Good afternoon, and thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2024 Stitch Fix Earnings Call. At this time, all participants will be 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 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 fourth quarter 2024 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 2023 previously filed with the SEC and the annual report on Form 10-K for fiscal 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 began to report our U.K. 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 Matt.

Good afternoon. Thanks for joining us. I recently completed my first year as CEO at Stitch Fix, and I'm encouraged by the significant progress our team has made. I'm also pleased that in the fourth quarter, we delivered results at the high end of our guidance on both the top and bottom line. We continue to execute our transformation strategy. We are successfully strengthening the foundation of our business by embedding retail best practices, increasing the efficiency of our operations, and optimizing our organizational structure. We have also begun to reimagine how we engage with our clients from the assortment we offer to how we bring those styles to them. Through these efforts, we delivered expanded gross margins in FY 2024 and positive adjusted EBITDA for the last seven quarters. We have $247 million of cash, cash equivalents and investments with no debt. Looking ahead, we expect to continue to drive improvements this fiscal year and we expect to return to revenue growth by the end of FY 2026. Since I joined Stitch Fix, we have been hard at work formalizing and executing our transformation strategy, which includes three distinct phases: a rationalization phase, a build phase, and a growth phase. Our rationalization phase, which took place over the past year was a period of critical assessment. It was during this phase that we began to strengthen the foundation of our business and ensure we had the right priorities in place to improve our financial position and enable us to operate as a more nimble and efficient organization. As part of this, we exited the U.K., closed two fulfillment centers, rightsized our corporate head count and continued our cost discipline management. These actions, among others, resulted in over $100 million of SG&A savings in FY 2024. Today, we are squarely…

Thanks, Matt. Let's get into the results. Our Q4 and full year FY 2024 results reinforce my belief that we've implemented the right strategy to get us back to sustainable, profitable growth in the future. This past year, we focused on rationalizing the cost structure of our business to deliver a strong foundation we can build on going into FY 2025. In line with expectations, FY 2024 net revenue was $1.34 billion, down 16% year-over-year. We ended the year with approximately 2,508,000 active clients, a decrease of 20% year-over-year. Despite the revenue decline, we continue to drive leverage in our business in FY 2024. Our merchandising teams focused on optimizing our inventory portfolio while our transportation teams diversified our carrier mix. This resulted in FY 2024 gross margins of 44.3%, up 190 basis points year-over-year, our highest annual margin since FY 2021. We also drove variable labor efficiency across our operations, styling, and customer service teams. This allowed us to actively manage our variable expenses, resulting in contribution margins above the high end of our historical range. We reduced our Fix labor costs, including stock-based compensation by more than $65 million in FY 2024. We reduced facility costs by consolidating our warehouse footprint and subleased excess space. And we reviewed each category of our fixed operating expenses to identify potential cost savings. These actions allowed us to deliver adjusted EBITDA for the year of $29.3 million or a 2.2% margin, up 30 basis points compared to FY 2023. We generated over $14.2 million in free cash flow in FY 2024, and we ended the year with a strong balance sheet, including $247 million of cash, cash equivalents and investments with no debt. As Matt said, transformations take time, and we're encouraged with where we stand today. We are being methodical…

Thanks, David. Before we close, I want to reiterate that I'm encouraged by the progress we are making on our transformation strategy and remain energized by the bright future we see for this company. I also want to express my appreciation to the employees of Stitch Fix for their hard work and dedication throughout this period of transformation, change demands that we think and work differently. And I'm both proud of and impressed by everything the team has done to get us to where we are today. I look forward to further advancing our transformation strategy together and returning to sustainable, profitable growth in FY 2026. With that, I'll now turn the call over to the operator for questions.

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

Hi, guys. Good afternoon. Two questions, please. So returning to revenue growth by end of fiscal 2026 is quite a bit of time, later than I think when most of us expected you guys to do that. So can you maybe talk about the biggest gating factors there? Anything in the macro that's going on that you guys are taking into account? Or is it all company-specific dynamics? And does that comment also hold true for active clients as well, meaning that you do not expect active clients to turn positive until the end of 2026? Thank you.

Hi, Youssef, it's Matt. I'll answer your question, and I'll speak to our path to revenue growth more generally as well as what we're thinking about in terms of the macro environment today. And hopefully, that will also provide some insights around how we think about active clients along this journey as well. And then David can share some additional details in terms of how we get back to that path to growth. So I think, first, what I'd say is, just as a reminder, when I joined Stitch Fix over a year ago, we were in the middle of our Q4 of fiscal 2023. And we just finished -- we're finishing that quarter down over 22% and then finished that fiscal year down over 21%. I'm proud of what we have accomplished since then. And I think the results that we've delivered in this most recent fiscal year, where we improved revenue trend by about 400 basis points and then ultimately also slowed the sequential decline in active clients. Now the guidance we just shared projects revenue improvement of almost another 400 basis points in fiscal 2025 and also shows sequential improvement in revenue throughout the year. And we'd expect our active client count to track pretty considerably to where we have revenue there. As I've stated before, and we'll continue to share, transformations take time. And the methodical approach we're taking to our transformation is producing these results. And we're confident that our strategy is the right one. We're confident that our strategy will enable us to return to that revenue growth by the end of fiscal 2026. And that confidence is rooted in a few things. One is that, our core value proposition, as we've discussed on prior calls, meets the customer need. At Stitch Fix, we…

And Youssef, I think it might help just to double-click a little bit into the guide, and I think that will answer some of the questions as well that you had. So just to provide a little bit more color around that. First, I think Matt called this out. Like we continue to see improvements in many of the key metrics as we closed out the year. And we actually expect to build on that going into FY 2025 and throughout FY 2025. Active clients is one of the things you asked for. I think, Matt, answered this. But just to be clear, like we do expect active clients to be down in FY 2025. But we do expect to see a significant improvement in the client trajectory in FY 2025. As you saw in Q4, we had our lowest sequential loss of active clients in all of FY 2024, and we expect that momentum to continue into FY 2025. We saw strength in AOV and RPAC. We continue to see momentum in sort of the promotional work that we've been doing around freestyle volume. All of those things are creating momentum going into FY 2024 because we expect that to continue as well in FY 2025. And all of that's included in the revenue guide. And I think Matt called out the sequentials, which is pretty important when you look at the year-over-year revenue guide of the midpoint of our guide assumes an improvement of almost around 400 basis points from a year-over-year perspective if you adjust for that 53rd week. And that's sort of the second year in a row that we're showing that type of improvement from a year-over-year standpoint. It's also important to note that it also assumes improvement throughout the year. If you look at…

All right. Thank you both.

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

Hi, guys. This is [Dan] (ph) on for Simeon. Thanks for taking our question. Since you mentioned launching some new private brands and extending others, I was just curious where private brand mix is now versus maybe any type of target level that you want it today.

Hi, Dan. Yes, I appreciate the question. As we've shared on prior calls, our private brands play a critical role for us, both in terms of how we serve our clients, but also in terms of the really strong financials and contribution profit that David just spoke to. Our private brands make up roughly about 50% of our product mix today. IMU is about 5% to 10% higher than our market or national brands. And also impressively, have a higher keep rate as well, our clients continue to tell us, and both effectively vote for our private brands. What we've been working to do within our private brand portfolio is to identify white spaces where we can continue to serve client needs or client need states that we currently aren't meeting or aren't meeting as well as we otherwise could with our private brand portfolio. And we just mentioned the launch of two new private brands, Montgomery Post and The Commons. And I think both of them do exactly that. They help our private brand portfolio meet in terms of where we're at for business attire within our women's business. And also, a more elevated and modern assortment for our men's clients. And we're going to continue to identify opportunities there to either expand our current brands into additional white space or launch new private brands to capture it. In terms of a long-term view of the ultimate makeup between private brands and national brands, we're going to continue to work towards what is most client right. We're going to continue to have an important mix of both national and market brands. It helps drive confidence in conversion during client onboarding. It also helps us serve certain client needs that wouldn't make sense for us from a scale perspective. But then it also is just something where a lot of our clients, national and market brands play an outsized role in terms of their purchasing decisions. But we've also had a lot of success with those private brands, and we'll continue to lean into those wherever possible.

Got it. I appreciate the color. If I could on gross margin for the year, the 44% to 45% guide. I guess, if there's anything you could share in terms of the puts and takes assumed within that or what gets you to the higher or lower end? Thanks.

Yes. Thanks for the question. The 44% to 45%, I think we've said on the last couple of quarters where we're really encouraged with the progress we've made over the last couple of years of really driving that gross margin up to those ranges. And really, the good thing about being at that range that gives us the opportunity to really make sure that we're being opportunistic within gross margins. And this last quarter in Q4 was probably a great example of that. I think we guided to 45% to 46% for the quarter, but came in slightly below that. And that's because we saw an opportunity to really engage our clients in more dynamic ways around promotions and leaned into that a little bit for the quarter. And so, that's probably one of the bigger puts and takes within gross margin. And I think the reason why we feel comfortable with that as well is because of what I just described around contribution margins that because we're driving increased leverage and contribution margins, that just gives us the room to be able to move within that range in gross margin when we see those opportunities.

Got it. Thanks very much.

Thank you. Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

Hi, good afternoon, everyone. As you think about the active clients and the reductions you've had, can you talk about who is the client today? What you're seeing change in that client base? And how you think about it going forward? And given what you talked about with the promotional environment in the current quarter with the net revenue per active customer is kind of improving, how are you thinking about that going forward? And how does the private label help or hurt? How are you thinking of those dynamics? Thank you.

Hey, Dana. I'll address the questions one by one, if I got them correctly. The first is around who our current client is that we're serving? The second is around the promotional environment. And then ultimately, the third then is how that's influencing our revenue per active client.

Correct.

Okay, excellent. If I go back to in terms of who our client is today, and I believe we've talked about this before, I'll start with just a high level of conviction that the service that we provide is one that can meet the needs of nearly all U.S. consumers from an apparel and accessories standpoint. Where our focus is at the moment is the clients that we're serving well today. That client is one that really appreciates guidance and inspiration when it comes to outfitting. That is a client that struggles with finding the right styles, that’s a client that really puts an emphasis on convenience and comfort where fit is critical for them over their challenge, finding apparel that fits in other retail offerings. And one that also just values the personalized recommendations and what we're able to do with our human stylist to uniquely serve clients. The ease in terms of which our service gets product to a consumer's home is again is a critical competitive differentiator for us as well. And the number of clients that we're serving is quite vast. The work that we've done though over the last year or two is to ensure that we make sure that when we go to market, we're as segmented as possible so that we can talk to the specific consumer segments and make it clear what that value proposition is. What I mentioned earlier, in terms of what we did for teachers, which is one of the professions that we over-index with, is a great example of where we're building tailored messaging for that consumer segment and building out experiences or certain promotions in order to drive and deepen our engagement with them. And also bring new clients into the Stitch Fix environment. We're working across…

And Dana, one more data point on RPAC that I think we've talked about the last couple of quarters is our new client cohorts. And that is an area that -- we talked about 90-day RPC and 90-day LTV. And those are areas that we continue to see strength. And that's why we're being so methodical about the approach of how we're bringing new clients in and making sure that the new clients that we're bringing into the experience are truly healthy long-term clients because that is driving up that RPAC number. And that's one of the reasons why RPAC is up for the second quarter in a row from a year-over-year standpoint.

Goi it. Thank you.

Thanks, Dana.

Thank you. Our next question comes from the line of Aneesha Sherman of Alliance Bernstein.

Hi. Thanks for taking my question. So if I look back to where the business was about kind of seven, eight years ago in 2017, 2018, you had a similar-sized active client base of about $2 million to $2.5 million, but the margin profile was a lot stronger. You were doing about 5%, 6% adjusted EBITDA margin. Can you talk about kind of how the business has evolved? Like if you compare the cost base then versus now on a similar sized customer base and similar sized revenue base, could the cost base get back to that kind of algo? Or what are the things that have changed over the last seven, eight years that prevent you from getting back to that margin profile?

Yes, Aneesha, it's a good question. I guess one of the big reasons that we want to be careful about going back to that profile is because of what Matt was describing of where we are in a turnaround and in transforming our business. We want to make sure that we are balancing driving cost savings and leveraging our P&L with investing in growth. And especially at this time now, when we see a path to returning to growth in FY 2026, I think it's that much more important to make sure that we're balancing that. And so, I think we've done, to your point, a lot of great work over the last few years of driving leverage in the P&L. But we're also looking at areas to reinvest that leverage into the P&L to make sure that we're driving towards that growth. And that's sort of the focus and where the balance is right now.

That makes sense. And then I have a quick follow-up. David, you mentioned new client acquisition. I know all the -- as you were talking about your success with teachers and certain pockets of consumers, I maybe wonder whether you are seeing more of a referral strategy work out for you. I know there was some adverse selection in referrals a couple of years ago and you backed off from that. Is that part of the increase in advertising spend? And is that a strategy that seems to be paying off now as you look closer into it?

Yes. I think I'd highlight a couple of things on active clients. Like, one, some of the teacher strategy, I think, is both around just being very focused, to Matt's point, around customer segmentation, but also what we're seeing is strength in reactivation. And I think that's the area where we're leaning into maybe a little bit more than referral right now. Referrals are a certain area that we continue to focus on as well. But reactivation is a big area of strength for us, and it's been up year-over-year over the past three fiscal years, and we expect that to continue into FY 2025. I think the other area, when you think about sort of double clicking into our guide in active clients, where I think Matt called this out, but just to double check. Like for the full year, I know I said we expect active clients to be down, but we expect them -- if you think about it from a comps perspective, to be approximately in line with revenue comps. And a big part of that trend improvement is actually on the dormancy side as well. All of the things that we've talked about over the last couple of quarters around really making sure that we're engaging our existing clients in new and dynamic ways, making sure that we're giving them more license and making sure that when we do engage with them, it's valuable. I think we talked about the Quick Fix experience and adjustments we made to that last quarter, talking about the auto ship management changes this quarter. Those are all things to make sure that we are truly listening to our clients and giving them the license to be as flexible with our experience as possible and see value at sort of every interaction. And because of that, that's where we're seeing a big improvement going into FY 2025. And that's -- those are two of the big components as to why those trends will continue into FY 2026 and that provides us a path of sort of what I had called out earlier, which is a quarter-over-quarter increase during FY 2026.

Thank you. That’s helpful.

Thanks, Aneesha.

Thank you. Our next question comes from the line of Maria Ripps of Canaccord.

Great. Thanks. Two questions, please. Can you please talk about any additional costs associated with including up to eight items in one shipment? How should we think about sort of any additional inventory investments needed to accomplish this?

Hi, Maria, it's Matt. I appreciate the question. And one of the things and I shared in the prepared remarks is how excited we are for the flexibility that we're building into our business model and what that's been able to do for us to better serve our clients. We're approaching it in a few different ways and ensuring that as we roll this new service or new feature out for our clients, that we're providing it for the clients that it's going to be the most benefit for, and it's going to be the greatest benefit for them at the right time. And what we've seen in all of the testing that led up to our wide launch of this feature is that when clients select into it, they ultimately have higher keep rates than in our traditional Fix experience and better order economics for us. We'll continue to monitor that going forward, but it is something that's really important. So it's not just an increase of revenue that we're seeing through the these transactions, but also improve profitability as well because it's generating higher keep rates for the clients that are self-selecting into these fixes with more than five items.

Got it. That makes sense. And then I just wanted to follow up on your expenses. So your fiscal 2025 guidance implies sort of further decline in expenses in terms of year-over-year. So as we look towards fiscal 2026, so it looks like it's going to be another year of revenue decline for the full year, it sounds like. But how should we think about sort of margin that year? And would you expect sort of your expense base to decline maybe a little bit further in 2026?

Maria, in FY 2025, I think you're right. I think in the guide, it definitely assumes additional savings. I think I called out a couple of areas there. One, is just the $100 million savings that we had this year. Some of those initiatives were only partially -- they started halfway through the year. And so going into FY 2025, if you think about it, it gets the full year annualization of those savings. And so that's part of that. I know we had talked about the warehouse consolidation. That's part of that savings from an annualization standpoint. And then the other big thing is sort of that variable labor leverage that we talked about of being above the 30%. Those are 2 big components to the savings in FY 2025. And in FY 2026, what I just want to make sure of is that just like we're being on the top line that we're being very methodical in our investments in FY 2026, that we still want to be able to make sure that we're doing targeted investments in the areas that will grow the business. But I think the thing that we're encouraged by and excited by is as we return to growth, like what Matt said, we have very good unit economics. And so, as we return to growth, we'll be able to continue to drive leverage.

Great. Thank you so much for the color.

Yes, thanks, Maria.

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

Hi, guys. This is Alex Vasti on for Dylan. Thanks for taking our questions. Firstly, maybe just a bit of a follow-up on one of the prior questions. Maybe if you could just talk about your expectations for advertising spend heading into the holiday season and throughout the rest of fiscal 2025? You previously mentioned that you're being very judicious with marketing spend, targeting specific client cohorts, especially given the elevated broader advertising spend going on in the industry. I would just love to get an update on how you're viewing advertising spend for the year. And maybe any color on how you plan to spend it, via bias towards new or existing customers? Anything on that? Thanks.

Hi, Alex. I appreciate the question. I'll speak to it a little bit, and then David can follow up with some additional color. I'll go back to what I said earlier, too, just in terms of the work that we've done to strengthen the foundation, improve our marketing capabilities over the course of the year. That's enabled us to be much more targeted, much more segmented in terms of how we go to market with our media budget, with our advertising budget in order to drive increased productivity. Along those lines, our customer acquisition costs in Q4 actually declined. It's the first time that we've seen that in a while. And in terms of conversion, which we've talked about on prior calls, we're comfortable with where conversion is today. It's stabilized and feel that where conversion is and where we have it forecasted a trend, enables us to get back to growth over time. So feel pretty good overall in terms of our advertising budget and the effectiveness of it. We also feel really good about our ability to compete in a crowded marketplace or during a period of inflated media investment. In part, that's due to the differentiation of the service that we offer at a very tactical level. We're not out there bidding on the same keywords, for example, is a more traditional retail experience and having to compete with the likes of Amazon or Walmart or Macy's in order to win those impressions or win that conversion. And feel really good about how we continue to tailor and segment the creative content as well so that we can speak to very unique audiences and have a message that clearly explains the value proposition of our business. And brings potential clients into the experience with the right expectations, and then brings them into the right landing experience as well that aligns with how we best meet their needs. Something else that's important to hit on, too, when you're talking about how our advertising budget would be deployed relative to new client acquisition versus engaging our current clients. One of the awesome things about our business model is that once we've acquired a client, almost all future transactions are organic ones. In a traditional retail environment, a retailer is often having to pay not just to acquire a client but having to pay for every subsequent transaction over the course of that client's lifetime. For us, once we bring a client into the Stitch Fix ecosystem, and they've signed up for the Fix experience. Fix continue to comment, we don't have to pay for those subsequent purchases. It's one of the unique advantages of our business model. It's one of the reasons why we have such confidence in the future profitability as well once we return to growth. So David, if there's anything additional that you'd want to add?

Yes, I think just a couple of data points. I mean, I think we guided to 8% to 9% of revenue from an advertising spend perspective. But I think we've always sort of voiced over with that. We'll be opportunistic with that. And so that number, from a quarter-to-quarter standpoint, can vary. And because of all the cost savings initiatives and what we've done to really create leverage in our P&L, it allows us that opportunity that when we do see opportunity, we'll lean in. And it's just more about that methodical approach to make sure that when we are leaning in that we're driving healthy client growth and not just driving growth for growth's sake. And so that approach has served us very well as we've gone through sort of this transformation and we'll continue to use that approach.

Got it. It makes lot of sense. Thanks for all that color. And then just one quick one on modeling, a little clarification. So you talked about the SG&A savings that came as a result of your rationalization phase at over $100 million for fiscal 2024. Just wondering if you could give a bit more color on these savings going forward. You mentioned in a response to a prior question that some of these savings are run rate going forward and then that you'll also be getting the full annualization of others. I'm just wondering if you could give a bit more color on where you expect overall SG&A savings to land in fiscal 2025, if that $100 million number is a good run rate one going forward? Thanks.

Yes. I think you could back into that, Alex. If you just think about sort of the midpoint of our guide, then we guided to 44% to 45% gross margin. And really, the remaining part of that below the 44.5%, which is the midpoint, would be the SG&A spend. So you could back into that assumption of SG&A [Technical Difficulty] to make sure that we are always looking at ways to save in the quarter. But also a big part of it is driving leverage across those line items.

Got it. Thanks for that. I’ll pass it on.

Thanks, Alex.

Thank you. [Operator Instructions] Our next question comes from the line of Jay Sole of UBS.

This is Mauricio Serna dialing in for Jay Sole. We were just wondering how things are trending in August and September so far, right? So in terms of top line and also kind of just based on how things are trending so far in August and September, where do you expect active clients to come in?

Thanks for that. Right now, things are trending right within where our guidance is. From an active client standpoint, we tend to talk about active clients. When we talk about quarterly active clients, we tend to talk quarter-over-quarter instead of year-over-year. And from a quarter-over-quarter standpoint, we do expect the quarter to be down, but definitely better than the last couple of quarters. If you think about where we've been, we were at 6%, then we were at 5%. Going into Q1, rough size and shape, probably a little bit above 3% from -- down quarter-over-quarter from an active client standpoint. And then on the revenue side, everything is included within our guide.

Got it. Got it. And just to follow up. So if there is a macro downturn or the macro downturn continues, are you planning to make any additional adjustments?

Yes. I mean I think we have a proven track record in really being able to identify cost savings in our P&L. I also think we have -- when you think about the leverage that we've created in gross margin and variable labor from a contribution margin standpoint, all of that is variable. And so, that also gives us the ability that if we did see a headwind to be able to reduce expenses when volume goes down. And so, I think we feel really comfortable that we're in a good place.

Got it. Okay. Thank you.

Thanks so much.

Thank you. 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.