Stitch Fix, Inc.

Good afternoon, and thank you for standing by. Welcome to the first quarter fiscal year 2025 Stitch Fix earnings call. At this time, all participants will be in a listen-only mode. After the speaker's presentation, you will be invited to participate in a question and answer session. To ask a question during this session, you'll need to press star 11 on your telephone. You will then hear an automated message indicating that your hand is raised. To withdraw your question, simply press star 11 again. Please be advised that today's conference is being recorded. And now I'd like to introduce your host for today's program, Lily Finder, Investor Relations. Please go ahead.

Thank you for joining us today for the Stitch Fix first quarter fiscal 2025 earnings call. With me on the call are Matt Baer, Chief Executive Officer, and David Afterhar, Chief Financial Officer. We have posted complete first quarter 2025 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 fiscal 2024 previously filed with the SEC. 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. In the first quarter of fiscal 2024, we began to report our UK business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operation. 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. And now, let me turn the call over to Matt.

Good afternoon, and thanks for joining us. We are off to a strong start to the fiscal year. We exceeded our expectations in Q1, delivering net revenue of $318.8 million. This is a 570 basis point improvement in year-over-year comps from Q4 when adjusted for the 53rd week. We also delivered adjusted EBITDA of $13.5 million, and we continue to improve our contribution margin, delivering approximately 34% in the quarter. This progress is the result of the ongoing execution of our transformation strategy. which includes our work to strengthen the foundation of our business and reimagine our client experience. We are on track to successfully transform our business, and we continue to expect to return to revenue growth by the end of FY26. We are also raising our annual guidance, and David will share more on that shortly. We continue to embed retail best practices across our business and drive operational efficiencies. The quality, freshness, and overall health of our inventory assortment continues to improve. We are also creating flexibility in our experience. And we've introduced more personalized marketing and engagement tactics to increase client visits, drive sales across both fixed and freestyle channels, and improve acquisition economics. Specific to our assortment, The freshness of our inventory is driving improved results across multiple categories, like at leisure, social, and special occasion, and in both our private and national brands. As we shared last quarter, the retail market and our clients' expectations evolved over the past few years, and we did not adapt our assortment quickly enough. To address this, we have been focusing on improving our inventory by building best-in-class strategies for buying, assortment planning, and allocation. Additionally, enhancements to our proprietary AI inventory management tool are helping to preserve our healthy inventory position. In Q1, we infused more newness and seasonally relevant styles into our offering. While we still have work to do, the penetration of newness in our inventory increased more than 40% in the quarter. and our clients are responding positively, driving AUR of 6% year over year. As an example, we have introduced a larger variety of silhouettes in denim that our women clients are embracing. Sales of wide leg and boot cut styles are up 250% from last year. This increase in demand highlights just how eager our clients are for fresh style choices. and we will continue leaning in to deliver emerging trends more quickly. Our two newest private label brands, The Commons and Montgomery Post, have delivered encouraging early results. The Commons has been popular in our men's business, quickly becoming a top 10 brand for clients under the age of 40. The Commons sweater polos were a big winner for our men clients this quarter. In women's, new workwear styles from Montgomery Post are resonating with silhouettes like cowl necks performing well. Many of our national brands delivered positive comps for the quarter, including brands such as Viore, Marine Layer, Roan, Vineyard Vines, Public Rec, Verity, and Pistola. We continue to deepen relationships with these and other brands as valued partners in our transformation. and we are further expanding our assortment with the upcoming launch of new national brands. In addition to improving our assortment, we are continuing to build flexibility into the Stitch Fix experience. Last quarter, we shared how we were beginning to expand beyond our traditional five items in a fix. Clients now have the opportunity to receive up to eight items in their fix, allowing them to better explore current trends and update their wardrobes for major life events. This flexibility enables us to provide more value and capture greater wallet share with our most engaged clients. While still early days, clients who choose this option are requesting nearly 40% more items in a fix on average and driving approximately 50% greater AOVs than traditional five-item fixes. Stitch Fix was built on personalization. And as we continue to tailor our styling experience to each and every client, we are also engaging all our client segments through a new personalized approach to marketing. Our strategy is not just about driving volume. It's about engaging our clients in very targeted ways. And over the last year, we have built promotional capabilities from the ground up to help us achieve that. We are being methodical about specific use cases to ensure our promotions drive increased lifetime value while still maintaining overall profitability, as demonstrated by our very healthy contribution margin. These new promotional capabilities are also enabling us to more effectively insert Stitch Fix into the consideration set during the holiday season. Now, in addition to adding a variety of seasonal styles, we are also rotating through a range of holiday promotions and offers. This allows us to better serve clients with a personalized styling experience for holiday dressing. In Q1, we saw higher engagement in both freestyle and fixed channels. In freestyle, we had improved year-over-year comps in furtherance of our strategy to capture a greater share of wallet. In our fixed business, for the first time in more than three years, we achieved a sequential increase in clients who have enabled recurring shipments. As we highlighted in our last call, we introduced a refreshed brand identity, the first significant update to our brand in more than a decade. Alongside our rebrand, we launched a new marketing campaign called Retail Therapy, a content series that explores some of the biggest shopping, fit, and style challenges people face and how Stitch Fix, as the industry leader in personalized styling, is uniquely positioned to solve them. As a result, We are seeing lower cost per acquisition and higher conversion in TV and related channels. Brand awareness among our target demographics has also improved across our women's and men's businesses, reaching the highest levels in two years for women's. As part of our broader effort to enhance our client experience, we recently launched Stylefile. a personalized resource that describes each client's unique style personality and our clients tell us they love it. We are also putting a greater spotlight on our stylists and their work through the recent introduction of Stylist Profiles, a new feature that enables clients to get to know their stylists better. These profiles are customized by the stylists themselves and include their background information as well as fashion tastes and preferences. we are encouraged by the early engagement we are seeing. I'm pleased with our strong start to the fiscal year and believe our progress this quarter further demonstrates we have the right strategy in place to return to growth. We are investing and innovating in our client experience, leveraging our AI and data science leadership, as well as our team of expert stylists to provide more reasons for clients to come back to Stitch Fix as their go-to for all apparel and accessories needs. Now, I'll turn the call over to David to share more details of our financial results and future outlook.

Thanks, Matt. As Matt said, Q1 was a strong start to this fiscal year, and we continue to expect a return to revenue growth by the end of FY26. As we continue our transformation, we're focused on driving long-term growth while maintaining the solid foundation we've worked so hard to strengthen. The positive results we are seeing, including healthier client engagement, improving top line performance, and continued leverage across the P&L, are all indicators that this approach is working, and give us confidence to continue making targeted investments towards sustainable, profitable growth. Now let's dive into the results. Q1 net revenue came in at $318.8 million, down 13% year-over-year and flat quarter-over-quarter. Revenue was above our guidance range due to our focused efforts in driving fixed AOV up 6% year-over-year and 11% quarter-over-quarter. This AOV work consisted of three main factors, our methodical efforts to capture upside from an earlier-than-expected shift into fall product, the expansion of fixed flexibility, and our ongoing optimization of our pricing architecture. Net active clients ended the quarter at 2.4 million clients, representing our lowest sequential decline in active client count in two years, down 19% year over year, and down 3% quarter over quarter. Revenue per active client for the quarter was $531, up 5% year over year, and relatively flat quarter-over-quarter. Gross margin for the quarter came in at 45.4%, up 180 basis points year-over-year and up 80 basis points quarter-over-quarter. Both year-over-year and quarter-over-quarter improvements were driven by improved product margins and transportation leverage. With a contribution margin of approximately 34%, Q1 was our third consecutive quarter delivering a contribution margin above our historical range of 25% to 30%. This was driven by the healthy gross margins highlighted above, as well as sustainable leverage in our warehouse and styling organizations. Cost per order in warehouse ops was down 23% year over year, and styling cost per fix was down 21% year over year. Advertising came in slightly above our estimated range at 9.4% of revenue in Q1, up 120 basis points year over year, and up 40 basis points quarter over quarter, as we leaned into opportunities to drive favorable returns on ad spend. We saw strength in reactivations this quarter, and we continued to make investments in our rebrand efforts and the retail therapy campaign that Matt mentioned. We ended Q1 with net inventory of $119.1 million, down 26% year over year, and up 22% quarter over quarter, due to the timing of receipts ahead of the fall winter seasons, as well as our continued investment in newness to more closely align our offering with the needs of our clients. Q1 adjusted EBITDA was $13.5 million, or approximately 4.2% margin, up 180 basis points year over year, and up 120 basis points quarter over quarter. We generated $9.9 million of free cash flow in Q1 and ended the quarter with $253 million in cash, cash equivalents, and investments, and no debt. Turning to our outlook. As a result of the strength we saw this quarter, we are updating our annual revenue and EBITDA guidance. For the full year FY25, we expect total revenue to be between $1.14 billion and $1.18 billion. We expect total adjusted EBITDA for the year to be between $25 million and $36 million. This guidance still assumes we will be free cash flow positive for the full year, but we do expect Q2 to be negative due to the timing of working capital requirements related to inventory purchases. For Q2, we expect total revenue to be between $290 million and $300 million. We expect Q2 adjusted EBITDA to be between $8 million and $13 million. We expect both Q2 and full-year gross margin to be approximately 44% to 45%, and we now expect full-year advertising to be at the high end of the 8% to 9% range we provided last quarter. reflecting our ongoing focus on opportunistically reinvesting our EBITDA upside back into the business when we see the right ROIs. This outlook reflects the methodical approach we have taken to drive leverage in our business while investing in targeted areas to return to growth. As we progress through our transformation, we are confident in the approach we've been taking and our ability to continue delivering efficiency and reinvesting. With that, I'll turn it back over to Matt to close us out. Thanks, David.

To reiterate, our results for Q1 show our strategy is working. We exceeded our guidance range for both revenue and EBITDA, and we've increased our full-year outlook for both metrics. We are delivering on our vision to be the most client-centric and personalized shopping experience. We continue to make great progress towards our return to growth, and I look forward to sharing more with all of you next quarter. I also want to take a moment to address our Stitch Fix employees. Thank you for the great work y'all do each and every day. Our continued improvements are a testament to your commitment to our mission and the client centricity which you have infused into all aspects of our business. I'll now turn the call over to the operator for questions.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. We ask that you limit yourself to one question and one follow-up, and to refrain from multi-part questions until everyone in the queue has had a chance to participate. If time allows, we will come back to answer any remaining questions. And our first question for today comes from the line of Maria Rips from Canaccord. Your question, please.

Great. Thanks so much for taking my questions, and congrats on the strong quarter. Can you talk about key contributors to stronger than expected spend per client this quarter? I think you mentioned a fixed flexibility and price sort of architecture, but was there anything else that's sort of worth highlighting here? And then, so you raised the four-year guidance, which is great to see, but maybe more broadly, how sustainable do you think this sort of dynamics are going forward?

Hey, Maria. It's Matt. I appreciate the question and the kind words. The first question in terms of the contributors for the spend per client, I would reference back a lot of what we shared in the prepared remarks and happy to share a little bit more information as well. One of the things that was a really strong driver for us in terms of our share per client was the continued improvements that we're making in our inventory and in our assortment. We've continued to increase the penetration of newness to ensure that we're on trend and in style for our clients, as well as having the right seasonal inventory available at the right times. We saw a lot of strength starting in the middle of September in terms of our fall and winter goods. We saw really strong sales performance from sweaters, jackets, and other seasonally appropriate inventory that really helped up drive spend per client. In addition, creating more flexibility in the fix, as you noted, is helping us increase our average order value pretty considerably for those clients that have taken advantage of this optionality that we've created for them. And as you noted too, the work that we're doing in terms of pricing architecture, we identified and spoke to this work a few calls ago where we had this great opportunity to really go back and take a holistic look and understand the elasticity of our opening price points for our inventory across the board. recognizing that net-net we had an opportunity to capture more value in terms of our initial pricing. And that's helped us drive up both AUR and ultimately AOV. In addition to those, something else that we've been really focused on is creating more moments for engagement with our clients. How can we engage them in between their fixes? How can we make sure that we're capturing as much wallet share as possible? really using our freestyle channel to complement the fixed business that we're doing with our clients so that we're increasing the frequency at which we're providing clothing and apparel to our clients. And all of those have really helped to contribute to the increase in spend per client. And I think in terms of how sustainable these are, we'll share a little bit and also let David provide some additional color. But we feel really good about where we're at today. Our concentration on increasing the penetration of newness in our assortment, while we're happy with our results in Q1, we also, as noted in the prepared remarks, still have work to do. As we shared on our last call, we're looking to triple the amount of newness within our assortment over the course of the fiscal year. and good for us to be up 40% from a penetration standpoint, but we'll continue to see our inventory approved through the balance of the fiscal year as we work to ensure we have the right product for the right client at the right time going forward. We feel really good about the flex-fix penetration that we have today, and the focus there is just ensuring that we're client-right with that optionality for them. And then from a pricing perspective, we're going to continue to lean in to capture the demand where we see it, We also recognize that, you know, over the course of our current quarter will be anniversary in the initiation of that work. So, you know, while there might be, while it might pull back a little bit, we still feel really good about the capability that we've built and the long-term impact that that will have for us.

And Maria, as David, I'll just add just a couple of numbers around that. Specific to Q1, you know, I think you saw in our remarks that fixed AOV was up 6% year over year, and that's really one of the primary reasons we beat the high end of our expectations. And within that were a couple things that we saw that I think Matt called out. The first, we saw AUR upside. And that was really driven by that earlier than normal seasonal transition into fall winter goods. And our merch teams did a really great job of being prepared for that with fresh new inventory to really be able to capture the upside that we saw there. And the second is what Matt called out around that new FlexFix offering is we were able to launch and ramp FlexFix earlier than expected in the quarter. Those were two of the main drivers of the quarter. And then to your point around the full year guide, there were a couple of things that occurred that do play forward, and that's why we updated the full year guide the way that we did. The first thing is that we did have a small beat to our expectations around active clients, where I think last quarter we had said we expected to be down a little more than 3%, and we came in right at 3%, and we're playing some of that upside forward. And then to Matt's point, there were other sort of AOV drivers that we saw in addition to sort of the Q1 drivers that we expect to play forward for the year as well. And then all of that is incorporated into the new full year guide.

Great. That's very helpful. Thank you both. And I'll get back in the queue.

Thanks, Maria. Thank you. And our next question comes from the line of Jason from UBS. Your question, please.

Great. Thank you so much. Matt, can you elaborate a little bit on the impact that private brands have had on the business You know, you touched on the prepared remarks, but just tell us maybe a little bit about, you know, what percentage of sales those brands are right now, you know, how that's driven, you know, greater AOV. And just if you can elaborate, that would be helpful. Thank you.

Hey, Jay. Yeah, happy to elaborate, you know, and where I'll start is just. In terms of the target that we have for the percentage of private and national brands, that's going to continue to ebb and flow. And that'll ebb and flow depending on what our client needs, what our client wants, and what are we learning from them day to day, week to week, month to month. And as I mentioned on a prior call, I think the strength of Stitch Fix is a robust offering of national and private brands. It's one of the ways that we can best serve our clients through that portfolio that we have. And given our healthy contribution margin that we spoke to in the prepared remarks, I do believe that we're operating from a position of strength that allows us to adjust the portfolio profitably to best meet our clients' needs. And we'll continue to employ a data-driven approach to the decision-making and using those client insights to guide where we're buying into and what that overall penetration is. As we've shared historically and on prior calls, Our private brand composition is around 40% to 50% of our total portfolio, and the keep rate and the margins in those continue to have an outperformance over our market brands. But our market brands also continue to really resonate with our clients, and we're seeing a lot of strength there. as we shared in the prepared remarks. So we're just going to continue to make sure that at the end of the day, we have the client right assortment and feel really confident in our ability to serve our clients extremely well and get them the product that they're looking for. Got it.

If I can sneak one more in before I go back into you. Just talk a little bit more about the progress you're making with the active client file. Just talk about things maybe that incrementally that have been successful and maybe things you're looking to do going forward to continue to move that in the right direction.

Yeah, so happy to speak to both where we're at from a progress of active clients as well as, you know, where we see this moving forward. And David, please jump in with any additional context. For us, and as we've spoken about previously, it is really important to, you know, work to drive up our active client base. But the primary focus is ensuring that our clients are healthy clients. That's both in terms of which clients we're acquiring upfront. And then once we've acquired a client, how are we driving engagement, ensuring that we're meeting their needs in order to increase our revenue per active client and increase our LTV over time. So feel really good today in terms of the work that we've done, both within our marketing and our product experience to continue to improve and enhance the onboarding that we have for new client acquisition. feel really good about the work that we've been doing to re-engage our prior clients and the strength that we've been seeing in terms of re-engagement. And also, as I noted in response to Maria's question too, feel really good about how we're engaging our current clients in order to drive more frequent visits and more frequent transactions with them. So feel pretty good about our active client count overall, and this will be something that we're perpetually focused on. both working to increase that number as well as increase that engagement to continue to drive up our RPAC and LTV metrics.

And I think, Jay, I would just add that I think to Matt's point, we're definitely very pleased with where we are this quarter, slightly beating our expectations. And for Q2, we expect to see continued improvement in terms of sequential growth. I think we had called out a little bit more than 3% down last quarter This quarter, roughly, I think we expect to be down somewhere between 2% and 3% from a quarter-over-quarter standpoint. And I think back to Matt's point, this is about being methodical, about making sure that we're bringing in the right clients, and certainly seeing that in some of the 90-day LTV numbers that we're seeing that are sort of the highest we've seen in almost three years. And all of that gives us confidence to sort of reiterate what we said last quarter, where we expect to see a quarter-over-quarter increase in active clients during FY26. Got it.

Okay, that's helpful.

Thank you so much.

Thanks. Thank you.

Thank you. And our next question comes from the line of Dylan Cardin from William Blair. Your question, please.

Thanks a lot. Nice progress here. So if you're seeing this improved ROAS, I'm curious if there's anything that you're doing on sort of the deep data sets that you have to leverage engagement. It sounds like right now AI is being used more on the inventory side, but is there anything you're doing as far as leveraging sort of the view of customer that you have from a retention or engagement standpoint?

Hey, Dylan, happy to answer the question. Can you just repeat it quickly?

Sure. I'm just curious, I mean, Short of it is, are you using AI in any capacity through your data sets to do a better job engaging or for customer retention?

Yeah, happy to answer the question and appreciate the comment regarding the strong progress that we've been making. So, you know, I think what's important is just a continued reference point. It's just for us at Citrix, AI is integrated into every aspect of our business. It has been from day one. It's not a new investment area for us. It's in our DNA and it's a core part of our value proposition. and we're absolutely using our AI and data science capabilities in order to both methodically and cost-effectively drive engagement and re-engagement with our different client bases and our different client segmentations. It's a key component of what's been able, us to be able to unlock a lot of the strength that we've seen in our promotional capabilities such that we're able to, you know, use these promotional capabilities to drive up AOV in order to increase engagement, and for a variety of other use cases, all while delivering the highest contribution margins that we've had as a public company. So it's something that we'll continue to lean on, and it's going to continue to be an area of competitive strength for us.

Excellent. And then it sounds like you rattled off a handful of brands there. in the prepared remarks. It sounds like some of those are incremental to you and I'm curious if that's true and if you're finding sort of better relevance or better access to brands and what your pitch is there to kind of get those in. Thanks.

Yeah, I appreciate the question. So in terms of how we're determining which market brands we're going to go after and integrate into our experience, As I mentioned before, a lot of that has to do with just being client-led and understanding what's trending in the market, what brands are our clients looking for, and also us with the data sets that we have, what do we think are the brands that are going to best meet the needs of our clients? We have a strong private brand portfolio, and we also acknowledge that in a lot of instances, the wants or needs of our clients are either very brand-specific Or there are certain white spaces that we need to fill in with market brands that we don't have coverage within our current private brand portfolio. I think we have a really compelling value proposition for market brands. We have a very highly engaged client base. We do a great job of meeting our clients' needs in a very differentiated and unique service. It's a service that creates unparalleled convenience and client satisfaction that you know, becomes a really good opportunity for market brands in order to get in front of clients and to introduce their brands to this client base and to a new client base potentially that's outside the reach of either their current direct-to-consumer reach or the reach of the physical network that they otherwise have access to. So we found really good reception as we go out to market to both deepen our relationships with the market brands we work with today as well as to attract new market brands to bring into our assortment tomorrow.

Really appreciate it.

Thank you. Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. And our next question comes from the line of Simeon Siegel from BMO Capital Markets. Your question, please.

Hi, this is Dan. Thanks for taking our question and congrats on the nice improvements. So you've talked about the opportunity around reactivation in the past, and then before you touched on it with Jay's question, we just wanted to see how reactivations are trending versus your expectations and how you view this opportunity going forward. Thank you.

Yeah. Hey, Dan, nice to hear from you again, and I appreciate the remarks. So we continue to see strength in the works that we're doing in order to drive reengagement. You know, David, feel free to add some additional color if you'd like. But that's been a big focus of ours. We have a really large and active client base as well as a large base of clients that have previously been Stitch Fix consumers. And as we continue to improve our assortment, continue to improve our experience, continue to improve our AI-driven engagement and targeting capabilities, we've seen a great opportunity and great results going back to that segment of former clients and giving them a really strong value preposition to come back to us They're well aware of the convenience that we offer and the great service that we offer when it comes to style and fit. And we've seen some really great results when they're experiencing the enhancements that we've made to both reimagine the client experience and improve our assortment overall.

And Dan, just to provide a couple numbers around that, we're definitely, to Matt's point, really encouraged around re-engagements. And that's one of the main reasons we did slightly beat our expectations from an active client standpoint this quarter. because re-engagements were up 17% year over year, and it was the second quarter of year over year growth in a row. And so to Matt's point, just really encouraged by the work the teams are doing to really lean in here, and we're seeing some good results.

Appreciate it. Thanks for the color. Happy holidays. Thank you.

Thank you. And this does conclude the question and answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.