Good afternoon and thank you for standing by. Welcome to the Fourth Quarter and Full Year Fiscal 2023 Stitch Fix Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, you will be invited to participate in a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to Hayden Blair.

Good afternoon and thank you for joining us today for the Stitch Fix fourth quarter and full year 2023 earnings call. With me on the call are Matt Baer, Chief Executive Officer; and David Aufderhaar, Chief Financial Officer. We have posted complete fourth quarter and full year 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 quarterly report on Form 10-Q for our third quarter previously filed with the SEC and the annual report on Form 10-K for our fiscal year 2023, which we expect to be filed later this week. 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. And now let me turn the call over to our CEO, Matt Baer.

Thanks, Hayden, and good afternoon. I want to thank everyone at Stitch Fix for such a warm welcome and for your passion and commitment to helping our clients discover and express their style. I also want to thank Katrina and the Board of Directors for entrusting me to lead the Company and for sharing their perspective with me. I've spent the last 90 days getting to know our business and our brands, working closely with our executive leadership team to understand the issues and opportunities, and meeting our corporate, stylist, customer experience and warehouse teams to learn about how we serve clients today. I've also met with a number of clients, attended several client research sessions and read a lot of client feedback to help me understand our opportunities from their vantage point. Consistent personalized client service is at the core of what we do, so it was important to me to become grounded in what we're doing well, how we can do better and where we can do more. These first few months have reaffirmed my conviction about the bright future ahead for Stitch Fix, and at the same time, I fully appreciate the focus, time and resources required to realize our ambitions for the brand and the business. Today, I'll say a few words about why I joined Stitch Fix, share my initial observations about where we are today, and how that will inform our future strategy, then David will take you through our Q4 and FY'23 results. When I first became aware of Stitch Fix, I recognized right away that it was a unique business model, and as a digital leader, I was impressed. Stitch Fix presented a compelling, differentiated and innovative experience powered by advanced technology, offering personalization, convenience and service at scale. When the opportunity…

Thanks, Matt. This is a pivotal time for Stitch Fix, and we're fortunate to have someone with match retail, digital and operational expertise leading us into the future. He is asking a lot of great questions and has a fresh perspective that's challenging our thinking in a really positive way. Let me begin with setting some context around FY'23. We made the decision to focus on the core fixed experience which meant changing our inventory product and marketing strategies. To allow time for those strategies to take hold, we focused on near-term profitability and cash flow. This meant restructuring our organization, consolidating our warehouse footprint and making the decision to exit the UK market. Decisions like this are never easy, but we believe these actions were the right ones. Throughout the course of the year, we improved our inventory position, realized over $150 million of annualized cost savings and achieved our goal of returning to positive adjusted EBITDA and free cash flow. FY'23 net revenue was $1.64 billion, a decline of 21% year-over-year. We ended the year with approximately $3.3 million active clients, a decrease of 13% year-over-year. Despite the revenue decline, we believe we effectively unlocked the leverage potential for our business moving forward. We made great progress through cost savings and restructuring initiatives and ended the year with adjusted EBITDA of approximately $17 million, an improvement of more than $35 million versus the prior year. We also generated nearly $39 million of free cash flow. For Q4, our performance was better than we expected and reflects the work we have done to improve gross margin and right size our cost structure. We also made progress on a number of key initiatives in the quarter. After a careful review of our operations in the UK, we made the decision…

Thanks, David. As I said at the top of the call, my first 90 days as CEO have reaffirmed my conviction about the bright future of Stitch Fix. The insight and vision on which this Company was founded are just as powerful and just as relevant today. We are evaluating and assessing every aspect of our brand, our business and our operating model. We are carefully examining what we do and how we do it, optimizing where we can right now while also looking ahead to the longer-term opportunities. Stitch Fix was founded on the belief that the technology meets humanity model could create an individually tailored shopping experience that would make it easy and enjoyable for people define their style and by clothing. The Company's commitment and investment in that belief has never wavered. While we have a lot of hard work to do, our clients deserve the best from us, and I am confident in our ability to deliver that. I am determined to unlock every opportunity for us to realize the full potential of Stitch Fix and drive long-term profitable growth. Thank you for your interest in our Company, and now operator, we'll take the first question.

Thank you. [Operator Instructions] Our first question comes from the line of Youssef Squali of Truist. Please go ahead, Youssef.

Hello. Can you hear me?

Yes, we can hear you.

Excellent. Thank you, guys, for taking the questions. I have two. So first, Matt, you talked a little bit about how you've been on the job now for 90 days. You've had a chance to talk to a lot of people internally, externally, et cetera. Maybe can you just summarize for us some of the key learnings that you had during this period? What are kind of the two or three key challenges that are kind of top of mind for you based on those learnings? And then Dave, for the fiscal '24 guide, can you talk about the assumptions you're making in terms of active client count and maybe just how you see pricing kind of progressing throughout the year? Thank you.

All right. Thank you, Youssef. Appreciate the questions. So, yeah, so 12 weeks in and definitely have spent a considerable amount of time onboarding, learning everything that I can, talking to all of our internal stakeholders, as well as external advisors, and also trying to get as close to our clients as we possibly can to truly understand the business from their standpoint as well. And in addition to what I shared in the earnings transcript preceding this, one of the things that I learned was just how strong of a bond our most loyal clients have with our service and that to me is something that really creates a tremendous opportunity for us as we continue to drive growth in our business into the future. It is quite rare to have an e-commerce business or any retail business where you're able to get such high levels of engagement from your clients. In the last quarter, as we shared, what is our business down 22% and our marketing spend down nearly 50%, it's pretty rare to be able to see those kind of proportions. And that speaks to the testament of how we engage our clients in an organic manner and how they continue to come back to us time after time despite any challenges we might see in the macro environment. Another learning that I think is really important to us is the strength of our private brand business. One of the things that becomes really important for us as we go forward is to have an assortment that's not only exclusive but has a strong desirability from our clients. And if we look at our total brand portfolio, of our top 25 brands, they deliver about 50% of our total revenue and over half of those brands are private brands. Those private brands are also delivering approximately 5% to 10% higher IMU than the national brands, and our clients absolutely love them with materially higher keep rates than our national brands. In terms of challenges, I really see those as opportunities going forward. As we continue to listen to our clients, we'll continue to see where we need to tweak our experience, improve our business model, where we need to find operational efficiencies to lock further savings to further improve our bottom line and profitability going forward. And as I continue to onboard further, I look forward to pulling all of that -- all those -- all of those learnings together and sharing our long-range plan and strategy at a future date.

And then Youssef on the FY'24 guide, a couple of call-outs. First on active clients. We aren't sharing any specifics on full-year active clients, but it definitely remains a primary focus for the teams to drive towards growth. We do expect Q1 active clients to be negative. You saw for Q4 FY'23, we're down about 5% quarter-over-quarter and we expect Q1 to be slightly better than that quarter-over-quarter. On the revenue side, a couple of callouts. The active client loss in FY'23 and the Q1 loss I just described are definitely a big contributor to the revenue headwind in FY'24. We also expect the headwind that we've recently seen in existing client order frequency to remain in FY'24 with clients still being cautious in the macro environment that we're in. You touched on pricing. Pricing we expect it to continue to remain stable with what we've seen in the past few quarters.

Great. Thank you both.

Thanks, Youssef.

Thank you. Please standby for our next question. Our next question comes from the line of Simeon Siegel of BMO Capital Markets.

Thanks. Hey, everyone. Good afternoon. Welcome, Matt. So nice progress on the gross margins. Could you just maybe quantify the moving pieces a little bit more just given there is nuance out there? And maybe how you're thinking about those moving pieces into the Q1 and full-year guide you gave? And then can you guys say what you are expecting the 53rd week to represent for revs and EBITDA? Thank you.

Yeah. Thanks, Simeon. I appreciate the question. It's Matt here. I'll speak to the gross margin at a high level. David can share some additional color as well as answer your question regarding the 53rd week. A lot of recognition to our merchants and many others within our organization for all the hard work that they've put in over the last year to ensure that we have a healthy inventory composition. It's a strong perspective of mine that more inventory is not better, but better inventory is better. And the merchant organization is truly taking that to heart and that's evidenced by what we just previously shared with inventory down 30% year-over-year. That also allows us to mix into higher-margin products. As part of that, it's our reinforcement and our continued investment within our private brands. And as I just shared, the IMU there is about 5% to 10% higher overall. So I believe that we still -- while we still have additional work that we can do in order to improve our overall inventory health, really encouraged by the early signs of success that we're having already.

And then, Simeon, on gross margin and just to give you a little bit more color around that. For FY'24, we are showing between 100 basis point and 200 basis point improvement, and that really ties back to what Matt was describing that focus on improving our inventory health, as well as sort of the transportation efficiencies that we continue to drive. A couple of other callouts just as you go further down the P&L. There's also an annualized impact of the cost savings initiatives that we had in FY'23 and then there is also a good portion of the $50 million of annualized savings with the UK and the warehouse closures that we would realize in FY'24 as well. And then on the 53rd week, we do have specifics in the press release as well. So you can see the impact there as well as the impact of the UK, but it's about a point to a point and a half.

Great. Thanks a lot, guys. Best luck for the year ahead.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Trevor Young of Barclays.

Great. Thanks. Just back to the full-year guide for kind of core US. What are you baking in terms of underlying assumptions in terms of like the macro environment, impact from student loan repayments starting back up and continued competitive pressure given higher levels of discounting at peers are at retail? Just any color on kind of what's your kind of broader macro outlook is? And then just more of a housekeeping one. Appreciate the color on UK revs being able to back that out, but any directional commentary on what average revenue was for those customers so we can kind of contemplate that in our models as well.

All right. Hi, Trevor. I appreciate the questions. This is Matt. I'll speak at a high level to -- how we're thinking about the macro environment and our competitive positioning around discounting. David can share additional perspective on that as well as try to answer your question around the UK. So in terms of the macro environment, I think that there is ample reason to take a cautious view of the US consumer. They remain under pressure. Energy prices are rising. Interest rates are at the highest levels in recent years. Student loan payments resume next month and there is a continued drawdown in consumer savings. And you already know all of that and also all of those factors are outside of our control. So for myself and the team, what we're focused on are the factors that are within our control. So do we have the right assortment? Are we priced intelligently? Are we acquiring high lifetime value potential clients? Is our brand resonating with the target market? And are we fostering deep enduring relationships with our clients? And I think also with our service, we have that privilege of being delivered in the customer -- customers' homes when the macro environment is both a headwind and a tailwind. So during tough times, when discretionary spend is constrained or when a customer is reducing trips to the mall or resisted opening that addictive shopping app on their phone, we're still being delivered to our loyal clients' homes and our focus remains on that experience. Our focus is on winning that wallet share upfront and we also have that awesome advantage of owning a direct relationship with every single client. So the client's budget is stretched, they can share that with their stylist and then we can adjust the assortment…

And then, Trevor, on your specific question around the UK. Yeah, there is definitely a reconciliation in the press release as well to give you the top line as well as gross profit and SG&A to help you sort of back those numbers out of the models. From an active client standpoint, the UK represented about approximately 180,000 clients and so you can back into our pack with that to be able to back that out of the models.

Okay, great. Thanks, Matt. Thanks, David.

Thank you.

Thanks.

Thank you. Please standby for our next question. Our next question comes from the line of Blake Anderson of Jefferies.

Hi, guys. Thanks for taking my question. I had two. Wanted to first ask on just if you could provide any more color on the trajectory of the year in terms of sales and margins. It seems like Q2 through Q4 EBITDA seems like it's around break even after Q1 so just wondering kind of the puts and takes on profitability for the back half of the year, the last three quarters versus the first quarter. And then second question was just curious if you could talk at all about kind of your return rates. How many of your customers on the fixed business are keeping boxes? How many items are they keeping? Wondering if you could share any color on how those KPIs are trending. Thank you.

Yeah. Blake, on the first part of your question, I think you're talking about EBITDA throughout the year, and the guide for Q1 was between $2 million and $7 million and then the guide for the full year was between $5 million and $30 million. And so you can see from that that we actually do expect to be profitable in the back half of the year as well because that's -- going back to what we talked about in prior calls like our focus on profitability has been something -- we have been really digging into and we're certainly proud of the work that we've seen there. And so we expect to be EBITDA positive for the year. We also expect to be free cash flow positive for the year as well.

On the second question, I can jump in there and David feel free as well. But in terms of the key metrics that we track from AUR, AOV and keep rate, overall we're seeing relatively stable metrics across the board, and then going forward we'll be working to put processes in place and strategy in place to improve those metrics over time.

Got it. That answers it. Thank you.

Thank you. Our next question comes from the line of Tom Nikic of Wedbush Securities.

Hey, everybody. Thanks for taking my question, and Matt, welcome aboard. I just want to ask -- so obviously, you had a big revenue decline last year. You're calling for another double-digit revenue decline this year. So kind of, in aggregate, it's a pretty significant decline versus where you were a couple of years ago. Just kind of conceptually sort of the idea that you're kind of resetting the revenue base to I guess kind of -- sort of a healthy sustainable base and then you find opportunities to grow from there. And I guess when you do kind of think about like how to kind of inflect to the top line from negative to hopefully positive again like how is inflecting customer growth? Is it a share of wallet like how do we think about that? Thanks.

Hey, Tom, I appreciate the question. It's Matt. I'll answer that question and then David if there's anything you'd like to add, please, feel free. So in terms of where we see the business going forward and where our focus remains, we're working really hard to ensure that we have a healthy foundation for our business that we have a healthy inventory position for our business, that we have healthy client franchise for our business and that we have a healthy financial and P&L ultimately for our business. And we also have a strong perspective that as we continue to invest in and deliver experiences that resonate best with our clients, and as we continue also to ensure that as we really judiciously rationalize our marketing spend, we're going to be able over time to both improve the experience and do a better job acquiring high lifetime value customers that will ultimately lead to future revenue growth and we'll be able to do that on a profitable basis. What I can also tell you confidently is that the service that we provide is a phenomenal one. The ability to get product delivered to your home that matches your style preferences, that aligns with your value orientation, that actually fits is surprisingly rare experience, and it's one that we have an exceptional experience and we excel in competitively. And I believe that, that service resonates with an incredibly wide audience and untapped future markets which over time will be able to expand our target market audiences and deliver growth. Right now, we're focused on the healthy foundations for our business and in the future, we'll be focused on driving that long-term profitable growth.

Understood. Thank you very much.

Thank you. Our next question comes from the line of Dylan Carden of William Blair.

Thank you. I'm just curious maybe even follow up to that last answer. How are you thinking about the relationship now between marketing and sales? You're kind of keeping the ratio relatively stable next year. Is that driven by the sales outlook or is that driving the sales outlook? And kind of what's the strategy as it relates to retention and sort of new customer engagement? Thanks.

Hey, Dylan, appreciate the question. It's Matt. I'll answer your question and then David if you'd like to provide some additional color, feel free. What we're focused on right now in marketing is exactly as you called out that we need to ensure that when we go to market, we have a judicious marketing spend that rationalizes every dollar to ensure we're doing our best job to acquire high lifetime value customers into our portfolio. And I've been -- based on my experience, I've seen where at times, if you're just chasing client growth from a vanity metrics perspective, you can get yourself into some really difficult situations that become then ultimately very difficult to unwind. More important for me and the guidance to the team is that we need to focus on the health of our client franchise. So are we acquiring the right customers? Are we acquiring customers that display all of the signals that would indicate a high likelihood of high lifetime value? And how the marketing team is focused and what gives me a lot of encouragement is that there is a few different things that guide their work. The first is that they go to market with a really clear audience focus. They know who it is that they're speaking to and who it is that they are working to acquire. Two, they're doing a really good job of telling our story, what's the uniqueness of our brand, which is the uniqueness of our business model and what is that value proposition for our prospective clients? Three, they're doing a good job balancing the budget between higher funnel brand and awareness campaigns and then lower funnel programmatic acquisition tactics. And to your point, we also have to be very mindful in terms of our retention and reactivation campaigns and the marketing team is really dialed in here as well. And recently we've had a lot of success in terms of re-engagement, and then going forward, we look to continue those efforts not just to continue to harvest reactivation but also to improve retention and fend off dormancy in the first place. So we feel confident that if we focus on these right things, we get the client experience, right, we're really acquiring and engaging with high lifetime value customers will create a better trajectory for our total client health over time.

Thanks. And I guess sort of a follow-up on that. I mean is I don't know if you're going to answer this per se. But as you think about sort of the active customers you're left with now at the end of this year and to your point about kind of unwinding past marketing spend or unwinding past growth. Do you feel you kind of mentioned the stability of some of those key metrics? Do you feel like this $3 million some is a more engaged core group? Or you're still kind of weeding out some less efficient customer base in the model?

Yeah. Dylan, I'll touch on that. I think to Matt's point sort of this holistic approach to marketing touches on a couple of areas. First is in gross adds and I think that was a lot of what I was describing as well. But I think what you're alluding to is on the dormancy side, we've talked about this in the past where we are still cycling through some of the Freestyle first clients that we've talked about in the past, although it's definitely less of an impact than it's been in the past. And we're also still seeing some of that elevated first fix dormancy that we've talked about in prior calls, but we're also seeing improvements in some of that first fix engagement as well. And so it's still a big area of focus for us.

Got it.

Thank you. Please standby for our next question. Our next question comes from the line of Mark Altschwager of Baird. Please go ahead, Mark. Mark Altschwager, your line is open. We'll go to our next question. The next question comes from the line of Edward Yruma of Piper Sandler.

Hey, guys, thanks for taking the question. Matt, thanks for all the forthrightness. I guess just stepping back maybe as a follow-up to the last question. When you look at churn obviously, maybe introduce some customers that were lower value or just not as focused on the service. But if you talk to your customer base and look at some of these longer-term customers that have churned or gone dormant, I guess one of the top two or three things that cause them to churn or go dormant? And how do you expect to address that long-term? Thank you.

Hey, Ed, appreciate the question. Matt here. I will provide an answer and then David can follow up with additional context if he'd like. So I've spent a lot of time as noted with our clients. I've been a participant in multiple client focus groups. I'll be participating in two more tomorrow. And one of the reasons or one of the things that really piqued my interest is both why they're excited about the service that we offer, and then also, to answer your question, for those that have decided to leave us, what were those drivers and what could we do in order to improve our service such that we mitigate the dormancy that we see from some of our clients. And the top couple of reasons are probably no surprise and actually give me a lot of optimism in terms of the value of our service overall. Number one, it's just that there is a life-changing event that they've had that interrupts their need for our service, and it's something where it's -- without -- beyond our control and something that is why we're also seeing I think a lot of success with the more recent re-engagement campaigns that we have. There's times in people's lives where our service is one that's have incredible value to them and they might want to receive a fix every 30 days, and then something else changes in their life circumstance that then they might go for a while where the service is less valuable for them, but then we have a really great opportunity to reengage them in the future when their life's circumstance changes again. The second and really proud of the work the team is doing is around continuing to --

Thank you.

The second is around what we're really doing to continue to improve the assortment quality and what we send to our customers. Overall, our customers give us really high marks in terms of the quality of our assortment and our keep rates -- and our success growing the business demonstrate that. Our merchants are definitely focused on making sure that our assortment is holistically focused on our core customer segments that we serve today. So the experience then is at its best when we have the assortment breadth and depth to meet the needs of the entire closet for our customers and that continues to be a focus for us.

Thank you. Our next question comes from the line of Kunal Madhukar of UBS. Please go ahead, Kunal. [Operator Instructions] Our next question comes from the line of Mark Altschwager of Baird. Please go ahead. [Operator Instructions] We'll go to the next question. The next question next question comes from Kunal Madhukar of UBS.

Hi. Thank you for taking the question. A quick numbers one and then a follow-up. So on the numbers one, you mentioned that UK had about 180 active clients, 180,000. So when we -- when I take that out from the 1Q numbers, that implies that on a Q-o-Q basis, your -- that would be a negative 5.5% in 1Q which is worse than the negative 5.1% in 4Q which kind of tells me -- and since you said that the expectation would be that in 1Q, there would be an improvement, that would suggest that at least as far as the US is concerned, you expect to add active clients. Is that right?

No, I don't think that's right, Kunal. We definitely expect -- another way to look at this is quarter-over-quarter, we definitely expect active clients from an absolute number to get better from a loss standpoint than what you saw in Q4.

So in Q4, you lost 179,000 clients. Now if 180,000 clients are going to go out of the system in 1Q because UK would be a discontinued op?

Yes. And so the down 3% that we were quoting included -- it was a US-only number.

The down 3%. Okay.

Yeah. When I was talking about the quarter-over-quarter sequential decline in Q1, it was a US-only -- it was a US-only comp.

Okay. Okay, great. And then -- and I think this has been asked before so I apologize. It takes me a bit to kind of understand stuff. But the negative 15% to negative 20% revenue guide for the full year, how should we kind of think about it in terms of where you'll probably end up with active clients versus where you will end up with LTM revenue per active client?

Yeah. Kunal, I think we touched on this earlier that we aren't giving specifics around active clients from a full-year guide standpoint and the guidance that we've given assumes pretty stable pricing throughout the year as well.

The stable pricing. Okay. Thank you.

Yeah.

Thank you. And as there are no further questions in queue, this does conclude today's conference call. Thank you for participating. You may now disconnect.