Good afternoon and thank you for standing by. Welcome to the First Quarter of Fiscal Year 2024 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. [Operator Instructions] Please be aware that today's conference is being recorded. I would now like to hand the conference over to Hayden Blair.

Good afternoon, and thank you for joining us today for Stitch Fix first quarter fiscal 2024 earnings call. With me on the call are Matt Baer, Chief Executive Officer, and David Aufderhaar, Chief Financial Officer. We have posted complete first quarter 2024 financial results and a press release on the quarterly results section of our website investors.stitchfix.com. A link to the webcast of today's conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause the results to differ, in particular, our press release issued and filed today, as well as the risk factors sections of our annual report on Form 10-K for our fourth quarter and full year 2023, previously filed with the SEC, and the quarterly report on Form 10-Q for our first quarter 2024, 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. In the first quarter of fiscal 2024, we met the requirement to report our UK business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operations. 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. Good afternoon. I'm pleased to share that Q1 revenue came in at the high end of our guidance, and we outpaced our guidance on adjusted EBITDA as a result of the work we are doing to manage the business to profitability. While these results are encouraging, there is much more work to be done to change the trajectory of our business. We began the fiscal year carefully assessing all areas of our company to identify impactful opportunities to transform our operations and improve our performance, and that work is ongoing. All that I've learned and observed in my first five months, as well as my experience in retail over many years, has reinforced my conviction in our company's ability to deliver sustainable, profitable growth. The original vision of Stitch Fix is as powerful, as relevant, and as compelling today as it was when it launched. Over the last 12 years, we have served millions of clients with a more innovative and more convenient way to shop for apparel and accessories. And new technology is making it possible for us to take personalization to a new level. To ensure that we continue to fully realize our vision into the future, we must think differently, work differently, and approach our business differently. And we have already begun to do that with three significant bodies of work. First, we are strengthening our foundation in embedding retail best practices throughout the organization. Second, we are building a healthier client base by more precisely targeting high lifetime value clients that we expect will help us expand our client base over time. And third, we are developing a long-term strategy to better serve the clients we have today and those we intend to attract in the future. We have begun to embed retail best…

Thanks, Matt. In Q1, we continued to focus on near-term profitability and cash flow throughout our organization, while also doing the work to strengthen our foundation and set ourselves up for sustainable, profitable growth. We successfully ceased operations of our Bethlehem, Pennsylvania warehouse and are on track to do the same in Dallas by the end of Q3. We expect this new three-fulfillment center strategy will have immediate cost savings and be cash-flow neutral throughout the transition. Once complete, the reduced warehouse footprint will allow us to have inventory in fewer warehouses and make it easier for stylists to build more personalized assortments for clients. We also expect to realize the benefit of inventory efficiencies as we scale. Additionally, we completed the wind down of our business operations in the UK in the first quarter. On behalf of the leadership team, Matt and I want to thank the teams in Bethlehem, Dallas, and the UK for their professionalism and hard work during these transitions. Because of the work our teams have done to improve gross margin and variable cost leverage, we continue to have enviable unit and order economics. Our contribution profit remains at the high end of its historical 25% to 30% range. We will continue to identify further opportunities to improve fixed and variable costs in order to increase both contribution margin and fixed cost leverage over time. Now, let me get into the Q1 results. Q1 net revenue was $365 million, flat quarter-over-quarter, and at the high end of our guidance range driven by higher than expected volume and stronger sequential AOV heading into the fall-winter season. Net active clients ended the quarter down 4% sequentially at approximately 3 million clients. Revenue per active client declined 6% year-over-year to $506. AOV improved year-over-year, but we continue to…

Thanks, David. This is an important time for our company. We are encouraged by all that has been accomplished, and we are focused on what is still to come. We are organizing, orienting, and galvanizing around transformational work on the foundation and operations of our business. We are making better decisions and marked progress after taking a step back, performing a holistic assessment, and challenging prior assumptions. Our teams are energized by new ways of working and motivated by early indicators of what we can achieve. I'm confident that our best days are ahead of us, and we are working to accelerate the pace with which we will reach them. I said at the beginning of this call that over the past 12 years, Stitch Fix has served millions of clients with a more innovative, more personalized, and more convenient way to shop for apparel and accessories. Let me quantify that. We recently shipped our 100 millionth fix. That is an extraordinary achievement, and it is both a testament to a great idea and a credit to the incredible people who bring their knowledge, skills, and determination every day. We celebrated this milestone internally and now I want to take this opportunity to publicly recognize everyone at Stitch Fix for this accomplishment. Thank you all for joining today's call and I'll turn it over to the operator so we can take your questions.

Thank you. [Operator Instructions] And our first question will come from line of Youssef Squali from Truist. Your line is open.

Great, thank you very much. Hi guys. So just two quick questions for me. First, as you step back a little bit and you look at kind of the future drivers of positive growth, can you maybe talk about the two or three key initiatives you believe should help reverse the active client decline and kind of when do you believe that that could happen? When do we reach that inflection point? Is it possible that we -- it happens in the next 12, 18 months? And then on the Q2 guide in particular, the revenue guide implies further deterioration in the top line growth. Maybe can you just help us -- can you help parse out maybe macro versus kind of things that you guys are doing company specific that may make things maybe step back before starting to grow again? Thank you.

Hey, Youssef. I appreciate the question you've got. Matt, here. I'll speak to the first part of your question in terms of the future drivers of positive growth. Will let David add any additional context to that as well as answer your question around the Q2 guide and implications for the balance of the year. In terms of the future drivers of positive growth, I think important just to reframe and reinforce that where our focus remains is just to ensure that, or at the moment, is to ensure that we have a healthy foundation for our business. This healthy foundation, that includes a seamless client experience, it includes compelling assortment, it includes well-planned inventory, it includes the emphasis that we're putting on efficient and scalable operations and a best-in-class customer service that we offer our clients. It also includes the continued advancements that we're making in the technology that's deeply rooted and embedded within our company and throughout this Stitch Fix ecosystem. As part of that, we also remain committed to building a healthy client franchise. And that's through a judicious marketing strategy that rationalizes every dollar spent. We do that to ensure our investment acquires high lifetime value clients. We're also, as we've discussed on prior calls, equally committed to engage in our current clients in an effort to reduce any future dormancy, as well as building on our successes to reengage those clients that may have lapsed. And as I mentioned on the call, a lot of the ways that we're building this foundation is to focus our efforts on retail operation best practices. A couple of things that we're doing there that have already proven positive results for us. The first is our focus of the team to improve that foundational client experience and that's across…

And then, Youssef, just some adds on the guide. From a revenue perspective, just a reminder, I think we touched on this last time, that the negative act of clients from prior periods, so from what we saw in FY ‘23 and in Q1, that is a contributor to the revenue headwinds. I think we also talked about expecting lower fixed frequency within our existing client base. And so that's another factor in the revenue guide. To what Matt called out earlier, we did see higher AOV this quarter, and that's certainly an encouraging sign. And then also for Q2, we are expecting active clients to be negative for the quarter and we expect that to be pretty much similar or slightly higher sequentially from a percentage standpoint than what we saw in Q1. And for that, we don't provide a full year guide, but as we've said in the past, we will continue to focus on driving healthy, engaged, active clients. I think Matt touched on this as well in what he just said. But we are seeing from a near term perspective, the clients that are converting are healthier. We're seeing a higher three month active RPAC. We've seen that this quarter and last quarter. And part of that, we're also seeing increased fix frequency in some of those newer client cohorts.

Great. Thanks for the color.

Thank you. One moment for our next question. Our next question comes from Aneesha Sherman from Bernstein. Your line is open.

Thank you so much. So, I just wanted to continue that same discussion topic around the clients you're attracting. So, Matt, it sounds like you're saying you're improving user client experience, assortment, et cetera, and it sounds like you're focusing on retention and re-engagement. So how do you square that with then the expectation of continued negative net ads? Is there still some adverse selection from freestyle first clients that you're now seeing churning out before your base is healthy or why do you expect the net ad number to continue to be negative while you're seeing all of these retention metrics start to improve? And then I have a follow-up as well.

Yeah, Aneesha, appreciate the question and happy to provide a little bit more context. And what I would do is I would reference back to what I mentioned in this conversation as well as on our last earnings call. And that's just how judicious we're being in terms of where we're spending our marketing dollars. So the customers or the clients that we do acquire are those that are going to deliver a high lifetime value. And I've been witness to organizations or practices where chasing short-term revenue growth or short-term client acquisition. And if you're doing that without a really firm conviction that those clients are going to deliver a high lifetime value for you, that becomes a losing proposition. And as I and David just mentioned, we are seeing some promising signs in terms of those newer clients that we have acquired. But it's also early innings there and we want to continue to be judicious and be methodical in terms of that spend. As I've onboarded into Stitch Fix, I've also learned more and more about the uniqueness of our business model. And it's one that's different from traditional e-commerce in many ways, as you know. And in this particular instance, I think the relevant context is that when you're going out in traditional e-commerce to acquire new clients, you're often thinking about it at a transactional level. Even some of the largest retailers out there are acquiring every single visit and every single purchase from even their most loyal clients. For us, we have that really unique competitive advantage in the differentiation of our business model such that when we acquire the right client, we get organic re-engagement over the long term from them. You see that in terms of where our media or marketing investment has been relative to the client results that we just spoke to. In other retailers, you're normally going to see that from a one-to-one degradation standpoint in terms of your reduction in [media] (ph) and reduction in client count. For us, we have that benefit where once we get the right client on board and they get a fix and they're happy with that, a subsequent fix, another fix, we get that organic re-engagement, that organic recurring revenue stream. But it also takes time to ensure that investment is fully optimized, as that occurs over a period of several months as opposed to something that you're able and other e-commerce businesses able to assess you know in much closer to real time. So we're going to make sure and to continue to be judicious, continue to be methodical and we are encouraged by these early results and we'll continue to build on those and invest into those into the future as we see appropriate.

Aneesha, just to add one more data point. On sort of the dormancy side of active clients, we expect similar levels of dormancy from a client perspective. And I think I touched on this earlier, but as we said on some of the prior calls, we saw a dip in first fix engagement last year, and that's impacted dormancy results over the last few quarters. Again, early results, but we're seeing progress here where recent client cohorts, we saw improved first fix outcomes in Q1 with higher retention both quarter-over-quarter and year-over-year. But the challenge with that is dormancy is a lagging metric. So it's one of those things that's going to take a little bit for us to see that come through in the overall metrics.

Okay, that makes sense. And a quick follow up, please. So what is inherently different about the new clients that is making them higher quality? Is it a demographic difference or behavioral difference? Can you give a little bit more color about why you're seeing this much higher quality in your new client base?

Yeah, happy to speak to that at a high level. And, David, feel free to add any additional context. So in terms of the new clients that we've been acquiring, I think it starts with, again, a conversation we started on the last call is just in terms of how we're going to market. We have our marketing team that's really working hard to find the right balance between upper funnel, brand driven messaging that creates the right awareness and consideration for potential clients that we onboard into the system, such that they have an understanding of the service, they demonstrate interest, and when we get them into the onboarding funnel and they become a client of ours, they have a high intent and a high knowledge and level of interest in the service and are more likely to become not just a client that has a first fix shipped to them, but has a subsequent and then a third fix and so forth. So I think we've done a really good job in terms of finding that balance in our media and marketing spend such that we can build awareness, build consideration in the upper funnel, as well as have a really optimized lower funnel programmatic marketing campaign in order to acquire all of those clients towards the bottom of the funnel.

And I think where we're seeing that in the metrics is the RPAC callout that we talked about earlier, that we are seeing encouraging signs in three month RPAC, and that's both sides of it. We're seeing positive signs from new clients who are receiving more fixes in their first few months compared to new clients last year. And, I think we also mentioned that [fixer] (ph) AOV was a strong point for total RPAC as well. And that was driven by hitting a multi-year high in Q1 that helped boost up the three-month RPAC.

Got it. Thank you.

Yeah.

[Operator Instructions] Our next question comes from the line of Kunal Madhukar from UBS. Your line is open.

Hi, thanks for taking my question. Continuing along the same lines in terms of RPAC, and given that fiscal second quarter, the AOV should be much higher, [indiscernible]. Why should we think that the guide that you have given, the top line guide, flat, QoverQ, should be the case? Why shouldn't the revenue come in much higher? Simply because the trends are all improving, and the AOV will be much higher in the fiscal second quarter. Thank you.

Yeah, Kunal, sorry, I just had a little bit difficulty hearing the question, but if I understood correctly, one of the things that we're seeing though is new clients versus the total client base. And I think one of the things that we had highlighted earlier is, RPAC, the reason it declined from a quarter-over-quarter standpoint is because we continue to see the challenges from a fixed frequency perspective that we've seen the last few quarters. And that's more of the drag on clients. And then we also have the active client loss as well and that plays into the revenue guide. And so those are probably the two factors that would be impacting that.

Got it, and then as far as one-time and restructuring expenses are concerned, are we done with everything or do you still anticipate some more restructuring expenses in the second quarter?

We may have some small charges related to it just because we're still closing out the warehouses that we had identified before, but nothing very material to call out. And also, Kunal, on the active client, just one more point on the active clients. Just to clarify, the quarter-over-quarter in Q2, we expect the decline to be similar from a percentage standpoint, slightly higher negative from a percentage standpoint than what we saw this quarter.

Got it. Thank you so much.

Thank you. And with that, I see no further questions in the queue. Thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great day.