Good day, everyone and welcome to the Stitch Fix First Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. At this time for opening remarks, I would like to turn things over to David Pearce, Head of Investor Relations. Please go ahead, sir.

Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2019. Joining me on today’s call are Mike Smith, President and COO and Paul Yee, our CFO. We have posted complete Q1 financial results in our shareholder letter on the IR section of our website, investors.stitchfix.com. 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 our results to differ. 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 shareholder letter on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website and a replay of this call will be available on the website shortly. I would now like to turn the call over to Mike.

Thanks, David and thank you for joining us. After the market closed today, we issued our quarterly shareholder letter with more details on our results, which I encourage you to read. As some of you may know, Katrina is on maternity leave. So Paul and I will lead today’s call. First, I would like to take a moment to highlight our results from the first quarter and discuss how we are successfully executing against our strategic roadmap. In the first quarter, we delivered net revenue and adjusted EBITDA that exceeded our guidance. Net revenue for the quarter was $366.2 million, representing 24% year-over-year growth. We delivered net income of $10.7 million in the quarter and adjusted EBITDA of $14.3 million. We grew our active client count to 2.9 million as of October 27, 2018, an increase of 534,000 and 22% year-over-year. These results demonstrate our approach to delivering disciplined growth while continuing to make measured investments in future opportunities in our business. Paul will discuss our financial results in more detail later on this call. As we have shared in past quarters, our strategic roadmap consists of three primary growth pillars, which include expanding relationships with existing clients, attracting new clients and growing our market opportunity. Today, I will discuss the positive client reengagement trends we have seen in our women’s category as well as provide an update on newer categories, men’s and kids. But first, I would like to take a minute to provide context on two key factors that reflect our strategic decisions and actions. Our net revenue is a function of the number of clients we serve and how well we serve them which are reflected in our active client count and net revenue per client respectively. We strive to deliver long-term sustainable top line growth between…

Thanks Mike. Our first quarter results reflect our steady long-term approach to the business, which is to grow the top line sustainably and profitably to drive continuous improvement throughout our operations and to reinvest the resulting free cash flow to drive future growth. Net revenue for the quarter exceeded guidance at $366 million, representing 24% growth versus Q1 2018. These results were driven by year-over-year increases in both our active client count and our net revenue per active client. As Mike mentioned through our various product and marketing initiatives, we aspire to drive both metrics and this was the case in Q1. Active clients in Q1 grew 22% year-over-year. This increase reflected growth across women’s and men’s as well as our first full quarter of kids. Revenue per client grew 2% year-over-year despite the dilutive impact of our newer categories. Our men’s clients for example spend approximately 80% of what our women’s clients spend. Our growth in revenue per client reflects the success of initiatives like Style Shuffle, Style Pass, Extras and improved styling algorithms which together have driven increased client wallet share and engagement. Q1 gross margin was 45.1%, 140 basis points higher than last year’s Q1. We continue to be laser focused on driving efficiencies with our cost of goods. Our year-over-year improvement was driven by a decrease in inventory reserve, reduced clearance expense and lower shrink levels. These results are net of the dilutive impact of higher penetration of men’s and kids, which have lower gross margins than women’s in this earlier stage of their growth. Advertising was 10.6% of net revenue this quarter compared to 9.5% in last year’s Q1. This spend was planned and reflected our strategy to take advantage of channel efficiencies in the fall. Looking ahead to Q2 like last year, we expect…

Thank you. [Operator Instructions] We will hear first today from Douglas Anmuth with JPMorgan.

Great. Thanks for taking the question. I was hoping to just go back to the conversation about net revenue per active client and active clients and we obviously saw the net revenue per active client increase year-over-year for the second quarter in a row, that’s after I think last quarter, when you talked about expecting some declines here? So just trying to understand a little bit more about how you think those two really run going forward? And then also how does that play into your CAC and what you are seeing in terms of advertising trends at all as well with the active client number? Thanks.

Hi, Doug. It’s Paul. I will start off with your first part of your question and then I will turn it to Mike to talk about marketing spend. You are right in that there are two drivers of our growth in terms of revenue and its active client count and revenue per client and those two can interplay for a given quarter. The upside that we saw Q1 versus our guidance was really the fact that we are seeing strength in our revenue per client. A lot of initiatives that we have put into place to understand our clients better such as like the Style Shuffle game and to be able to really ensure the product that we have available and have the right algorithms to match our product with clients is translating into higher revenue per client. We are seeing some very good momentum there despite the fact that we have the dilutive impact of newer categories like men’s. So, we are really pleased with the momentum we are seeing on that front and we are noting for Q2 that we are seeing that continue going forward. So again, for a given quarter, we are looking at variety in a portfolio of initiatives whether it’s product or marketing and they all tied back to our longer term commitment to 20%, 25% revenue growth.

And this is Mike. I can tell you our marketing strategy. Our marketing strategy remains the same which is staying consistent with having a diversification of channels and also looking for healthy payback and sort of fast payback on our spend. I would say kind of a new component that we touched on briefly was this idea of where brand can play in the mix. So, we think that there is a lot of opportunity for brand in the future. There is just attributes of this model that clients experience that are around confidence and personalization fun that we think have the opportunity to kind of show up in a brand campaign in the future.

Okay. Thank you, both.

Thanks, Doug.

We will hear now from Ross Sandler with Barclays.

Good. First off, knowing Katrina fairly certain that she is looking to this call, so congrats on the second kid. I guess two questions from me. First, as you guys talk about our record purchases per fix or keep rate in core women’s in this letter a little bit more prominently than in prior letters. So just wondering to get some color on what’s driving the keep rate in core women’s? And then Mike you mentioned the new warehouse automation efforts, I guess stepping back, do you think that there is meaningful improvement in efficiency and in cost of goods sold reduction through automation or is this going to be kind of a gradual process? Any color there on long-term thoughts on automation and how that can help drive the business?

Yes, I will take both those, Ross. So first of all, I think in each quarter as we look at trying to provide color on what’s driving the business. In this quarter, our keep rate in women’s was a really good example of that, where we have just got better personalization, we are able use our scale to really – sort of be faster and getting inventory right for clients and again past strategies expanding our price points and aesthetics and just frankly doing a better job with merchandising and doing a better job with styling and doing a better job with matching is what drove that keep rate. So, it was a really good quarter in women’s in that front. On heavy automation, if I understand your question correctly, yes, there is a lot of opportunity with automation to improve kind of warehouse efficiencies and we still believe we are in the early innings. The Phoenix warehouse was just sort of a test that we saw very clearly that we were getting fast payback on that. Now, it’s time to roll that to the other four warehouses, but we have a number of projects that will help drive efficiencies that are kind of on the table for us. And again, we think we are in early innings of getting leverage and efficiency in our warehouses.

Anything further Mr. Sandler?

No. Thank you very much.

And from Piper Jaffray, we will move to Erinn Murphy.

Great. Thanks. Good afternoon. A couple of questions for me. First just on the guidance for the second quarter, you talked about new users being flat, I am curious now that we are through a lot of the holiday season for some of it at least. Are you just – is it just prudent, it’s always been a lighter quarter historically, but I don’t think we have ever seen flat, just particularly given all the new growth initiatives you have underway. We would love just a little bit more comments on that?

Sure. And this is Paul. I will answer your question. So, the holidays are a time for us that’s actually quite steady in terms of our seasonality compared to other retailers. We think it’s a great thing in terms of not having to step up or necessarily have uncertainty around the inventory. And then from a marketing perspective, it’s just a very busy time, in terms of lots of noise and communications to clients and consumers out there. So we actively choose to lower our spend from a marketing perspective and therefore there is an impact that has on active client count. On the flipside, we are continuing to see great momentum on the various initiatives to ensure we are delivering a great client experience for existing clients and that’s manifesting in our revenue per client metrics and that is helping us put together our guidance for Q2, 22% to 24% growth, which frankly is sort of in the midpoint of sort of the longer term range we have shared with you on previous calls. So, the holidays are a time where we know clients are focused in the family than something that we are really excited to support them when they come back after the holidays to start to refresh their wardrobes.

Okay, thank you. And then in the press release you guys called out a number of exciting brands that you are starting to carry now. I am curious a lot of them just look a little bit higher price point than some – than your kind of low price point strategy. What are you seeing with ASP right now and is this an opportunity to kind of lift that a little bit higher than your average kind of $55 price point?

Yes, I mean, I think this is Mike, Erinn. We really believe that we can – and we have shown this. So, we can represent a lot of different price points from lower price points to higher price points. Those brands that we have recognized in the shareholder letter were more to kind of discuss and show our ability to bring high-quality brands into the franchise and clients were asking for those and we are able to serve clients. And it’s a different conversation as we have talked about, the evolution of brand conversation has been great as we have gotten bigger and as we can point to show these brands exactly what clients will want their product and specifically also how we can make their products better by using the aggregated dataset to share back with them. So, it’s the same story that we have had with all brands, which is price protection, growth strategy for the brand and the ability to kind of share data with them at an aggregated level that makes them a better brand.

Got it. And then if I could just ask one more on the UK, I am just curious if you can give us an update on kind of staffing progress as you build out the stylist team there. And then just the vendor base would love if you could talk about how you compare and contrast the potential UK vendor base versus what we have here in the United States? Thank you.

Sure. So, this is Mike again. We are on track for the UK. We have started hiring our merchandising team and our styling team. As a reminder, we are building local operations there, because we want to have an localized market strategy in the UK. The vendor base, it’s too early to talk about, but I will say that the early read is that we are working with all the vendors that we would want to work with in the UK and there will be opportunities I think to be able to share UK vendors actually in the U.S. at some point in the future as well. And I think that’s one of the great things about this platform is with each new business launch, we are able to take best practices from kids and apply it to men’s or men’s and apply it to women’s or UK launch and apply it to all of our other businesses and we see that opportunity as we get started in the UK as well.

Great. Thank you guys and all the best. Happy holidays.

Thanks. Happy holidays to you too.

We will move next to Heath Terry with Goldman Sachs.

Great. Thanks. Curious what you guys are seeing in terms of inventory supply whether or not the issues that we are seeing from a macro perspective with China or just even more broadly whether or not you are seeing any sort of increases in terms of the cost of the supply and your ability to get the inventory that you are looking for and to the extent that if at all, there is anything implied in your guidance in terms of that changing from the run rate that we’ve seen over the last few quarters?

Hi, Yee, this is Paul. We’re all watching the sort of macro-economic and political dynamics very carefully like all retailers. And I can’t say that, the current tariffs enacted have a very mature impact on our business, the categories under tariffs are not ones that we were heavily invested in. So nothing that we’ve seen so far, but obviously, working very carefully and closely with our partners and we have really great relationship with our vendors just to continuously plan and to anticipate on various scenarios. So nothing else to sort of further speak on that front at this point. The good news we have – beyond the great partnerships we have with the vendors, we have very strong inventory management capabilities. Our ability to buy the right product upfront using our data science capabilities and also our merchandising expertise to make sure we’re buying the right inventory and get into right clients, which reduces the risk on the back-end. And so we’re definitely focusing on that as we think about the quarters ahead.

Great. Thank you. And as we look into those quarters ahead, can you give us a sense of just sort of what your expectations, or I know you’re – with – targeting 25% or so revenue growth. Should we expect any sort of meaningful mix shift in terms of the makeup of that, you’ve referenced a few times, the trade-off between adding new customers and average order size or average spend per customer. Any reason for us to expect or that you expect that mix in the components of that growth to shift materially over the coming quarters?

I don’t know, Heath, the answer is no. I mean we have a very balanced approach to our growth. We think 20% to 25% growth in terms of a rate is good for our clients, allows us to be able to serve them consistently. We have to buy inventory as we line up our logistics and so we think that growth is a really healthy one for our clients and for our business. And we look at that target in terms of continue to build our base of clients and serving them well as evidenced in our revenue per client metrics we shared today, as well as continue to plant seeds for growth. Men’s just hit a 2-year anniversary, Kids is just out the door and we’re very excited that we’ll be launching in the UK end of this fiscal year. And as we sort of look forward, we kind of continue to have that balanced approach as we ensure that we have the right client experience over the long-term.

Great. Thank you very much.

Thanks, Heath.

And from SunTrust, we’ll move to Youssef Squali.

Excellent. Thank you very much, and apologies for the background noise here. Can you just speak to the margin side of the business? So I think for Q2, you’re guiding for a relatively flattish top-line, but at the midpoint of margin – the midpoint of EBITDA, it seems like there is a pretty substantial decline at the time when you’re talking about the efficiency on a marketing spend, in other words you’re spending less on marketing. So just help us understand the puts and take there, may be touch a little bit on the gross margin where I think you talked about Q2 likely to show some negative efficiency. So just trying to understand how much of it has just contributed and built into it, how much of it is really just a – maybe a slight decline in gross margin reverting back to what you’ve done in prior quarters? And I have a follow-up. Thanks.

Hi, Youssef. So a couple of things are reflected in my EBITDA guidance for Q2. One, I did note, we had a really good gross margin in Q1, I’m really proud of our results, 140 basis point increase year-over-year really due to our ability to manage inventory as well as lower clearance rates and a positive inventory reserve impact because we have healthy inventories end of the quarter. So with a look to Q2, which is our holiday quarter, I did note that our clearance rates will be little higher as we sort of get ready for the new season, which is Spring and we saw that phenomena last year. So quarter-over-quarter, you’ll see a slight impact on our gross margin. And then also I will say that inventory reserve impact in Q1 was higher than average, while the dynamics of improving our clearance abilities over time will also go forward. We’ve noted that the inventory reserve impact in Q2 will be – will not be as material as it was in Q1. I would think also in terms of comparing the two quarters, we are starting to continuously ramp up in our investments. We’ve – the UK, Mike just mentioned that we are hiring talents, we are also building our warehouse capabilities, so that will start to play out. And finally, talent investments is something that we’re very focused on ensuring that we continue to have great talent to drive our business especially in our engineering and data science teams. And so you’ll see SPC as a percent of revenue increase over the course of the year including Q2. So nothing has really changed in our strategy. We continue to think long-term in our investments and that was reflected in our EBITDA guidance and that’s helping us also to drive sort of the long-term top-line growth that I’ve shared.

Okay. That’s helpful. And then on the exclusive brands commentary that you have been there, Eric [ph], can you just speak to maybe the benefits of having exclusives on the platform? Any quantifiable benefit maybe like a higher keep rates or higher ASP that you can point to? Thank you.

Yes, Youssef, this is Mike. I mean the benefits are being able to just offer a wide range of aesthetics and price points in ways that a brand can’t other retailers that are sort of more singularly focused in this data core price point that they offer. We’re able to broaden that range very clearly and we’re able to sort of take the data that we get from clients where they tell us say, oh you don’t have, well, you know, what about this product for this occasion or I need this price point and when we don’t find in the market, we can develop that product ourselves and we’ve just gotten really good at developing exclusive brand product and some of that flow through you’ll see in gross margins. So Men’s has a higher penetration of exclusive brands and some of that shows kind of in the margin improvement that we’re seeing. But we are confident in our abilities to develop exclusive brands for all of our businesses and we’ll continue to develop that product to make sure we have a wide range.

Thank you.

Thanks, Youssef.

[Operator Instructions] We’ll hear next from Mark Mahaney with RBC.

Okay. Lot of my questions had been answered or asked and answered. So let me just try to broaden it. So just talk high level about brand advertising campaigns, you already talked about the next quarter, I mean at a higher level like how do you think about ramping that up over the course of the next year or 2, what kind of impact do you expect to have from that, maybe some details about how you would spend that, you’ve done broad kind of TV campaigns before, but they’ve been kind of performance marketing-oriented, performance-oriented, not brand-oriented. Can you just talk about your plans on that? And then secondly, can you just again go through some of the details on what kind of traction you’re seeing for two specific products Extras and it’s not a product, but Style Pass like the usage of that? Thanks a lot.

You’re welcome, Mark. This is Mike. I’ll take both of those. So I think it’s too early to talk about specifics on ramping up brand advertising. I mean, one of the things that we’re doing research on now and feel really good about is this ability to understand the client’s experiences on the platform in a way that is above and beyond just like a transaction. They really enjoy getting their fixes, it’s a gift to themselves. It is confidence inducing, they really have a lot of fun and we do see that it’s a better, smarter, just of more fun way to shop. And as a result of that, because we’ve only really been doing marketing for a couple of years in terms of paid, we have this opportunity to invest in brand, in a way that sort of elevates those attributes. But as far as like how we will employ them and what attributes we’ll elevate, that’s what the work we’re doing right now and research and I think in future quarters, we can talk more specifically about the effect that the brand marketing campaign has on the business, but we think there’s a lot of opportunity. On Extras and Style Pass, there’s still two really great capabilities that expands. For Extras, it allows us to gain more – gather more market share. There’s no reason why a client has to go outside of our platform for buying things like socks and underwear and Extras provides that opportunity. And then Style Pass, we’re still using a very disciplined [Technical Difficulty]. Hey Mark, this is Mike. We got cut-off. I was – I think I was in the middle of answering your second question about Extras and Style Pass, could you get…

Yes. Keep going, Mike. Keep going, sorry about that.

Okay. Yes, so, I mean –

My question is a bit [ph] complicated.

Yes, the technology couldn’t handle it. So, no I mean, the Extras and Style Pass are great capabilities to – again add more flexibility to the service, gather more – garner more wallet share. And so there is no updates really in Extras. We use it when we’re able to test some things like socks or underwear and we’ve had really good kind of uptake from that. And then on Style Pass, we’re still very disciplined in the way that we roll that out. We want to roll it out to clients that we know that it’s great for. Again, as a reminder, it’s $49 offering, the $49 is sort of a down payment for anything that you keep in your fix, but then you get unlimited fixes based on for that year. And we’re seeing higher engagement in that, higher average order size, and as a result of that we feel really confident that for those clients that it makes sense for, we’ll continue to have a disciplined approach to rolling it out.

Okay. Thanks a lot, Mike.

Sure.

We’ll hear next from Adrienne Yih with Wolfe Research.

Good afternoon. Thank you for taking my questions. Paul, I was wondering if you could expand upon the comment in the second quarter there’s a focus on growth in revenue per acquired customer. What is the assumption for the retention rate there? And when you focus on that, is it increased ad dollars that are deployed to retain customers, is it from add-ons keep rate or both? Any color there would be great. And then my second question is also a clarifying question, the ad expense looks like it seasonally is lower in the second quarter, and so I’m just wondering, if we should be thinking about year-on-year growth rate being lower than that in the first quarter? Thank you so much.

Hi, Adrienne, I’ll try to answer your two questions. I might need a clarification to the second one.

Sure.

So your first one, you’re correct in that, I’ve noticed that the revenue per client growth will be accelerated in Q2. There’s nothing specific on pointing out the driver of that, you’ve heard a lot of initiatives that we had in place, all around being that partner for our clients when they’re ready to buy clothes and I think our abilities through Style Shuffle, the data that we get and really being able to understand styles, our client’s styles better, over time it’s certainly helping and we have a variety of products that our merchandising teams are continuing to broaden in terms of our capabilities to please clients certainly that’s embedded into that, but nothing specific. It’s just the fact that we continue to get better and the fact that we had our highest ever keep rate in Women’s kind of a testament to kind of the capabilities we build over time, but nothing specific color in terms of an issue that you haven’t yet heard about. Your second question, I just want to make sure I understood, you mentioned something about expenses. Can you just repeat that again, please?

Yes, so the advertising expense, I believe you had mentioned that it would be obviously growing at a slower rate and that’s what in part will drive the flat active clients. So when I’m looking at it, obviously in the first quarter, it looks like the ad expense grew call it 37% somewhere in that range. When I look last year, it looks like there’s a natural absolute reduction in that ad spend. So when I – I‘m just trying to figure out if we should be growing that ad expense line 25% year-on-year or in line with the customer growth, which obviously is flat to the prior quarter, but growing over 20% year-over-year. Does that make any sense?

Yes. What I just – yes, thank you for clarifying and what I can share with you is that, as a percent of revenue advertising will be declining in Q2 relative to Q1. So last year you saw 3 points – a 3 point drop in terms of revenue – percent of revenue in terms of advertising spend. And so I would point to that as history in terms of the fact that in Q2 we’re less focused on our advertising spend. So all of these sort of assumptions are embedded in both my revenue and EBITDA guidance for the quarter and I think sort of last year sort of an indicator of that.

Okay. So just to summarize – this is more seasonal in nature, the new proactive strategy, would that be fair?

That’s correct, it’s just the fact that, it’s just a very competitive time and we choose not to advertise in terms of investing.

Great. Thank you very much, and best of luck.

Thanks, Adrienne.

And our final question today will be from Edward Yruma with KeyBanc Capital Markets.

Hey, thanks for taking the question. I guess first on the higher average annual revenue per client, I know obviously you had some success with increasing take rate or excuse me, keep rates, how should we think about frequency particularly as it relates to the core female customer, if you are coming in more frequently for fixes? And then second, I know that you gave some color on the UK drag or said it was to drag the EBITDA, give us a little bit more color how much of a drag it was in the quarter and how we should think about the drag building as the year progresses? Thank you.

Yes, Edward, this Mike. I will answer the first one. We talk about frequency on for folks that are on Style Pass, it is more frequent, I think people really enjoy getting fixes, they pay the $49 and they are more engaged in driving higher average order values. I think we will be balanced between those two things both kind of how frequently someone is getting a fix and also the fix characteristics with keep rate. So there is – I don’t think there is it really varies by business line and it varies across men’s, kids and women’s, but I think Style Pass drives some of it up, but there is no kind of real news to kind of share as it relates to any big change that we are seeing in frequency?

Hi, this is Paul. In response to your question about the UK spending cadence, there will be a step up in Q2 relative to Q1. Q1 costs are relatively small and as we build out our team in country from a merchandising, styling and customer service standpoint that will increase our payroll costs. In addition, I mean Q2 we are starting to build out our warehouse capabilities. We will be having a warehouse in country and we want to make sure that setup appropriately to facilitate the supply chain. So, those two investments are going to start to show up more materially in Q2 and that’s reflected in my EBITDA guidance for the quarter.

Great. Thanks so much. Best of luck.

And at this time, I would like to turn things back to Mike Smith for closing remarks.

Thank you all for joining us on today’s call. Have a great rest of your holiday season.

And again that will conclude today’s conference. Thank you all for joining us.