Stitch Fix, Inc.

Good day, everyone, and welcome to the Stitch Fix second quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tani Shelburne. Please go ahead, ma'am.

Good afternoon, and thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2022. Joining me on today's call are Elizabeth Spalding, CEO of Stitch Fix, and Dan Jetta, CFO. We have posted complete second 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 our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause the results to differ. In particular, our press release issued and filed today, as well as the risk factors section of our quarterly report on the Form 10-Q for our first quarter, previously filed with the SEC, and the quarterly report on the Form 10-Q for our second quarter, which we expect to be filed tomorrow. Also note 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, Tani. As we pass the midpoint of our fiscal year, we've delivered second quarter results as expected, though we acknowledge we are not yet where we want to be with new client acquisitions and conversion, which will weigh on our outlook. As you saw in our press release, we have provided guidance for the third quarter as well as for the full year revenue. However, we have withdrawn our full year EBITDA guidance at this time, which Dan will discuss later. Before I go into the details of our results, I want to level set on where we currently are in Stitch Fix's journey and why we continue to be confident in our long-term success despite recent and near-term challenges. We remain confident we are taking the right steps to become the global leader in personalized styling and shopping. We are continuing to improve onboarding and client conversion, evolve how we market, and enhance our overall client experience. We discussed on our call last quarter that our journey is not a linear one. With that, let me turn to our Q2 results from the factors that influenced our performance. Topline revenue grew 3% year-over-year to $517 million, along with gross margins of 45.1% and $10 million in adjusted EBITDA. RPAC reached a new record high of $549 in the second quarter, and freestyle revenue grew at nearly 30% year-over-year, We ended the quarter serving approximately 4 million active clients, an increase of 4% from a year ago. Active clients declined 4% quarter over quarter. There were two factors that largely impacted growth ads. First, conversion of new visitors for fix and freestyle is not where we want it to be. Second, given changes in iOS 14, marketing channels that have historically been effective for us are presenting challenges and effectively targeting clients. I'll elaborate on each of these points further. However, as a result, we experienced lower gross client additions and also opted to pull back on marketing spend in the second quarter. We invested 6.8% of net sales for the second quarter relative to 8.3% in the same period last year. Also, higher dormancies contributed to lower active clients for the quarter. As a reminder, we had higher dormancies in Q2 due to lapping of the high dollar referrals from last year, which we ended in Q3 of 2021. I want to touch on the point I mentioned earlier about conversion and provide some further insight. In our efforts to launch and promote Freestyle, we chose to direct visitors coming to StitchFix.com towards the Freestyle experience. It is important to note that stitchfix.com is the primary landing page for customers interested in ordering a fix. Therefore, in leading clients to the freestyle experience first, we inadvertently created friction for those seeking a fix. In an effort to mitigate this friction, we are beginning to direct stitchfix.com traffic to a clear and easy fix onboarding path. We expect this to boost new fix client conversion over time. This change in onboarding flow should not be taken as a change in our long-term vision for freestyle, which is to unlock a much larger TAM through daily shopping, styling, and inspiration. As we've shared in prior calls, we believe the TAM potential is two to three times larger than the fixed business alone. We're still learning how best to onboard Freestyle First clients and recognize we have work to do on the freestyle experience. We've learned that Freestyle First clients are coming primarily through product listing ads and other marketing channels that were not available to us prior to launching Freestyle. We will continue to test, learn, and iterate on how best to use these new marketing channels. We also recognize that we have work to do to improve the Freestyle client experience so we can convert more visitors to active clients and make Freestyle the growth engine we expect it to be. We have already made changes to enable a better logged-out experience. including the ability to add multiple items to a shopping bag and check out while logged out. We also understand that there are a number of basic but necessary features we need to add to Freestyle, such as search functionality, which we plan to introduce in the coming quarters. Ultimately, we believe the efforts I've discussed, both around fixed and Freestyle, will help drive improved new client conversion, and we will be prepared to ramp marketing spend when we get the client experience right. The lower-net client ads we have experienced in the first half of the year have impacted our revenue and are driving our revised outlook for the back half due to the compounding nature of fewer new clients buying. However, to reinforce my comments from the start of the call, we are confident in our long-term strategy, and we're seeing clear signals that we are taking the right steps for the future of the business. We believe the combination of fixed and freestyle demonstrates the potential of our future ecosystem as we observe behaviors of our existing and new clients. RPAC reached a record $549 in the second quarter, up 18% from a year ago, a result of higher average order values in our fixed business, which are up 5% from the second quarter of fiscal 2021, as well as the incrementality provided by Freestyle to our existing client base. Freestyle revenue grew 29% year over year, and penetration from our fixed business is steadily improving, with over 32% of our women's fixed clients purchasing via Freestyle today. Additionally, our recently acquired customer cohorts are engaging with us more holistically, spending over 25% more on average in fixed and Freestyle combined than clients acquired in the comparable month in 2021, and over 15% more on average than in 2020. The 90-day RPAC, a measure of quarterly net revenue divided by clients that made one or more purchases within the same quarter, is up 8% year over year. With the combination of fix and freestyle, we believe we are better able to meet the consumer needs of fit and discovery than search-based shopping. The return rates we see in freestyle, which continue to perform at less than half of e-commerce peers, underscore why we are confident in our direction. I will share some final thoughts with you after Dan goes through our results and our guidance in more detail.