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spk09: Good day and thank you for standing by. Welcome to the second quarter fiscal year 2023 Stitch Fix earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Hayden Blair.
spk19: Good afternoon, and thank you for joining us today to discuss the results for Stitch Fix's second quarter of fiscal year 2023. Joining me on the call today are Katrina Lake, Interim CEO of Stitch Fix, and Dan Jetta, CFO. Also joining us on today's call is David Ockerhart. We have posted complete second quarter 2023 financial results in a press release on the quarterly results 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 sections of our annual report on Form 10-K for our fiscal year 2022 previously filed with the SEC, and the quarterly report on Form 10-Q for our second quarter of fiscal year 2023, which we expect to be filed tomorrow. 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 Investor Relations 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 investor relations website and a replay of this call will be available on the website shortly. With that, I will turn the call over to Katrina.
spk15: Thanks Hayden. 12 years ago, I was inspired by a very simple human problem to help people look and feel their best. Now, as I find myself back as interim CEO, this simple mission feels more resonant than ever. I'm proud of the ways that we've made our mission a reality but also motivated by the opportunity ahead. We're still in the early days of transforming the industry of apparel, and I feel optimistic that Stitch Fix can continue to lead the way in personalization and achieve greater impact in the years to come. While many companies may be starting to define an AI strategy, our company was built on data science from day one. We have built technology and systems that leverage the best elements of human stylists combined with machine learning And the billions of proprietary data points that we have around client and product interactions are rich, meaningful data sets that predict outcomes and help us to understand what clients need. At the same time, I realize we haven't met recent expectations. Driving towards an ambitious vision has resulted in a loss of focus. We must, now more than ever, deliver on the client experience, bring focus in our marketing efforts, and drive results for our shareholders. We have clarity on our path long-term and short-term. Long-term, I continue to have great conviction that the market opportunity for a more personalized way to buy apparel is large and growing, and that we have a significant advantage rooted in our decade of experience in leveraging data to deliver personalization at scale. Shorter term, we also have clarity. We need to get back to a position of execution and profitability. We have a history of achieving both in the past and I'm confident we will get there again. There were two major events in fiscal second quarter intended to help reposition and refocus the company to set ourselves up to optimize for liquidity and profitability in the short term and maximize our long-term growth potential. First, we restructured our operating model and made the difficult decisions to reduce our headcount by 20% of salaried positions and to shutter operations in our Salt Lake City warehouse. Late last year, we began analyzing the team and determined to restructure the organization in an effort to create a leaner operating model. This also allows us an opportunity to reorganize and refocus to more nimbly execute. These decisions are never easy, but we know it was the right decision to achieve our goals of liquidity and profitability and for the overall health of the business. And second, we are conducting a search for a permanent CEO. The Board and I realize that the macroeconomic environment, competitive landscape, and even our own business has changed meaningfully over the past few years, and we are excited to find the right leader for the present and future of Stitch Fix. I am encouraged by the process thus far and am confident that we can find an inspiring person to lead the Stitch Fix team and help reestablish the track record of results we were once known for. In addition, we shared in our press release this afternoon that Dan Jetta will be stepping down as CFO to pursue a new opportunity. The Board and I want to thank Dan for his service to Stitch Fix and wish him well for the future. David Ofterhaar, our SVP of Finance, will succeed him as CFO. David joined us four years ago with an eye towards CFO succession. In working together these many years, I have been impressed and inspired by his depth of partnership with the functional leaders at Stitch Fix, his deep commitment to and understanding of our business and our team. He is a thoughtful and trusted leader, and I'm excited for him to step into the CFO role. Now onto the financials in the quarter. Fiscal second quarter revenue came in at $412.1 million, which was at the lower end of the provided range. Despite this, we delivered adjusted EBITDA of $3.8 million, which was at the high end of our guidance range due to effective cost controls and our corporate restructuring. Dan will dive more into the financials later on, but before handing it over, I want to touch on topics in marketing and our product that demonstrate how the company is rallying around bringing focus and clarity to better deliver results for our clients and shareholders. Consistent with the broader company, our marketing strategy aims to preserve liquidity and achieve profitability while simultaneously attracting long-term customers to fuel a return to growth. This will be the case as we continue to refine our traditional paid channels as well as diversify into under-penetrated channels we have yet to scale. We are also continuing to lean into client retention and re-engagement strategies in an effort to continue to increase engagement and optimize our CPAs. It's worth highlighting that our CPAs were down over 40% from a year ago, which shows, despite a significant reduction in overall budget, we are gaining traction and more effectively deploying our marketing dollars. Overall, we know these are the right things to focus on, and when combined with our efforts to maximize the client experience, and improve retention should maximize ROI in the short term and set the stage for a return to growth. Moving on to the client experience. A complicated macroeconomic environment and tighter client wallets make it more critical than ever to re-examine and bring focus to our client experience. The ambitious vision we embraced for the past many months has resulted in a client experience that is less focused on our core areas of differentiation And we believe that there is opportunity to drive long-term value by being really deliberate and targeted about the role of features and functionalities in the Stitch Fix ecosystem. As an example, we've recently refined our point of view on Fixed Preview. Although at the highest level, Fixed Preview has demonstrated a positive impact on AOVs, digging into the data, we see a more nuanced story. There absolutely are clients who significantly benefit from fixed preview, but there are also clients for whom showing a preview actually increases cancellations. Acting on this data, we found an opportunity to drive better outcomes and LTV by experimenting with eliminating the preview for some clients, allowing those clients to enjoy the surprise and delight that we know those clients value, while allowing other clients to benefit from the agency of fixed preview. I share this example of letting data drive our decisions and providing more intention and focus in the client experience. I anticipate there are many similar opportunities as we dig into the data and the experience, and we believe these strategies will drive LTV, enabling us to optimize cash flow and profitability in the short term while positioning ourselves for an eventual return to growth. Before I turn it over to Dan, I want to thank the entire team at Stitch Fix. We talk internally about celebrating Stitch Fix Grit as one of our core operating tenants, and I've been inspired by the grit I've experienced day in and day out from the team these past few months. I continue to be inspired by the passion I see to deliver value for our clients and our business and to make our company a fantastic place to work. Our continued focus and data-driven decision-making are paving the way for a bright future for Stitch Fix. I believe we are on the right track to get there and I look forward to continuing the journey with you all. With that, I'll turn it over to Dan.
spk07: Thank you, Katrina, and hello to everyone on the call. Before jumping in, I want to thank Katrina and the Stitch Fix Board for this opportunity and congratulate David on his new role. David and I have enjoyed a positive and productive working relationship during my tenure and I am confident he is the right person to lead the team. David and I will be working together over the next several weeks to ensure an orderly transition. On to our Q2 results. Q2 net revenue declined 20% year-over-year to $412.1 million due to lower net active clients and higher promotional activity in the quarter. Net active clients in the quarter declined 11% year-over-year to approximately 3.6 million. As Katrina mentioned earlier, we have continued to diversify our marketing channel while ensuring we realize positive near-term ROI on advertising spend. Total advertising spend in the quarter was 5% of net revenue and down 46% year-over-year. We like the trends we are seeing in overall CPAs. Even with the lower spend in advertising, we did see positive year-over-year in gross client ads in men in Q2. And while women's and kids' gross ads were down year-over-year, our rates are improving in both lines of business. We do continue to see elevated levels of inactive clients and continue to focus on improving this with the right client experience. We expect advertising to be 6% to 7% of net revenue for the rest of the year, though we'll continue to be opportunistic if we experience the right ROI and lean in where appropriate. Revenue per active client declined 6% year over year to $516. While our overall average order value is holding relatively steady year over year, similar to Q1, Our analysis continues to show that all client cohorts are spending less than in prior years. We expect this trend to continue through the rest of FY23. Q2 gross margin came in at 41%, down 400 basis points year-over-year, driven primarily by lower product margins due to increased promotional activity and higher product cost. Total transportation costs were also up year-over-year due to increased carrier rate. Consequently, gross margin was down approximately 100 basis points from Q1 due mostly to increased promotional activity. We expect gross margins to be around 42% for the remainder of the fiscal year and are actively focused on improving gross margins as we see opportunities to improve product margin, transportation efficiency, and inventory efficiency over time. Q2 adjusted EBITDA came in at 3.8 million reflecting our ongoing cost control efforts, including a reduction in force and the closure of our Salt Lake City warehouse. The adjusted EBITDA excludes $34.7 million of restructuring and one-time costs. Net inventory ended the quarter at $159 million, down 28% quarter over quarter and down 13% year over year. Free cash flow for the quarter was positive $15.4 million, our first quarter of positive free cash flow since Q1 of FY22. And we ended the quarter with $224 million in cash, cash equivalents, and highly rated securities. In summary on our cost structure, with the execution of our restructuring actions and our reduced advertising levels, We have now executed against all the actions needed to realize 135 million of cost reduction targets for FY23. Additionally, we shipped our last fix from the Salt Lake City Distribution Center at the end of January, and we have distributed the inventory across the remaining fulfillment centers in our network. We will begin to see cost savings from the closure in Q4. Our goal remains to achieve positive adjusted EBITDA and free cash flow in the short term while continuing to position ourselves for profitable growth in the future. And we believe we are well on our way to achieving these goals. Now onto our outlook. For the remainder of the fiscal year, we expect to continue to face a challenge in highly promotional operating environment. With that said, we are leaning into our areas of differentiation and focusing on managing the things within our control. We will continue to responsibly manage our cost structure with the goal of staying adjusted EBITDA and free cash flow positive for the remainder of the year. For our fiscal Q3, we anticipate revenue to be between 385 and 395 million. We expect adjusted EBITDA for the quarter to be between negative 5 million and positive 5 million largely reflecting increased seasonal advertising spend as we continue into the spring-summer season, where our CPAs are generally more efficient. For the full year FY23, we now expect revenue to be between $1.625 billion and $1.645 billion. We expect adjusted EBITDA for the year to be between break-even to positive $10 million. Going forward, we remain relentlessly focused on liquidity and profitability. The improvements we have made in our cost structure will allow us to invest in growth as we continue to focus on improving our client experience. And over time, we expect the improved client experience will enable us to grow our net active, revenue, and free cash flow. With that, I'll turn the call over to the operator for Q&A.
spk10: Thank you.
spk09: As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.
spk10: Our first question comes from Yusuf Squali with Truist. You may proceed.
spk01: Great. Thank you very much. Hi, guys. A couple of questions. Good to hear from you, Katrina, again. The first question maybe for Katrina, can you just speak at a high level about how you see, I mean, you talked earlier about you, on the one hand, you've had a lot of focus, on the other, you have clarity on the path forward. One, maybe can you just expand a little more about what, pinpoint the two or three areas where you felt the Citrix had lost its focus And then maybe kind of what gives you the confidence that you are back on the path that should ultimately get you to growth. And then maybe can you double click a little bit on your EBITDA margin guide of negative five to positive five and just help us about how you get there. Obviously, I think you said gross margin should be around 42%. which really only leaves advertising and sales and marketing and G&A as the other components. So maybe just provide a little more color on where you see those for the second half of the year. That would be very helpful. Thank you both.
spk15: Great. Thanks, Yousef. It's good to be back. I'll answer your first question, and then I will have Dan weigh in on the second around EBITDA margin. On kind of the focus and clarity, I think there's innumerable examples that I could bring. you know just at a very high level as we thought about expanding the business in a very ambitious way we took a marketing approach that that probably tried to bring people in through a variety of different customer segments and you know very notably we spent marketing dollars trying to bring people into a freestyle first experience as an example so that's a place where You know, not only did we find that that marketing of freestyle first wasn't as effective as what we had done historically in fixes, but it also actually made it harder for us to be able to be acquiring people into the fixed channel. And so that's, I think, one example of how that comes to life. Another one is around inventory. You know, we definitely built up an inventory in anticipation of a freestyle customer that, you know, was a different set of inventory than fixes and also more unknown. It was a customer we hadn't served before. It was a channel we hadn't served before. And so, you know, there was more risk in the inventory. And going forward, we can use our 10 plus years of historical data to really be able to buy with confidence on the inventory side. And that's another good example of focus. And the customer experience as well, I mentioned us looking at Preview as an example, and I think there are still other places where we can really kind of clean up the customer experience so that we're really maximizing value for the client and value for the shareholder at the same time. In terms of confidence back to growth, I think there's a lot of places where, I think all of those places are areas where on the inventory front, I think we can feel confident looking at what we're doing going ahead from now. And on the marketing front, I think we have near-term results that show that things are working. When Dan referenced that we saw customer acquisition costs down by 40% compared to last year, and to me, that's a great example of how focused is is kind of creating value in the business today. And I think we feel really confident that it's creating value in the business long-term. Dan, you want to talk about EBITDA?
spk07: Yeah. Hi, Yusuf. On the EBITDA guide, the negative five to positive five, again, I think we've provided obviously revenue and gross margin. And we also provided that 6% to 7% advertising number. For Q3, we're going to be on the higher end of that 6% to 7% simply because as we enter our spring, summer season, it's a very efficient quarter for us. We talked, Katrina talked about it, and we're very focused on the efficiencies within our marketing channel. And we just feel as we exited Q2 and go into Q3, we're like what we're seeing. And so think of Q3 as the higher end of that 6% to 7%. That leaves us, of course, with SG&A excluding advertising on a run rate basis. After our restructuring, that gets you to that negative 5 to positive 5 million. Of course, if we're not seeing the efficiencies, we won't spend the advertising dollars. So we feel pretty good about the guidance and, of course, the level of spend that we're now targeting for advertising.
spk01: And just to be clear, that $34 million that I think you mentioned in one time, restructuring costs and other, that hit the SG&A and expense line of $187 in Q2?
spk10: It did.
spk01: Okay. All right. That makes sense now. Thank you very much.
spk09: Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. You may proceed.
spk02: Hi, this is Garrett Klingstern on for Simeon. Thanks for taking our question today. Just noticing in the press release, you guys noticed going back to more of a stylist-focused approach. Is that kind of a de-emphasis maybe a little bit for kind of freestyle? Katrina, you just mentioned getting inventories right from within the freestyle versus the fixed business, understanding how those are different. I'm just curious how you guys are thinking about that business going forward and how you're planning kind of how to work around some of the challenges maybe you've had there.
spk15: Yeah, thanks, Derek. It's a good question. I think there's no question that freestyle adds value in ways that fixes didn't. I think the most clear way that we think about that is looking at the assortment data. We've shared in calls historically that we're seeing a different assortment being bought in freestyle than fixes. We're seeing more outerwear, shoes, accessories. That says to us that this is helping to fill a different need for our clients. That being said, as I mentioned in the last question, I think using freestyle as a customer acquisition vehicle as an example, that was less effective. what we're really trying to do is to say, where are areas of differentiation? And personalization, styling are really at the core of that, especially if you think about our kind of competitive positioning relative to others. Those are spaces that we really uniquely own. And so as we think about what is the customer experience that best delivers against personalization, against styling, I think freestyle can be a component of that, but we're probably thinking of it more as one ecosystem that has a more clear customer journey rather than thinking of them as kind of separate business units.
spk02: Great. Appreciate that. And just as a quick follow-up, I'm just, you know, looking at the 42% guidance for gross margins the remainder of the year. And Dan, your comments on how, you know, the difference from 1Q to 2Q is about 100 bps of markdown pressure. Are you guys seeing kind of a return to markdown levels where you were, you know, going back a few quarters? I'm just curious how you're planning about markdown pressure for kind of the back half of the year and kind of what you're seeing more broadly within your customers and their ability and their willingness to shop on kind of more of a full price level compared to kind of a discounted one.
spk07: Yeah, you know, the way we approach, we've talked about this in the past and thanks for the question. The way we've approached markdown is really focused on where we think we have excess or the wrong inventory and using our freestyle channel to move that inventory. And we've seen success in that as opposed to the option of selling it out to a third party liquidator. And so we've seen success in that and we will continue to utilize that. Although, as you can see from our inventory levels now, we've come down considerably and we feel we've right-sized our inventory. We feel very good about the inventory position that we're in now in terms of total dollars. We still have some buckets to work through. And so we are using the Freestyle channel for that. And the Fixed channel, we are not discounting a lot. We simply aren't doing that. Clients love the styling service that we give them, and we have not seen the need to discount in the Fixed business, and we don't anticipate doing that going forward.
spk10: Great.
spk07: Thank you, Pastor.
spk09: Thank you. Our next question comes from Mark Altrager with Baird. You may proceed.
spk12: Hi, this is Amy Teske on for Mark. Thanks for taking our question. On the inventory point, you know, as you've worked down inventory and pulled back on your receipts, what is your level of comfort that you now have the right type of inventory? So how do you think about the composition of your inventory between casual and dress styles and product categories? Thank you.
spk07: Yeah, I'll take that one. That's a great question, Amy, and thanks for asking it. First of all, we had talked about inventory in our Q4, again, in our Q1 results, and how we had a lot of inventory and we simply needed to work it down. And we've done that. And a lot of that, of course, was getting rid of excess inventory and or the wrong styles or brands of inventory. We're in a much better position now. As I mentioned, we still have a little bit of work to do on the inventory that is going to be short-term, and that's included in our guidance going forward. But we feel really good about the brands that we're targeting and with a big focus on our exclusive brands, which are trending very well for us. And in fact, I'll just share that we did notice in January where we were soft on some of our exclusive brands on, you know, our customers told us they wanted that. And we quickly pivoted and where we were short on inventory, we chased back into it. And that's a great sign for us that our customers love our exclusive and our Stitch Fix only brands that we're selling. And so we're going to continue to focus on that in the very near term as we get into spring, summer, and then as we get back into fall, winter a year from now.
spk11: Thank you.
spk09: Our next question comes from Ed Urimo with Piper Sandler. You may proceed.
spk20: Hey, thanks very much for taking my question and welcome back, Pat. I guess just a bigger picture question. You guys are really known for personalization. You've talked about this a lot today. Do you think that your competitors have gotten better since the inception of your business? And maybe, Kat, if you have any observations of things that have changed adversely since you left and have come back and you're looking to rectify quickly, we'd appreciate that. Thank you.
spk15: Thank you, Ed. I think I got your question here. So in terms of just more of the competitive gap, you know, honestly, I feel really strong about our capabilities. And, you know, we've been able to be in this business for 10 plus years of a history of profitability with history of being able to deliver cash flows and and you know there's not a lot in the competitive set that are able to claim the same thing and so you know this focus that we've had around data science the focus that we've had around personalization I strongly believe that we continue to lead on that front and and I feel you know just as good if not better about that coming back into the role of In terms of things that I think your question was more of just like what has adversely changed, I think I spoke to it on the call, but I really do think it's focused. You know, I do think hindsight is 20-20, and I think we had some really ambitious visions that we were chasing after. And with kind of chasing an ambitious big vision came a kind of reduction of focus on what I would consider our core differentiators, which are really around personalization and the styling. And so, you know, I think a lot of what we've been talking about internally is just How can we make sure that everything that we are doing with our valuable resources and time are really focusing against delivering that for our clients and ultimately our shareholders, is being able to deliver an experience that feels personalized for all of our clients and making sure that everything that we invest in achieves that goal.
spk11: Thank you.
spk15: Thanks, Ed.
spk09: Thank you. Our next question comes from Trevor Young with Barclays .
spk04: Great. Thanks. First one, Katrina, just on the testing of discontinuing the fixed preview. Are you getting any sort of signal that keep rates are eroding in those circumstances? And then more broadly, big picture, do you feel like the call space is in a good place now to set the stage for recovery in some future quarter after we go through kind of the reset on core fixes here? Or is there some work to be done and maybe even some reinvestment to be done on the tech side to get that into a better place? Just any thoughts on that would be appreciated.
spk15: Great, thanks for the questions, Trevor. I'll take the first one and have Dan talk more about the cost basis. On fixed preview, I mean, one way to really think about it is to try to maximize the ROI and LTV of a given cohort. And so as we do some segmentation, we can see at a high level that overall we saw AOVs go up with the ability to have access to fixed preview. But once you dig in, there's going to be some cohorts where we see people more likely to cancel when they see a fixed preview. And so what we're really trying to optimize for are those LTVs. And so I think what we're able to do is to fine-tune, I guess, a little bit more at a more personalized level of where we're going to be deploying fixed preview to be able to maintain that benefit that you mentioned, to keep rate and AOV for the population for whom we know that that will occur, while at the same time reducing cancellations and making sure that we are retaining and engaging clients best in all of our cohorts by eliminating fixed preview from those who we don't think will benefit from it. And I would say also, you know, from a customer survey perspective, like one of the things that we hear is that one of the real benefits of FishFix is surprise and delight. And so to be able to, you know, for some clients, you know, you can think of it as a lack of agency, but you can also think of it as actually allowing people to have that surprise and delight. You know, somebody said to me, which I love this quote of like, as an adult, you just don't get a whole lot of good surprises in your life. and Sitch Fix can be one of those and so we know there are clients who really really value that and actually being able to continue and maintain that for those clients is valuable and LTV positive for those clients. Dan, you want to answer the question on the cost basis?
spk07: Yeah, on the total cost, when you look at where we ended Q2 and adjusted for restructuring, we're back to fiscal 2019 SG&A excluding SPC, and we feel very good about that. And going forward, and there's still more efficiency to have. In my prepared remarks, you heard us talk about gross margin and the opportunities that we see there. There's also this further opportunity on our footprint to better monetize that as we reduce our corporate office space. We have variable efficiency projects that are ongoing. Yes, I feel the cost structure is in a very good space and in a very good place, and I think there's tremendous opportunity to improve it going forward. So we're in a good place from a cost standpoint and a liquidity standpoint.
spk10: Great. Thank you both, and best of luck, Dan.
spk07: Thank you.
spk09: Thank you. Our next question comes from David Bellinger with Roth MCAM. You may proceed.
spk18: Hey, everyone. Thanks for the question. On the cost per acquisition being down 40% and a quarter, how much of that is internally driven through some type of channel mix shift and the ROI where that's getting better versus some of the external factors that play within the broader apparel category?
spk15: Yeah, thanks for the question, David. I can start and might benefit from some of Dan's weighing in here. But I think honestly a lot of that is really more from a perspective of focus. And so if you think about where we were last year, we were doing more freestyle first marketing. We were driving people to an immediate purchase experience instead of driving people into a styling experience through fixes. And just very simply put, that freestyle first marketing was not as efficient as our core fix experience. And so I think just to be able to have the marketing messages be more clear around the benefits of personalization and styling, and to be really focused on driving people through one channel of conversion has been driving that efficiency. We definitely are always looking at diversifying our channels, and so we have our tried and true channels that we know perform, and those have performed well, as you've kind of heard in the numbers. And at the same time, we're always experimenting to make sure that we're getting all the emerging channels and to make sure that we're kind of exercising that muscle as acquiring and converting clients in all the new places that we see our clients kind of spending time. I don't know, Dan, if you have anything to add to that.
spk07: Yeah. First of all, I 100% agree with what Katrina said. And I think I would simply add that part of the experiences where we really hardened the funnel really helped with conversion of traffic and therefore the efficiency of the marketing spend, in addition to just being very focused on the next dollar spent within the channels, and is that an efficient spend? And I think the marketing team has done a tremendously good job of diversifying the channels, but then focusing on the efficiency and making sure we're bringing in the right clients, which we feel very good about. And I think we've talked about that in the earlier remarks.
spk18: Great. Thanks for that. And just one other follow-up. I think you mentioned some type of chasing inventory. It sounds like you're more comfortable with the assortment. So what's the next step, if we think bigger picture here, in getting your core customer back and spending again? Is there some type of refresh needed on top of that on the inventory side, or is there more of a technology connectivity issue you need with your core customer to get them back again?
spk15: Yeah, I mean, I can take that. And I think to be clear, like, we are seeing – we're seeing the customer perform in a pretty healthy way. I mean, we're seeing our AOVs be pretty consistent. On the inventory side, you know, it's, of course, been gradual over the last few months of kind of evolving into the inventory mix that we want. But we feel really good about where we are in the inventory perspective. That being said, like, there's definitely opportunity. I think, you know, we see – Dan mentioned we're seeing some cohort weakness. There's no question there's some macro headwind, but I'm not willing to accept that it's all macro. I think there are still opportunities for us to improve the customer journey, for us to improve the ways that we're serving our clients so that they can have the best possible experience that then leads to LTV, it leads to shareholder value, And so, you know, I definitely still think that there's a lot of opportunity. But, you know, as we kind of dig in and look at, you know, how are fixes doing? How are people feeling in their actual transactions? We're actually seeing goodness there. And I think, you know, it's on us now to be able to deliver more goodness to the rest of the customer experience.
spk10: Great. Thank you. Thank you.
spk09: Our next question comes from Ike Borica with Wells Fargo. You may proceed.
spk05: Hi, everyone. This is Jesse Sobelson on for Ike. It looks like taking down inventory was a major source of cash this quarter. So on the liquidity front, I'm just curious, how much cash do you guys need to run the business? And what should investors expect regarding cash flow generation throughout the rest of the year?
spk07: Yeah, thanks for the question. And so, yes, we did have a source of cash come from our inventory position, which we implied was going to happen. last quarter as we brought our inventory down. And on the go-forward, how much cash do we need to run the position? From a liquidity standpoint, we're in a very good position. We have $223 million of cash-to-cash equivalents, and we have a credit facility, which we don't plan to use. And so going forward, as we guided to a positive H-2 adjusted EBITDA We talked about EBITDA as a great proxy for cash flow for us simply because we do not have a lot of CapEx and we do not anticipate a lot of CapEx spend over the next several quarters. And so, we feel that both our EBITDA and cash flow are trending positive for H2 and, you know, we'll give more guidance on FY24. at a later date. But overall, we feel very good about the liquidity position that we're in and the cash flow that we've generated in both Q2 and for H2 as we go forward.
spk10: Great. Thank you. Thank you. Our next question comes from Blake Anderson with Jefferies.
spk09: You may proceed.
spk08: Hi. Thanks for taking our question. I wanted to revisit the freestyle topic and how the tone has seemed to maybe change a little bit on that. This is more of a philosophical one, but should we expect any strategic changes to that business before a new CEO is announced? Just wondering, Katrina, how much influence we could have on that business in the short term. Thank you.
spk15: Yeah, thanks, Blake, for the question. I mean, we're always evolving the experience. And so at a very high level, I really don't see a big foundational shift in the strategy. I think the strategy of focusing on personalization, of focusing on styling, and focusing on the areas that we know are valuable areas of differentiation for our client, I think it's hard to imagine that we would deviate from that. That being said, we are always doing experiments. We're always doing A-B tests to better understand what can we be doing differently or better in order to optimize that client journey, to drive LTV, to drive value for our clients, to drive, you know, profitability and long-term growth. And so, you know, we're always making changes. And so hopefully what I could say is, like, you can probably expect to see some small changes in terms of the way that the customer journey evolves over time. But, you know, I honestly, I wouldn't see them as, like, fundamental big changes. I think we know that freestyle adds value. We know which ways in which it adds value, and so really it's about how do we make sure to tailor and target the right customer experience so that clients are getting the most value out of their experience with Stitch Fix, and thus we are getting the most value out of clients that we acquire.
spk08: That's helpful. Thank you. And maybe I missed it, but did you talk about kind of trends by month throughout the quarter and any commentary you guys can provide on the quarter to date?
spk07: especially how that how the budget shopper is holding up thanks so much yeah I can take that so the we did not provide trends by quarter for our q2 I will say that you know February has largely been as expected for us we are again we the guidance that we gave of course takes into account five weeks of February and And we're not seeing anything that is out of the ordinary where we've seen a change in trajectory to the negative. So we continue to see our keep rates trending positively. There might be some frequency with the cohorts analysis that we talked about for Q2 to see that trend continue. We haven't looked at that yet for Q3, but we will. But no real trend update. beyond what we've provided for the guidance for Q3 and the commentary we gave on Q2. Great. Thank you. Best of luck.
spk15: Thank you.
spk09: Thank you. Our next question comes from Tom Nickage with Wedbush Securities. You may proceed.
spk03: Hey, thanks for taking my question. Dan, quick one for you. Sorry if I missed this. Did you actually say what the marketing expense was in Q2 as either in dollars or as a percentage of revenue? We did, 5%. Got it. Okay. Thanks. And, Kat, welcome back to the CEO role in an interim basis. But when we think about, you know, the permanent, you know, the successor, what are you looking for? What skill sets are you looking for? Optimally, what attributes would your ideal candidate have for the permanent CEO seat? Thanks.
spk15: Yeah, thanks, Tom. Yeah, so we've kicked off the search, we've engaged with the search firm, and we've been having conversations with candidates, quite a few conversations with candidates. Overall, I feel excited and optimistic about the quality of people that we're meeting. At the highest level, or very simply, I really do think it's having a history of delivering results, of executing a business. Our business is fairly complex, and so I think somebody who's had experience in a business that has similar complexity to ours and have a kind of history of delivering results is, of course, first and foremost important. And then relatedly, we have a large company that has a lot of people in different types of roles. And so that leadership and someone who has a natural leadership and somebody who's going to be able to be successful and leading a diverse organization is really important and so you know at the highest level I think those are two things that that we're really looking for but you know we've kind of talked in it as we've had a lot of conversations we've have a lot of candidates who have first-hand experience with such fix who know the business well and feel really connected to the business and the customer and and you know I think you know we're excited about the people we're meeting so so you know optimistic
spk03: Sounds good. Thanks, Kat. Best of luck in the CEO search and with the business the rest of the fiscal year.
spk15: Thank you.
spk09: Thank you. Our next question comes from Kunal Madhukar with UBS. You may proceed.
spk00: Hi. Thanks for taking the question. One more housekeeping and then one more longer term. So on the housekeeping side, can you help us understand the LTM active clients has been down, has been declining for the past five quarters now. How should we kind of think of the trend for LTM active clients going forward? And then Katrina, you talked about the eventual return to growth. And you also talked about having a lot more visibility on the business. So can you help us understand in your mind how you're thinking of growth going into 2024 and maybe into 2025, when are we going to get to growth? And part of the reason is in fiscal 4Q of this year, that is going to be a 14-week period rather than a 13. So the guide does not inspire a lot of confidence. Thank you.
spk07: So I'll take the RPAC question. RPAC is a trailing metric. It's a trailing 12-month metric on actives. And so There is a lot of math that goes into the mix of RPAC, and I know your models take into account RPAC, but I think the best way we can say that is, while we are seeing some cohort degradation in terms of spend, which will impact RPAC, mix is a bigger impact of RPAC, mix of the tenure of our clients. We've mentioned in the past that our older clients spend less, our newer clients spend more as their closets get filled up. We'll continue to talk about RPAC from an actual basis, but we're not guiding to future RPAC. That being said, I think it's safe to say that where we might see some cohort degradation on spend and some mix, we're not expecting big reductions in RPAC on a go-forward basis. We will probably see some of that because of the spend and cohort on a year-over-year, but we don't think it's going to be material. Our clients do continue to spend with us. They do continue to stay with us. The newer clients that we're bringing in, as we look at them, are cash flow positive clients that we talked about the near-term ROI. All that will have the effect eventually of stabilizing that RPAC and ultimately bringing it up. But that's going to happen over time.
spk11: Thank you.
spk07: Sorry, I think we want to get to the second. Yeah, is there a part?
spk15: So the part two is more around, like, how am I thinking about the eventual return to growth? Is that? Okay. You know, I think, I mean, Dan mentioned, I think I totally agree with everything that Dan mentioned. And I would just add also that, you know, in our business, so much of our business is serving clients. That are returning and that's a great part of our business. We generate a lot of revenue from our existing customer base and so all of the benefits that we all the things that we are able to do to be able to make that client more valuable and so all the ways in which we can re-engage that client all the ways in which we can Offer those clients reasons to come back also add and so, you know, we're always thinking about new clients we're also thinking about how do we make sure that our existing base is healthy and And, you know, I think we've seen some positive signals that we've been excited about and feel really confident that we're doing the right things and the things we need to be doing right now.
spk10: Thank you.
spk09: Our next question comes from Janet Joseph Kloppenberg with JJK Research Associates. You may proceed.
spk17: Hi, Katrina. Hi, Dan. I just wanted to follow up on that question is, it seems to me that, and please correct me when I'm wrong, that you're going to be spending, your investment will, spending will shift to a higher degree of investing in fixed and low degree in freestyle and that that should drive up your active customer participation and your sales. I think that's what you're saying. and that you'll use Freestyle to some extent as a liquidation channel for fixed, but that your investment spending will go back towards the personalization fixed business, and that that should help to improve the EBITDA performance of the company as well? And does it mean that maybe the advertising rates can stay below 7%, 8% as we as we go forward or is that something that needs to be tested and refined? Thank you.
spk15: Sure, I think I can answer at a high level and then Dan can kind of weigh in on more of the specifics. But I mean, I think at a high level, the way to think about it is that we are really focusing the business around personalization and styling. And yes, fix is a very big part of that. And having a more focused messaging from a marketing perspective helps us to drive marketing efficiency. Having a more focused point of view around who the client is I think one of the challenges with trying to acquire Freestyle First clients was that we were definitely deviating from our historical client and trying to have many different messages and to actually have an assortment that backed that. And so simplifying on the inventory side also It delivers efficiency. And, you know, freestyle definitely still has a role to play in order to be able to help our client to fill in their closet, to be able to engage in between fixes. And so we definitely are going to continue to be thinking about how does freestyle add value to that client experience. But I would say that the investing is more around thinking more holistically around what is the fixed ecosystem and how do all these pieces fill in together in order to drive the best LTV and experience for our clients, but then also, of course, delivering results for our shareholders. Dan, you want to talk a little bit about the marketing side?
spk07: Yeah. On the marketing side, again, Katrina mentioned we're not marketing a freestyle first experience, which we had done in the past. That, along with a lot of the client experience improvements we have made, it just has allowed us to focus on that fixed first client in a very efficient way. And so while the advertising drop year over year seems large, when you look at the clients that we're bringing in, we're seeing very efficient spend. And that was the point when we talked about men's actually being up on a gross ads basis and women's and kids improving, while still down year over year, improving from current trends. That's with that 46% reduction in marketing and advertising. So we do anticipate to stay on this trend of lower advertising spend, but focusing on the right client, the fixed first client. And then having freestyle be a very important incremental opportunity once the client is in the door and engaged in the fixed business. It still is a material part of our business and will continue to be freestyled as.
spk17: Thank you both so much.
spk09: Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed.
spk16: Hi. Good afternoon, everyone. Kat, welcome back for the interim period. As you think about the near term and the long term, on the near term, how are you thinking about the core customer, what they're spending on pricing, how you're thinking of brands, and how do you think about the differentiation between the freestyle and the fixed in terms of whether it's AUR or captivating the customer? And then on the long term, obviously new processes, it sounds like, are being put in place right now. What do you see as the most incremental driver to return to growth under the hood in terms of operations or logistics or processes? Thank you.
spk15: Thanks, Dana. Let's see. So on the first part, as we think about like kind of what are we seeing on the customer side, we actually are seeing AOVs hold pretty strong. We're seeing AURs hold pretty strong. You know, I think in terms of what the customer is looking for, I think what's really differentiated about our channel relative to others, it's not necessarily price. It's not necessarily, you know, kind of finding the brand that you love. It is actually around fit. It's about fit. It's about style. It's about finding things that you love and, in some cases, finding things that you love that are surprising to you. And that's something that really only our channel can deliver on. And so that's kind of how we're thinking about who the core customer is. And the good news is I think there's a lot of that core customer. There's some data that we had that most men and even half of women would characterize themselves as not loving to shop. And there's not a lot of other retailers that are focusing on that customer. And, you know, Stitch Fix is one that really makes shopping more tenable and makes it easier. It helps people to look their best without spending a lot of effort to do it. And those are really differentiating qualities in our customer that we can build the right assortment to be able to deliver on. In terms of what's most influential under the hood, I mean, that's a good question. But I mean, really, for me, I think the broad umbrella of it really is focus. And it really is around focusing those marketing messages, focusing that conversion funnel, focusing on the inventory side. I think just really being able to focus on the things that we already know that we are able to deliver on, that we have a business that's 10 plus years old, that has a history of profitability, delivering on this business. To be able to focus back on the things that we know and know that we can deliver is is kind of the core thesis. And I would say, you know, rather than having one big thing, it's probably a lot of little things like the ones that I mentioned around marketing and inventory. And I shouldn't call them little things. They're really meaningful. And I think you could see that in the marketing numbers that we shared. But, you know, I feel optimistic by kind of what we've been able to see as we dig into the business and, you know, excited to be able to deliver more in the quarters to come.
spk16: Thank you.
spk09: Thank you. Our next question comes from Mark Mahaney with Evercore ISI. You may proceed.
spk06: Okay. Thanks. Two questions, please. Katrina, you talked about marketing diversification into newer channels that have yet to scale. Can you provide a little color on what those newer channels could be? And then secondly, I was wondering if I could just get you to comment on sort of macro trends. And I realize there's a lot of other factors going on here. You've got year-over-year revenue declines pretty consistent in Q1, Q2, Q3, and Q4. So my sense is that maybe overall macro trends are soft but kind of consistently soft or kind of riding along at the bottom. But can you just comment on whether you think macro trends, consumer demand trends are at the margin here? further softening, stabilizing, or possibly recovering? And I know there's a lot of other factors going on, but I wonder if you would just address that question. Thank you.
spk15: Great. Thanks, Mark. So first on marketing diversification, I think, you know, it's probably some of the obvious, but, you know, we've done some experimenting with TikTok that I think has some promise. We've done some experimenting in YouTube and trying to think about how does YouTube fit into kind of our overall conversion funnel. And then actually return to organic is definitely a big place too. I think we've seen being able to use influencers, both I think well-known influencers, but also more of what you would call like micro-influencers be effective. And that's definitely been a part of the history of Stitch Fix is some of the very early years of growth of Stitch Fix were driven by that kind of at the time was more bloggers, but more of those micro-influencer categories. And so that's another place that we're making sure we rebuild the muscle in. In terms of macro, I wish I had a crystal ball and that I could tell you what's happening. What's happening in our business, we see AUR and AOV actually be pretty stable. And so I think the places where we would expect to see macro headwinds would be probably around more conversion and customer acquisition. We've seen some success there as we shared in this last quarter, but I think that's a place that you could anticipate that there could be some headwinds. And then I think, and the other place is probably around just longer term like fixed frequency or purchase frequency. And I think Dan shared that we've seen some software cohorts and I think we do believe that some of that is macro, but as I said, I'm not willing to accept that it's all macro. I do think that there are things that we can be doing better to be able to deliver on a better client experience that delivers more LTV. And so, I don't know, Dan, if you have any pontification to add, but I wish I could give you a solid answer on what to expect.
spk07: I don't have anything to add. I completely agree with all that. Specifically, on some of the macro, we talked about how We like the trends we're seeing on gross ads on the improvement. I think that's a positive. But we are still seeing some elevated inactives, and that's something that we're very focused on fixing with improvements in the client experience. And we do believe a lot of that, of course, is macro related.
spk06: Okay. Thanks, Katrina. Thanks, Dan.
spk07: Thanks, Mark.
spk09: Thank you. Our next question comes from Anisha Sherman with Bernstein. You may proceed.
spk14: Yeah, thank you for taking my question. So continuing on the theme of the macro and the consumer demand behavior trend, last quarter you talked about the consumer being more judicious with their spending and frequency declines. It sounds like you've seen that again. Is the mixed shift or higher demand for own brands over national brands, do you think that is part of it? Are you seeing the consumer sort of trade down a little bit to lower price points rather than the national brands? And if so, how does that or does that change your national brand strategy that you've been talking about for the last few quarters on increasing your mix of national brands? And can you also talk about how that impacts gross margins? Because I understand that your own brands are more profitable. Does that change your margin mix kind of looking into next year? Thanks.
spk15: Great. It's a great question, Anita. I'll answer the first part, and I know Dan is chomping at the bit to answer the gross margin part. But, yeah, I mean, I don't know if I would say that it's necessarily mixed shift that's driven by macro, but I would say, like, historically, it's very interesting in our channel. Historically, national brands do not perform very well in fixes. And I do think fixes are a place where the apparel is kind of the most stripped down version of itself. And people are really looking at those fixes to say, is this my style? Does this fit me well? And brand is like a very tertiary kind of consideration beyond those. And so historically, we've actually not seen national brands perform very well in fixes. And so a lot of the intention around bringing national brands into the portfolio recently has been to support a better freestyle experience. And so as we, and I think candidly, like those brands haven't performed as well in the freestyle experience, although better than in the fixed experience, but I think longer term, the national brands will probably be a smaller part of our portfolio going forward as the way that they were historically with fixes. And I would actually really position that as a positive of being really a testament to our personalization. And at the end of the day, even if it's not a brand that somebody recognizes, if you're delivering jeans that fit someone, someone's going to buy them. So Dan can speak more to that on the gross margin side.
spk07: Yeah, just to follow on to your second point on that question, what Kat is saying, this idea that we're going to be focused more on our exclusive brands and be tighter on with national brands having less of that. That will, of course, we think it's the right client experience. And also what that does is, of course, lead to higher margins simply because the private label and exclusive brands have higher product margins. When I mentioned earlier in the call that we see opportunity in gross margin, the first comment I made was in product margins. That is a big driver of product margins. So as we get tighter with that, We do expect margins to positively impact margins. We do have some national brands that we're still – inventory that we're still working through, although it's not a huge number, and we'll get through that. And we feel very good of the impact. Our focus will be on product margins. It will also have the impact of making inventory more efficient, which is a huge positive to cash flow. So we feel good about that strategy and how it will impact the financials.
spk11: Thank you.
spk09: Our next question comes from Noah Zetskin with QBank Capital Markets. You may proceed.
spk06: Hi. Thanks for taking my question. Kind of along the lines of the macro questions, maybe I'll ask it slightly differently. With Stitch Fix traditionally being a full-price business, how would you kind of frame or how do you kind of think about parsing out the impact of the broader promotional environment in apparel and what that's had on Stitch Fix over the last couple quarters. And with others in the space talking about inventory beginning to be right-sized or at least having line of sight to more right-sized inventory positions, you know, how are you thinking about potential upside in the model should the promotional environment begin to normalize over the next couple quarters? Thanks.
spk15: Thanks, Noah. Yeah, it's a good question. I mean, you know, Stitch Fix has been, I would say, kind of oddly resilient to promotional periods. And, you know, I think we see some marginal impact, but not really as much as you'd expect. And, you know, what we see is, like, in the Fix experience, like, you know, first of all, I don't think people are coming to Stitch Fix in order to find a deal. That's not the primary intention. Of course, we need to do right price all the time. There's no question about that. But I would say that people aren't coming to our channel in order to get a deal. And so what that means is people are actually coming to our channel because they want clothes that fit them, because they want to refresh their wardrobe, because they want things that are their style. And so as a result, I would say that we see like our AOVs and our AURs have kind of held pretty strong. And so I would say that we see maybe less of what you would expect in terms of like the highly promotional environment right now. But, you know, I would say my hypothesis is that it probably impacts conversion more where, you know, that there are probably going to be fewer people that as they're looking at, you know, their budgets and as they're looking at where are they going to spend fewer dollars that they might have in a bank account that refreshing a wardrobe might not be as high a priority as it might have been 10 months ago. I would say our hypothesis is that our existing clients that are in the ecosystem are relatively stable. I think there probably is a headwind a little bit on the customer acquisition side that hopefully as things let up and as we see things turn up the other way, that will alleviate and make things easier for us. I would say that it's It's a little bit of a unique proposition within Stitch Fix. That's not a perfect analogy to the promotional environment that you see outside of our ecosystem.
spk07: I'll take the second part of that question, which I believe was a question on inventory, and I hope I'm interpreting that correctly. But from a standpoint of where we see inventory going forward related to the macro and what we're seeing in our our focus on our exclusive brands is we do expect our inventory to be more efficient. When you look at the way we report turns externally, we've been as high as six turns in the past, and while that was pre-freestyle, we do believe that we are going to see improved efficiency in the back half of this year, simply because we've taken our inventory down as we ended Q2, and we do not expect significant changes for it to increase. It may ebb and flow a little bit quarter to quarter, but we feel very good about the inventory efficiency, and we expect on a net inventory basis to be back above four in H2.
spk10: Thank you. Thank you, and this concludes today's conference call. Thank you for participating. You may now disconnect.
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