Stitch Fix, Inc.

Good day and thank you for standing by. Welcome to the third 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 will 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.

Hayden Blair Good afternoon, and thank you for joining us today to discuss the results for Stitch Fix's third quarter of fiscal year 2023. Joining me on the call today are Katrina Lake, interim CEO of Stitch Fix, and David Afterhart, CFO. We have posted complete third 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 involves 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 discussion of the factors that could cause results to differ In particular, our press release issued and filed today, as well as the risk factor 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 third 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 linking 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 that website shortly. With that, I will turn the call over to Kat. Please go ahead.

Thanks, Hayden. Five months ago, I came back as interim CEO, motivated by the opportunity ahead and with a clear understanding of the need to reposition and refocus the company to set ourselves up for success. Today, amidst a challenging macroeconomic climate, preserving profitability and cash flow remain top priorities. We are focusing on the near-term, protecting the balance sheet, actively managing our inventory levels while improving composition, and managing the global impacts of tightening credit standards on vendors and manufacturers. But we are also mindful of the long-term opportunity ahead and by no means standing still. We understand that focusing on our clients is key to success, and we continue to invest in personalization and AI to maximize our long-term potential. We also completed a strategic review of our business operations in Q3 with a critical eye on operational efficiency and effectiveness while maintaining profitability and cash flow over a longer timeframe as we focus on driving future growth. This was a robust review of our operations and processes across the company to identify areas to enhance the client experience and drive improved business results. One aspect of this review was a full analysis of our network strategy. As we have refocused on our core fixed business, we believe our inventory will be better optimized across a smaller network of warehouses in the U.S. Understanding this, we have developed a three-node strategy that will allow us to more optimally serve the entire country and simultaneously showcase the greatest breadth and depth of inventory to our clients and stylists. This consolidated network will allow us to deliver a better client experience with access to more inventory for a given fix. while at the same time allowing us to operate with lower, more cash efficient inventory levels. Because of this, we intend to close two additional fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. As we have a lease already expiring in Bethlehem, we are choosing not to renew that. Our analysis has also shown that our remaining three fulfillment centers in Atlanta, Indianapolis, and Phoenix will remain optimal even with a larger client base in the future as we could expand capacity within these locations in the short-term and the long-term. We will undertake a phased approach with the closures to maintain our current high levels of client service. We expect to begin the Bethlehem wind-down in Q1, and we will move on to Dallas later in the year. We expect to achieve approximately $15 million in annualized cost savings once the three-node strategy is completed. I want to thank all of our associates and team at the busy and the dizzy. We are immensely grateful for your hard work and commitment to our clients. Thank you. Additionally, the continued realities of economic conditions in both the US and the UK have led us to re-examine our geographic footprint. And this morning, we informed our employees in the UK that we are exploring exiting the UK market in FY24. In FY23, the UK will represent approximately $50 million in annual revenue and negative $15 million of adjusted EBITDA. Though we believe Stitch Fix is a service that will ultimately find success across many geographies, including the UK and Western Europe, today we are not confident in a path to profitability in the near term in that market, especially as we prepare for potentially extended periods of complicated macroeconomic conditions in both the US and UK. There are also numerous investments we have made in our core client experience that we have not replicated in our client experience in the UK. Going forward, we would prefer to be investing in our core experience and continue to build it as a more modern, globally capable platform with the ability to scale in many geographies instead of managing multiple tech stacks country by country. We are proud of the UK team and what they have accomplished to date. Consistent with UK law, we will enter into a consultation period with UK employees regarding potentially exiting the UK market prior to making any final decision. While there are a number of moving parts to these operational changes, we know they are the right decisions to make. This review has helped paint a more realistic view of what it will take to change the course of our trajectory, and we have more clarity around the opportunities ahead. We are retooled and refocused on the right metrics that will navigate us through a wide range of macroeconomic scenarios in the short term, and we are setting ourselves up to be in a healthier position for the eventual growth to come. In the meantime, we are committed to continuing to build on our competitive advantages and to further the leadership we have in the space of personalization. We continue to invest in our core client experience, leveraging AI and data science to enable our human stylists leveraging the advantages of each to further our leadership in personalization and style. For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engine, and more recently, automatically generated product descriptions. We have also developed and implemented more advanced proprietary tools, such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market. A new area we have enhanced our AI capabilities in is our inventory buying. We have historically utilized a number of tools to make data-informed decisions with our inventory purchases. Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize match scores at the client level to drive company-level buying action. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and AOV over time. This backend personalization will also allow us to more effectively tailor the depth and timing of our buying decisions so it will allow us to buy the right inventory in the right amount at the right time. Early testing of this approach compared against our existing buying tools have shown a 10% lift in keep rate and AOV, and by the end of Q1, we expect 20% of all POs created to be algorithmically informed. We will continue to scale adoption throughout the year, and we are excited about the capabilities. It remains a clear example of how we continue to lean into data science and AI to further our differentiators and drive long-term success. Ultimately, we are continuing to build a business that is truly differentiated, and we want to lean into these areas of differentiation by investing in capabilities that will both improve the customer experience and prioritize profitability in the short term. I'm excited about the work we have done, understanding the work that we have to do, and continue to believe we are taking the necessary steps to set the stage for healthy growth in the future. With that, I'll turn it over to David for a deeper dive on the financials.