Stitch Fix, Inc.

Good day, everyone, and welcome to the Stitch Fix third quarter 2022 earnings call. Today's conference is being recorded. And now at this time, I'd like to turn the conference over to Alexandra Viskohanka. Please go ahead, ma'am.

Good afternoon, and thank you for joining us on the call today to discuss the results of our third 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 third 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 involved 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 factor section of our quarterly report on Form 10-Q for our second quarter previously filed with the SEC, and the quarterly report on Form 10-Q for our third quarter which we expect to be filed today. 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. Reconciliation to the most directly comparable GAAP financial measures are provided in the press release on our IR websites. 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, Alexandra, and thank you all for joining us for Stitch Fix's Q3 2022 earnings call. Before we dive into our financial results, I'd like to take a moment to remind everyone where we are in the broader Stitch Fix journey to put into context the actions we're taking to improve performance. As you know, we are in a period of transformation from a fix-only business to a fix plus freestyle ecosystem. This enables us to serve our clients on-demand styling needs as well as to begin to acquire new clients through personalized shopping, thus opening up a much larger opportunity with a TAM that is two to three times greater than the fixed-only business. We are building upon our core strategic assets of rich data science plus the personal touch of human stylists. This is a necessary and significant undertaking that requires us to adjust our original systems, marketing tools, and selection to ultimately deliver enhanced customer experiences. While Freestyle has already demonstrated strong unit economics and meaningful client value, expanding Freestyle into a client acquisition vehicle is an iterative process. As we discussed previously, establishing a fixed plus Freestyle ecosystem will take time and will not be linear. We are moving forward deliberately and thoughtfully with a sense of urgency, addressing the areas that are within our control. In Q2, we saw that our new onboarding flow created friction for customers eager for a fix. therefore impacting conversion. In parallel, similar to many in our industry, we continue to navigate the ongoing effects of Apple privacy changes, which is impacting traffic to our site. Both of these have made new client acquisitions challenging. We are working through both of these with tremendous focus. Today, I will provide more detail on steps we have taken to mitigate these challenges and what is to come. Additionally, as we promised in our last call, our team has taken a deep look at our business and our cost structure. We have done a detailed review of how we deliver our experience, and we've begun to take action to become more efficient and deliver profitable growth over time. Both Dan and I will spend time on this momentarily. Now, onto our Q3 financial and operating results. While we are confident in the strategy we have in place, we are not satisfied with our Q3 performance. We can and must do better, and we're focused on execution as a team. Top-line results as well as active client counts were largely within our expectations. We generated net revenue of $493 million, reflecting an 8% decline year-over-year and an adjusted EBITDA loss of $36 million. Active clients declined 5% year-over-year and 3% on a sequential basis. ending Q3 at $3.9 million. We have made several improvements to the new client engine, which I will speak to in a bit. Revenue per active client, or RPAC, reached $553, our sixth consecutive quarter of RPAC growth, and our 90-day RPAC also remains strong. This RPAC expansion is a result of the incrementality of fixed plus freestyle usage by our clients, as well as the ongoing benefit of keep rates with fixed preview. Freestyle revenue grew 13% year over year, with outsized growth in categories like special occasion and social wear. In fact, freestyle revenue from dresses grew more than 75% year over year, which is over five times the rate of growth of dresses and fixes. Freestyle continues to drive incrementality in client spend once inside our ecosystem, and we are increasingly encouraged by the activity of our emerging Freestyle First customer base. Today, approximately 20% of Freestyle First customers come back and purchase again within 30 days. To improve our clients' experiences, we recently updated our core recommendation algorithm to a novel client time series model architecture, which unifies data from client interactions across both FIX and Freestyle. Historically, our algorithms focused on understanding a client's set of specific attributes. In contrast, this model focuses on understanding the client through their interactions with Stitch Fix over time. A test of this new model demonstrated significant improvements to client outcomes, with a nearly 6% lift in freestyle revenue and a 4% lift in freestyle reorders over a 30-day period compared to our previous algorithm. It is now rolled out across the freestyle experience. Now, on to our progress on conversion and marketing. Given that conversion of new visitors was not where we wanted it to be in the second quarter, we took action to refine the onboarding experience and our landing page. This has resulted in approximately 40% improvement in new client conversion in the third quarter as compared to the second quarter. First, We began directing all stitchfix.com traffic to a simplified fixed-verse onboarding path. Now clients entering through stitchfix.com are directed to schedule a fix upon completing a style profile. After scheduling, their freestyle shop is unlocked. Second, our landing page experience better clarifies our offering and highlights our key differentiators. We now feature more community-based stylist content and we enable visitors to interact with StyleShuffle before creating an account. While this is indeed positive progress, we are still not yet at our desired conversion levels. In addition, overall new client traffic to our website was down in Q3. As I noted at the outset of the call, both factors, conversion and traffic, ultimately played a role in the 3% decline in our total active client counts quarter over quarter. We are deeply focused on driving traffic into our ecosystem and reigniting new customer conversion. As part of these efforts, we are further diversifying our marketing portfolio with the support of our new chief marketing officer. We are moving more into digital channels such as TikTok and YouTube, as well as leaning into the use of influencer partnerships. To that end, we recently launched an integrated men's campaign with Keegan-Michael Key called Stitch Fix It!, During this campaign, we not only saw an increase of over 60% in men's traffic than over the prior weeks, but also strong efficiencies in our direct response ads, CPAs. Additionally, as we said we would do last quarter, we have successfully rolled out personalized search. With this feature, client search results are based on relevance and only show in-stock items that match individual style preferences, fit, and size. We believe this will drive continued engagement once inside our ecosystem for our clients, as this has been their most highly requested new feature. Now I want to shift to what I mentioned at the top of the call regarding decisions we are making to adapt how we operate to position ourselves to profitable growth. In light of our recent business momentum and an uncertain macroeconomic environment, we have taken a renewed look at our business and what is required to build our future. Today, we are sharing changes that we estimate will result in FY23 annual expense savings of $40 to $60 million. These savings will predominantly come from the difficult decision to reduce our workforce. This includes a reduction of approximately 15% of salaried positions and represents approximately 4% of our roles in total. Dan will spend time going into detail on our broader cost structure and expected savings. We also expect to see meaningful operational improvements from this restructuring. We are centralizing a number of key capabilities and streamlining decision-making to drive efficiencies in how we operate and deliver experiences. We are also ensuring that we are allocating resources to our most critical priorities. Going forward, we will continue to innovate our client experience and broaden our offering. In parallel, we will continue to identify opportunities to drive efficiencies in how we operate and deliver our experiences while investing strategically in both technology and product. I would like to thank those team members with whom we are parting ways for their many contributions to Stitch Fix and to our clients. Our priority is to support them through this transition in every way that we can. In summary, we strongly believe in and remain focused on our mission. We are transforming the way people find what they love by combining data science and the personal touch of human stylists. While we have work to do to expand our fixed plus freestyle ecosystem and reignite our new client engine, we have made progress in key areas in the third quarter. We remain focused on executing our fixed plus freestyle strategy with excellence. We are thoughtfully and deliberately making the necessary decisions to drive our business forward, and we commit to providing you updates as we make progress on our efforts. I will now hand it over to Dan.