Stitch Fix, Inc.

Good afternoon, and thank you for joining us on the call today to discuss the results for our first quarter 2022. Joining me on today's call are Elizabeth Spalding, CEO of Stitch Fix, and Dan Jetta, CFO. We have posted complete first quarter 2022 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 the 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 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 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. A replay of this call will be available on the website shortly. I'd now like to turn the call over to Elizabeth.

Thanks, Tammy. After the market closed today, we issued a press release with details on our quarterly performance and outlooks. In Q1, we delivered top-line revenue of $581 million, representing 19% year-on-year growth. We also achieved our highest gross margin ever of 47%, along with $38 million in adjusted EBITDA. We ended the quarter with 4.2 million active clients, an increase of 11% from a year ago. At the same time, our sequential net client additions were lower than prior quarters, and we are currently making changes to get this moving in the right direction. We are in a major learning phase right now as we build out our new freestyle experience in full, and we opted in Q1 to be conservative with marketing spend as we optimize our new onboarding experience and conversion. I will discuss this more ahead. Today, I will first share highlights on the quarter and our recent launch of freestyle. Then, we'll discuss why our approach is so highly differentiated in apparel retail. And finally, I will share our focus areas as we scale our ecosystem of personalized shopping, styling, and inspiration. First, on Q1, we've grown top-line net revenue for freestyle 40% year-over-year. Freestyle penetration increased quarter-over-quarter as we continue to see our clients leveraging both fixes and freestyle, demonstrating the complementarity of our growing offerings. We are also capturing more purchase occasions through freestyle and product categories that have been underrepresented in fixes, such as footwear, dresses, outerwear, accessories, and sleep and loungewear. Today, these categories represent $90 billion in the U.S. women's market alone, demonstrating the opportunity ahead of us. In fact, footwear, accessories, and dresses together saw an over 50% increase year-over-year in freestyle, which is five times the rate of growth we see in fixes for the same categories in the same period. We also enjoyed growth in our fixed offering, which benefited from the first full quarter impact of fixed preview, now rolled out to the U.S. and U.K. women's and men's client populations as of the end of Q4 FY21. As a result of our innovations with fixed preview, we continue to see average order value increase driven by strength in keep rates and continued satisfaction, with over 80% of our first fixed clients in the quarter purchasing at least one item and sharing that they look forward to their second fix. When looking across both freestyle and fixed, our revenue per active client topped $500 for the second quarter in a row and reaching a record high of $524. Stepping back, this expansion into freestyle represents an evolution of our business which you can think of as Stitch Fix 2.0. There will be significant learning and experimenting to build this future of retail experience. We may experience short-term impacts of cannibalization. We will be implementing new systems, and we are building new workflows. All of this learning of new motions is in service of building a great customer experience, and we will need to optimize these. We do not anticipate a linear journey. Specifically on new client additions, with Freestyle now available in addition to our fixed offering, we are learning how best to wrap clients into the right experience for them. We've been testing client onboarding flows, whether a client comes directly to our main site or lands on a product detail page through paid search or other paid channels. We see significant new client potential ahead, as Freestyle enables us to access a greater share of shopping occasions and has opened up new marketing channels for Stitch Fix to drive user acquisition. That said, and as I noted at the beginning of the call, our sequential net client additions were low for the quarter. We are at the early stages of this learning journey, and as a result of our testing in Q1, we experienced lower fixed conversion rates than we expected. We will continue to test and iterate the optimal client experience and conversion paths for new clients. During this learning stage, we will efficiently deploy our marketing dollars for learning, and we will scale them when the time is right. Now, on to our second topic, our differentiation. We are at the very beginning of this next chapter for Stitch Fix. To transform and evolve from our unique fixed model for styling clients into the global destination for personalized shopping, styling, and inspiration. The last 10 years of our Stitch Fix journey sets the stage for this future with our highly differentiated approach to marrying data science and creative human judgment. Central to our model are rich data feedback loops that harness our millions of clients and their proactive relationships in sharing both preferences and many points of feedback on nearly every item we ship. For example, over 50% of fixes include client notes. with our stylists that inform emerging trends. Clients provide five points of feedback on over 80% of items shipped. And now, clients are providing a growing foundation of engagement data in our freestyle experience. Similarly, Style Shuffle, our gamified rating experience in our app that one million clients play monthly, informs which items in our catalog will succeed with different clients. For example, Within 48 hours of a new item being adjusted into our product catalog, we have tested and understood the likely success rate of that item, informing which fixes as well as which freestyle shopping feeds are most likely to benefit from that item. These unique feedback loops enable a deep understanding of the drivers of customer preference and fit, applicable in styling services and shopping. These loops are responsible for our strength in fixed keep rates over time, as well as contribute to the success of our exclusive brands. They also enable our freestyle return rates to be materially better than other apparel e-commerce. To our knowledge, no other retailer is generating insights at this scale to inform a personalized shopping experience. Now, our final topic, where we are in our journey with Freestyle & Fixes and the areas of focus for the coming year and beyond. Over the course of Q1, we fully opened Freestyle to new consumers and began to market the offering. We enhanced the home feed experience to create many different entry points into shopping to help address the purchase intent of each client. From a growing number of branded curated shops unique to each client, to carousels on trending outfits for the client, to launches of new product lines including our Elevate Black-owned brand grantees, and the launch of MiltonMade, our new sustainable and U.S.-built basic line. We also began testing influencer-curated pics as well as enabled clients to see more richness in our product detail pages with a growing foundation of on-model imagery. Going forward, we have three areas of priority for our continued build-out of Freestyle. First, we are strengthening the customer experience through product feature enhancements and expanded inventory selection. One key area of investment is reducing friction for new clients to access Freestyle through testing new onboarding approaches that balance personalization with speed of access into the experience. We expect this to be highly impactful work given only a fraction of our new traffic fully completes the style profile. Inside Freestyle, our secret sauce is styling on demand. Everything we show each client is unique to them. and reflects what will best fit their body, represents as well as pushes the boundaries of each client's personal style, and provides value-added features, such as algorithmically generated outfits. We have begun to make discovery easier for customers to find items they love. For example, we recently added a Fresh Finds category, which clusters thematic items based on feature attributes tagged by our merchants and stylists, such as fall hues, straight-leg jeans, and all that glitters. We will also continue to invest in a brand and category expansion of our assortment. For example, in Q1, we added over 20 new women's and men's brands. Over the course of FY22, we anticipate adding over 50 brands and continue to test which are traffic-driving products as well as which are more likely basket fillers. Over the course of Q1, national brand freestyle revenue contribution grew to 19% in October, versus 12% in September as we enhanced our assortment as well as points of access. While we see the importance in ensuring we have the right national brands to attract and delight clients, we are also intending to begin to build greater external brand equity with our strongest performing exclusive brands. For example, O1 Algo represents roughly 10% of men's Q1 revenue, and Market & Spruce represented roughly 13% of women's Q1 revenue. both of which enjoy success rates higher than our best national brands. Second, we are preparing our technology foundation for scalability. There are various elements of our technology that need to evolve to support the next chapter of Stitch Fix. We realize that it will be important to evolve our overall tech platform to help us achieve our goals. This multi-year investment will include a move to a shared services architecture, relative to our current separate stacks for each line of business, expanding the real-time availability of our personalization data, and implementing the next generation of our vendor interaction API. Specifically on the personalization topic, we are now shifting our algorithms to combine detailed client-based feedback on our products and personal style preferences with real-time user behavior in our freestyle usage. All of these technological investment areas are critically important to where we are headed. It will take time to have them all in place, but it is an investment that we believe will pay off in a big way over the long term. We will keep you up to date on the progress. And lastly, we are building new marketing activation channels for new consumer growth. Historically, we had access to a subset of client acquisition channels as a result of our business model. These include word of mouth, performance-based channels such as Facebook and Instagram, as well as incentive-based referrals. With the launch of Freestyle and the ability to share our product catalog as a vehicle for consumer engagement, we are now entering into a number of new marketing channels including Google product listing ads, influencer marketing, and we will eventually participate in SEO. With that, I will hand it over to Dan to discuss our financial results and provide our updated view on FY22.

Thanks, Elizabeth, and hello to everyone joining us on today's call. In Q1, we generated net revenue of $581 million, representing 19% year-over-year growth. We saw continued momentum in women's as well as in kids' and in the U.K., where we nearly doubled revenue when compared to the first quarter of last year. Additionally, Freestyle has grown 40% year-over-year as we ramp the offerings. We grew active clients to nearly 4.2 million, an increase of 417,000 clients, or 11% year-over-year. However, sequential net client additions of 15K were below our expectations. As Elizabeth mentioned briefly, since the full rollout of Freestyle, we have been iterating on new client acquisition and onboarding methods, and that has had an impact on fixed conversions. Also, in the first half of fiscal 2021, we launched a high-dollar value referral program for new customers, which ultimately brought in clients who did not remain active as long as we had hoped. We have since ended the program. However, our net client ads were impacted by this in the first quarter, and we expect to continue to see the effects of this into the second quarter. And finally, we continue to face IDFA challenges in both historical and new channels as we evolve our marketing strategies. We expect a sequential decline in actives in Q2 and anticipate actives returning to growth in Q3. We continue to test, learn, and evolve our onboarding process and our marketing channels with the focus on adding new clients that engage with us over the long term. As a result, we're seeing healthy retention and engagement rates for new and recently acquired clients, which is driving the highest RPAC we have ever experienced. Q1 gross margin was a record 47%, representing a 220 basis point increase from the same quarter last year, largely driven by improved product margins as well as shipping cost optimizations. Advertising was 8.7% of net revenue in Q1, compared to 10.5% in Q1 of 2021. We continue to test new marketing channels, including SEM, brand, and influencer marketing. As we ramp these channels throughout the quarter, we opted to not overspend in marketing while we refine our onboarding experience. As we continue to improve onboarding, we'll also continue to ramp our marketing as appropriate to optimize for long-term free cash flow. Q1 adjusted EBITDA was $38 million, reflecting sustained revenue growth, strong gross margins, and lower marketing spend. Net inventory ended the quarter at $184 million, down 13% quarter over quarter. While we continued to add selection throughout the quarter, we did experience delays in receipts, primarily due to shipping delays in the global supply chain. We are currently experiencing delays from one to four weeks, and we expect these delays to continue in Q2 and beyond. We delivered $125 million in free cash flow and ended the quarter with no debt, and $401 million in cash, cash equivalents, and highly rated securities. Given our strong balance sheet, we are well positioned to make the necessary investments to become the global destination for personalized shopping while maintaining an unwavering focus on managing costs by operating efficiently. As we've shared today, we are in a moment of transformation, which will be a multi-year endeavor. The investments we are making now will allow us to unlock the long-term opportunity that Freestyle presents. As Elizabeth mentioned, we are very early in our journey, especially with Freestyle. In parallel, the apparel industry continues to be impacted by the macro supply chain challenges related to port congestion and logistics constraints. These unknowns have been factored into our outlook. Looking forward, for Q2, we expect net revenue in the range of $505 million to $520 million, representing growth of 0% to 3% year-over-year. We expect adjusted EBITDA in the range of negative $5 million to $5 million, or negative 1% to 1% of net revenue. For the full year, we now expect revenue to be in the high single digits year-over-year and adjusted EBITDA margins to be between 1% and 2%. This guidance reflects our expectation of lower net ads in clients discussed previously as we continue to optimize the client experience and onboarding in advance of accelerating further spend in marketing. It also reflects the ongoing macro impact of global supply chain challenges in the industry. As we've discussed today, we are in the first inning of a long game and will likely take several quarters to start seeing the impact we expect from our efforts. As we continue to learn, we are confident we are pivoting quickly to respond to any challenges we encounter. We remain excited for the journey we have embarked upon and confident that we are positioned well to become the global destination for personalized shopping.