the question, please?

Yeah. Can you just talk about how to think about the sizing of marketing moving from 4Q into 1Q with the Freestyle Launcher?

Yeah, I'll basically say what I said earlier is getting back to that 9% to 11% is where we see the entire fiscal year for 2022, and that includes Q1, which, again, is a step up from Q4, which we very intentionally delayed some of our marketing spend until we launched Freestyle.

Okay, great. Thank you.

Thank you. And we'll take our last question from Roxanne Meyer from MKM Partners.

Please go ahead.

Great. Thanks for taking my question. I'm just wondering how you're thinking about growth of the fixed business as your freestyle business ramps. Obviously, you're seeing nice trends in the AOV. And in the past, you've talked about low cannibalization. But I'm just curious to get any updated thoughts.

Yeah. Thank you, Roxanne. Great question. You know, I think overall, we're just focused on clients being able to enter the Stitch Fix ecosystem in what works best for them. And obviously, over the course of the last year, we've seen real strength in our fixed business, and we know that it is incredibly appealing to many consumers. And so, you know, as you will see in our new onboarding experience, there are opportunities to engage directly in fixes, to engage directly in freestyle and personalized shopping, which we really like the ability to cater and actually help clients find what's best for them. And so I think what we would anticipate over time is, you know, many new clients coming in through this new freestyle experience, but then finding their way to certain use cases and occasions that a fix is really a great experience to add on to, and vice versa, continuing to see clients also enter through fixes. I would imagine a few years down the road, we will probably just be talking more about Stitch Fix as a whole and more fluidity between stylist-led support, stylist-led experiences that we will expand over time, including things that will be more deeply integrated into the shopping experience of freestyle as well. In terms of, I guess, the specific cannibalization question, maybe two thoughts to offer. One is just we think that revenue per active client that we shared and the knowledge we have of the newer cohorts of clients is the real strength and incrementality of these two offerings really being quite complementary. We do know that in this new phase of onboarding we're in, we have a lot to learn of helping consumers find the right fit

um over the coming quarters so that they can engage in the full fish fix ecosystem so more to come but i think we see um solid growth in both sides of the business in the coming year great thanks for that color and then just as a as a follow-up i'm just wondering if you could talk about the inventory strategy for you know your fix and freestyle businesses are those going to be completely separately managed and how should we think about the mix of private label versus brand for each of those businesses?

Yeah, thanks, Roxanne. That's a great question. You know, we love our exclusive brands. We know that they're incredibly high performing and clients love and fit the data that we apply to designing those products. And we actually share the same data with our vendors so that they can build new products. You know, for example, we help 30 of our vendors build new plus size products given the uniqueness of entering that product category. As we think about fixes and freestyle, we know there are certain product segments that tend to do better within freestyle just because, and also actually fixed preview where clients tend to be higher intent. They're bought less on impulse like outerwear, accessories, footwear. And so there are product categories that we will probably be intentional of thinking about how those are going to perform in each channel. But there actually is a benefit where we're sharing the pool of inventory across. And we can get the benefit of seeing how these products perform in both and having the benefit of some of these, you know, probably over time, higher fashion, higher trend that may be more higher sell through and freestyle, but being able to now participate in some of those goods in a bigger way and fixes as well as a result of having these two channels.

Great. Thanks so much for all the color.

Thank you, and that does conclude today's question and answer session.

I'd like to turn the conference back over to Elizabeth for any additional or closing remarks.

Well, thank you all for joining us today. We look forward to seeing you in the coming months.

Thank you, and that does conclude today's conference. We do thank you all for your participation, and you may now disconnect.