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.

With that, we're now ready for your questions. Operator, I'll turn it over to you. Thank you.

If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Again, press star 1 to ask a question. And we'll take our first question from Mark Mahaney with Evercore ISI. Please go ahead.

Thanks. Two questions, please. Could you talk about the impact from fixed preview, what impact that's had in terms of spend per customer, the number of items fixes, the number of items per fix that people are keeping? And then secondly, could you go through again the net ad shortfall in the quarter? I got the IDFA part, but the other factor that dragged down in the first quarter and is likely to continue in the second quarter. Could you double click on that, please? Thanks.

Hey Mark, thank you for the questions. Yeah I will answer those and Dan feel free to add on. So on fixed preview we really like what we have seen with that experience and it's continued as we furthered the rollout. So overall we've seen increased average order values largely as the result of higher keep rates. You know clients have an opportunity to see ahead, select a few things and then the stylist finishes the fix and that's had a positive impact on average spend. We also you know have seen a improvements year on year on client retention, which we also think can be attributed to the positive experience of fixed preview coupled with freestyle. And then on the net ads, we pointed to really three different drivers, which we are focused on. So the first is, as both Dan and I mentioned, we're incredibly focused on evolving the onboarding process to Stitch Fix, both for clients that are experiencing and wanting to get into fixes as well as freestyle. And so we see opportunity. We've already made some adjustments as we've entered into Q2 and just more learning to just make it, frankly, a lot easier for new clients that want to get shopping right away to get into that experience as quickly as possible. The second that we pointed to that I think you were alluding to, Mark, is we've always really had a good client growth from referrals and incentive-based referrals. We tested a program last Q1 and into Q2 of last year that was offering a higher referral fee, and that was something upon analysis we realized was not generating the kind of clients that we want in our ecosystem. And so we've ended that program, but that is having an impact not on the growth ads, but net ads as a result of dormancy. And then the third is kind of the impact of IDFA and the iOS privacy changes, which is We're continuing to learn and improve our performance within marketing, just given those changes, similar to many other companies that market.

Thank you, Elizabeth.

Next, we go to the line of Ross Sandler with Barclays. Please go ahead.

Hey, guys. I guess I'll ask about the revenue guide. So you mentioned that you're having all these supply chain delays in getting product, and I know that inventory levels kind of dictate how many fixes and how much freestyle you can send out in any given day, week, month, quarter. So how much of the decel is related to the client net ads that you just talked about versus not having enough inventory to then fulfill the demand that might be out there? And I guess just stepping back from these issues, how much of this do you think is kind of temporary versus, you know, pretty easily salvageable? Like, could we, you know, get the growth rates back up in a matter of a couple of quarters? What's your view on that? Thank you.

Yeah, thanks, Ross. I mean, maybe I'll start at a very high level and then I'll hand it over to Dan. I mean, I definitely think we think both of these are temporary, just the supply chain issues we would expect to subside over the coming year plus. And then onboarding, you know, we're learning a lot right now and we're confident we're going to improve over the coming quarters. But with that, let me hand it to Dan to give more detail.

Yeah, I'll just add that with respect to the client actives and the impact that has, obviously The client active in Q1 and as we mentioned into Q2 will have some downstream impact, although we do expect to return to growth in Q3 as we enter the spring season for client ads. So we do view that as temporary, although it does have a quarter-on-quarter effect. In relation to inventory, we do have certain categories that we would like to have more inventory in, not all categories, and that does have an impact. Going into the back half of the year, we're managing that as tightly as we can by looking at placing orders early and tracking through all the logistics. We'll have to wait and see how that impacts our Q3 and Q4. So back, just to round this out, back to Elizabeth's point, it's really both, and we do view them both as temporary.

Next, we go to the line of Corey Carpenter with J.P.

Morgan.

Thanks for the questions. I had two. Maybe first, I think, Elizabeth, you mentioned in their prepared remarks dealing with short-term impacts of cannibalization. Could you just expand on that comment a bit and maybe what you're seeing on the cannibalization side? And then just in terms of COVID, how sensitive is the business or consumer demand to COVID headlines? Are you seeing much impact at all when cases flare up or do you feel like we're kind of past that at this point? Thank you.

Yeah, thanks for the question, Corey. So on the cannibalization point, I mean, I guess I would think about that a couple different ways. First is we feel really good about the additive nature of fixes together with freestyle for clients in our ecosystem. And I think the record high of $524 on our RPAC is a really strong signal of the benefit of having both freestyle and fixes, as well as the evidence of category growth rates in categories that have typically been underrepresented buy fixes like footwear. So that we feel really good that on the long-term basis we're generating, you know, over time we'll be generating higher LTVs with our clients. The short-term cannibalization that I was referring to is more as we think about onboarding new customers to our experience, over time we anticipate generating more traffic to site through both Stitch Fix.com, through product detail pages, and new channels. But in the short term, you know, people are making a tradeoff between do I want to try fixed, do I want to try freestyle. And so that's the learning phase we're in right now that we see opportunity to get better and better at and really grow the overall net ads with our clients. But I think in the short term we anticipate, you know, some learning over the coming quarters to really get that right. And one of the short-term adjustments we've already made there is We know really high-intent clients that just want to be styled, want to get a fix, making sure we get that signal and take them directly into that experience. But those are some of the learnings that we've had in the quarter plus that we've since opened Freestyle.

Next, we go to the line of Edward Iruma with KeyBank Capital. Please go ahead.

Hey, thanks for taking the questions. I guess first, back to this net new customer number. how much of it is driven kind of both with the gross numbers being softer versus higher churn of the existing customer base? And I guess just stepping back, I know you identified, you know, the onboarding process as a particular sticking point, you know, but it's been kind of the same process for an extended period of time. So I guess why is it that you think you're starting to encounter some of these newer problems today? Is it that maybe you're starting to exhaust the people that would be open to this type of product? You need to kind of Reintroduce it to them or kind of help us understand why it's an issue today versus maybe six, 12 months ago. Thank you.

Yeah, thanks, Ed. So on the net ads front, it was really a combination of those two things. So both acquiring fewer clients, we opted to spend less on marketing, and then also the headwind of just this temporary effect of a higher dormancy rates. On the onboarding, we really had never onboarded clients directly into Freestyle. The plurality of our clients, even today still using Freestyle, are fixed customers that we've introduced to Freestyle. We have started to add a lot of new clients, and we'll be adding more as we improve our onboarding experience to Freestyle. But I think what we're learning is how do we make it as simple as possible for people to start to explore Freestyle? there isn't a logged out exploration experience yet with Stitch Fix. And so you can land on a product detail page through a Google product listing ad or a Facebook ad on a particular item, or you can come to stitchfix.com. We did make a number of improvements before launching Freestyle where our signal capability on fashion and style preference, I would say, has improved quite a bit over the last several months. But just this idea of how do we make it actually even easier to just get shopping right away? And I think now that it's open, we're seeing places and opportunities to continue to test and expand that. And I did want to go back. I apologize, Corey, I missed the second part of your question on COVID. So in addition to those questions from Ed, with COVID headlines, what impact do we see? I mean, I think maybe there's two things that we have seen with that historically in all the chapters of COVID over the last year and a half. First is we tend to see new signals of what consumer product category preferences are. You know, typically when we go into a shelter-in-place mode, there's been more nesting, more comfortable clothes versus when we see a reopening. Like, for example, in Q1 of this year, we saw a 100% increase quarter-on-quarter on people looking for commuting-based clothes, so kind of going back in the office. So what we typically see is just changes in category preferences. And then, you know, I think in general, there has been just the trend to online accelerates during these time periods of, you know, higher rates of COVID. But on the flip side, as a general category, we know that apparel, some of that shopping does go down. So net-net, it's been a positive for us. But really, the trend spotting is now what we look for as we go through chapters of COVID.

Thank you. We go next to the line of Erin Murphy with Piper Sandler. Please go ahead.

Good afternoon. Two questions for me as well. First, on the men's business, that has been weak for a couple of quarters now. Can you just talk about what you attribute that to? And then, secondly, what's the right way to think about marketing spend here in the second quarter and then as you move back into the second half of the year? Thank you so much.

Thanks, Erin. I can start with the men's question, and I'll hand it to Dan on the marketing question. Yeah, I mean, overall, you know, the U.K. business doubled in the quarter. Women's and kids are both very strong. I would say men's has been slower to reaccelerate in this COVID time period. We're testing a lot of new things. We've added actually a lot of new brands. We are starting to acquire customers through that product detail page experience. A few highlights we're excited about is we've seen footwear and denim as a great starting point for those clients. So we're learning what they're looking for in this time period. But I think what we've realized is some of our our messaging on fixes, and that approach was just less resonant during the COVID time period. I think we're pretty excited about what freestyle represents, and we're in really test and learn mode to get that business accelerating once again. On the marketing side, let me hand it to Dan.

Yeah, Erin, on marketing, going into Q2, which can be a weaker quarter for us, at least in the November-December time period due to the We're looking at slightly lower marketing spend probably from Q1, but for the full year, we are likely going to spend close to what we spent last year. So think of that as 9% to 11% of revenue as we ramp up into spring, as we improve our onboarding experience, and as we continue to branch out in new channels. We're going to test, iterate, and learn and scale what's working well for us from a traffic and conversion standpoint, as well as the new channels that Elizabeth alluded to, such as the SEM channels and the influencer channels and brand-based channels, all of which were ramping. So in total, we're really looking at back to that 9% to 11% of marketing spend.

Next, we go to the line of Kunal Madhukar with UBS. Your line is open.

Hi. Thanks for taking the questions. A couple if I could. One, you know, freestyle revenue increased 40% year over year. UK revenue has doubled significantly. What does that mean for the core business U.S. revenue? Did that increase or decline? That is one. And second is, can you talk to the effectiveness of, you know, the algo plus stylist plus the preview when, you know, 80% of the fixes, the first fixes, have at least, you know, one accept? which means 20% don't have any accepts, and there could be more non-accepts within that 80% kind of vicinity. So how personalized is this? How effective is the algo? How effective is the stylist? And how effective is the preview? Thank you.

Yeah, thanks, Kunal. I can take that, and Dan, feel free to chime in. Yeah, we did mention those growth rates with Freestyle and the UK. So Freestyle is still a much smaller percentage of our business than Fixes, so the core Fix business is growing. The UK is an earlier stage market, and we love what we're seeing there. It gives us a lot of confidence of global expansion, and we know, as I mentioned with Freestyle, that as we get more new customers into that experience, which we're very early stage on, that growth rate really represents subsequent purchases by existing Freestyle customers that were already fixed customers. So I think we're very early stage of opening up Freestyle to new customers and we are still seeing growth in that core fixed business. On the effect of ALGO plus Stylus Preview, you know, we've mentioned the strength and it was an earlier question on what have we seen with fixed preview and we have seen you know, just continued positive increase on keep rate and overall average order value, which really is a sign of a strength of that signal of being able to generate previews for clients and really get the fix experience right. You know, for clients that don't request specific asks within their fix, which is about half of our clients, the first step of that preview is actually algorithmically generated, and we've done a lot of testing to show the power of that experience And then we know in the second step that our stylists add a lot of value of finishing that fix out. I think you referred to that 80% successful first fix. And we've seen that to be actually a very strong indicator of the first experience. And it's a pretty high bar we set for ourselves. It both means that the client not just kept something, but they also are positively anticipating their next fix. And we're constantly working to improve that stat. But if you think about it, This is a very different experience than typical shopping, and yet to have that high percentage be successful is a really good sign of the power of the combination of our data science together with stylists.

Thank you.

Next, we go to the line of Yousef Squally with Truist Securities. Your line is now open.

Thank you. Two questions for me, please. First, your fiscal year guidance implies, I think, about 10% growth in the second half. Can you maybe just parse out the mix of growth in unit versus price? Is it fair to assume that the bulk of that 10% is still going to come from price rather than unit growth or active clients' growth? And then relative to that and maybe stepping back and looking at the bigger picture, if I look at your performance last quarter and then this past quarter, well, the last two quarters, it seems like your LTV to CAC has gone up pretty dramatically. So has your thinking about maybe the growth prospect of the business changed to a certain degree, and therefore you may be putting maybe more emphasis on the economics of the business on a profitability or LTV to CAC standpoint, considering how much better have gotten relative to what you thought maybe a year or two ago. Thanks.

Yeah. Thanks, Yusef, for the great questions. Let me hand these to Dan.

Hi, Yusef. You're right on the back half. It does imply around that 10% growth rate. And it is both unit and rate as well. As I mentioned earlier, we do expect actives to go and to grow in the back half of the year, especially as we enter into the spring season. We continue to see very solid order economics in terms of AOV for both fixed and freestyle. So it is a combination of both in the back half. It's not rate only. We do expect units and actives to grow as well. To your second question on LTV to CAC, I think I'll remind everyone we've talked briefly in prior calls about the unit economics of both freestyle and fixed, which are very strong. If you exclude marketing, on an overall basis, we're north of 30% in contribution profits. So very strong unit economics, very strong order economics. And we're investing a lot in the product and the tech to continue to grow and scale. And so I would not say that we're optimizing for profitability over growth. What we are optimizing for is an amazing client experience that will ultimately lead to higher growth rates and long-term free cash flow. And the unit economics that we have, the order economics, the unit economics, and the overall contribution profit that we generate allows us to invest heavily in the customer experience, which will accelerate growth on a forward-looking basis.

Great. Thank you both.

We go next to Lauren Schenk with Morgan Stanley. Your line is open.

Hi, this is Nathan Feather on for Lauren Schenk. Can you help quantify the impact of supply chain disruptions in 1Q and what you're thinking about for that for the remainder of fiscal 22? And then is that supply chain impact primarily in lower inventory and therefore revenue that you're able to actually get in those specific categories? Or is there some impact to gross margins as well with higher rates? Thank you.

Thanks, Nathan. Let me hand both questions to Dan.

Yeah, in Q1, the impacts were muted from supply chain simply because we had ordered in advance of the major delays. As you know, our ordering is six to nine months out. That said, we are starting to see the impacts of it coming into our Q2. I made the comment on our inventory being down sequentially. We are seeing one to four week delays in inventory. And so we are seeing certain categories lighter in inventory than we'd like. Other categories are fully funded. And that does have the impact of freestyle, of impacting freestyle in the back half, just because we can't offer the full selection of the catalog in certain categories. Now, we are working to manage and mitigate that to the extent possible by placing orders even earlier than we normally would and ensuring that we're doing everything on our end to alleviate any of the supply chain constraints. But, yes, it does have an impact in the back half of the year for us.

Okay, great. Thank you. Next up is Mark Altschwager with Baird. Your line is open.

Good afternoon. Thanks for taking my question. Elizabeth, first, just to clarify some of your earlier comments on cannibalization, are your learnings that more new clients coming to Stitch Fix are opting for freestyle versus trying their first fix? Or are you seeing that existing clients are either canceling fixes or changing the fixed frequency once they're becoming more aware of the freestyle offering?

Yeah, thanks, Mark, for the question. We're seeing really strong metrics on retention of clients with fixes and, in general, the continued health of that business. What I was more referring to is in the onboarding process, we're kind of introducing a little bit of paradox of choice And for some of our clients, they probably are very high intent that just want to fix. And, you know, I think we acknowledge in the onboarding we may be distracting some of those clients with shopping and freestyle when in reality they just want the support of a stylist. So that's an area of one opportunity, and we've already made some adjustments on that. And then for those that are really interested in just personalized shopping, making sure that they get access and availability to that as quickly as possible. But I think what we've found is We expect over time those two things to be highly additive, but in the short term and part of what we saw in Q1, with that not being as additive as we thought it would be in the new onboarding of conversion. But not an issue to your question of once those clients are inside of our ecosystem.

Thank you. And just one more, if I may. You talked about the transformation being kind of a multi-year endeavor, and it sounds like there's some bigger tech investments that you're planning here in the near term. So my question is, how should we be thinking about kind of the medium-term revenue growth algorithm? Do more of these multi-year investments need to be coming online in order for revenue to kind of reaccelerate back to the target ranges we were seeing prior to 2022?

Yeah, thank you for asking that. Let me start, and then I'll hand it to Dan. I mean, first of all, I would say You know, we feel like we probably haven't been as explicit as we could be on the magnitude of transformation that we're going through. You know, it's a very exciting phase for the business. If you think about the first, you know, nine years of our existence, it was building this incredibly disruptive model of fixes. And now in the last, you know, year and a half, we've embarked on our second chapter. And it really changes so many elements of our business to really build on the foundation of personalization that we've built so it absolutely takes advantage of our understanding of the style graph, benefiting from, you know, a million people playing style shuffle monthly, understanding what drives fit. But opening up personalized shopping has a huge set of investments for us to understand and make on making our infrastructure scalable, ensuring we're building it to launch into new markets. taking our algorithms that were largely behind the scenes and making them highly available and client-facing. And so a lot of what we're doing right now are making those investments. We don't have an exact timeline, but it also means building the right team. So another big focus, and you can see that in areas like SBC, is we're really growing our tech talent. We've added a new chief people officer. We've added a number of VPs and directors. We'll actually be looking for a new chief product officer in next fiscal year. Our current chief product officer will be departing. So there's just a lot of investments we're making to get that right over the coming quarters. And we anticipate we're doing this for the long game of acceleration in the future. We haven't given a specific time frame. But Dan, I don't know if you want to add on to that and sort of the investments that we're making.

Yeah, I will just add that obviously there's investments that are shorter term that will have bigger impacts, such as our investment in increasing selection, improvements that we're making, the features in the onboarding experience, the product features that we'll launch. And then as you noted, the investments that we're making in tech and infrastructure, which are basically investments that we need to scale into new categories and new regions, those will be a bit more long term. And so I can't answer your question specifically on growth rates, but there's a lot we're doing that's going to have an immediate payback, and there's a lot that we're doing for the long term to scale into new categories, new products, and new regions.

Thanks for all the detail.

And we do take our final question today from Simeon Siegel with BMO Capital Markets. Please go ahead.

Off an earlier one, did you say, what are you expecting just for gross ads in the guided decline in actives next quarter? And then the same idea, but a little bit zooming out. I think we used to talk about the lapsed customer database being this really large opportunity to mine for freestyle adopters. So any update on that lapsed customer reactivation learnings you've gotten from the rollout? And then just lastly, Dan, I mean, congrats on that gross margin strength. Do you want to talk about how you view gross margin opportunity from here? Maybe speak to the differences between freestyle and fixed? and then any important inventory management discrepancies between the two. Sorry, that was a lot. Thanks, guys.

Thank you, Simeon. You know, you were – I think we maybe missed the very beginning of your question. What I heard was a question on growth ads relative to net in Q2, then activating our prospects, and then growth margin. Were those the three questions, or did we miss anything in the upfront?

No, that was perfect. Okay.

Why don't I mention the prospect opportunity, then I can let Dan chime in on the growth ads as well as the growth margin, the first and third question, so I'll take the second. Yeah, so as you've mentioned, we have actually millions of clients who have signed up historically with Stitch Fix but not converted to a fix. And so we are always testing dormant reactivations with those basic clients. And now that we have Freestyle available, we're excited to embark on greater marketing and activation of those clients. And we have seen some accelerated performance with that group, but nothing so big that we're kind of pointing it out separately. But we're excited with what we're seeing and see opportunity to just have more to offer to that client base with the opening up of Freestyle. So I think it still represents a somewhat untapped opportunity. And as we continue to expand the client experience, the thing I would say is like clients that are in that population that are within one month, three months, six months, those are a lot more likely to be engaged than folks that went through that sign-up flow two years ago. So we're really focused on the more recently engaged. The rest of those folks almost behave like pure new prospects, but it's absolutely a segment that we have been marketing to and learning how to activate them with freestyle in addition to fixes. I'll hand it to Dan for the other two questions.

Yes. I mean, on your first part on gross ads, I think it was in reference to Q2. And obviously, the Q2 is one of our weaker quarters. That said, you know, gross ads, we do expect to continue in a similar vein that we saw in Q1 and before starting to grow in Q3. And so just given the marketing channels that we have and what we're seeing with the healthy clients that we are acquiring, gross ads will be similar in Q2 versus Q1. And the reason for the guide down in net ads is simply because of the high dollar referrals that we referenced earlier on. We are copying that as that program ran through Q2 of last year. Before we ended it so that's a very that is a short-term comp that we have which is the reason for the guide on net And that act is being down quarter on quarter before we start to see growth again in q3 In terms of your question on gross margin the 47% was a very strong gross margin that we had in q1 we we do expect that gross margin to come down slightly over the next several quarters and For a variety of reasons, one, we are seeing a mix into more national brands as we continue to launch that will have a slight impact on gross margins. And we also are seeing product costs continue to start to come up, which is really across many industries for that matter. Higher raw material costs, higher shipping costs, and we do expect gross margins to come down. and be similar from a full-year perspective as they were in 2021, which was 45%. So from a full-year perspective, we see gross margins trending in that direction for the remainder of the year and for the full year.

Great. Thanks so much, guys. Best of luck for the rest of the year.

Happy holidays to you and your families. Thank you.

Thanks, Damian. Thank you, everybody, for joining us on today's call. We look forward to keeping you updated on our progress.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.