Good afternoon, and thank you for standing by. Welcome to the First Quarter Fiscal Year 2025 Stitch Fix Earnings Call. At this time, all participants will be in a listen-only mode. [Operator Instructions]. Please be advised that today's conference is being recorded. And now I'd like to introduce your host for today's program, Lilly Bindley, Investor Relations. Please go ahead.

Thank you for joining us today for the Stitch Fix first quarter fiscal 2025 earnings call. With me on the call are Matt Baer, Chief Executive Officer; and David Aufderhaar, Chief Financial Officer. We have posted complete first quarter 2025 financial results in a press release on the quarterly results section of our website, investors.stitchfix.com. A link to the webcast of today's conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause the results to differ. In particular, our press release issued and filed today, as well as the risk factor sections of our Annual Report on Form 10-K for fiscal 2024 previously filed with the SEC. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. In the first quarter of fiscal 2024, we began to report our UK business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operation. Finally, this call in its entirety is being webcast on our Investor Relations website and a replay of this call will be available on the website shortly. And now, let me turn the call over to Matt.

Good afternoon, and thanks for joining us. We are off to a strong start to the fiscal year. We exceeded our expectations in Q1, delivering net revenue of $318.8 million. This is a 570 basis point improvement in year-over-year comps from Q4 when adjusted for the 53rd week. We also delivered adjusted EBITDA of $13.5 million, and we continued to improve our contribution margin, delivering approximately 34% in the quarter. This progress is the result of the ongoing execution of our transformation strategy, which includes our work to strengthen the foundation of our business and reimagine our client experience. We are on track to successfully transform our business, and we continue to expect to return to revenue growth by the end of FY '26. We are also raising our annual guidance, and David will share more on that shortly. We continue to embed retail best practices across our business and drive operational efficiencies. The quality, freshness and overall health of our inventory assortment continues to improve. We are also creating flexibility in our experience, and we've introduced more personalized marketing and engagement tactics to increase client visits, drive sales across both fixed and freestyle channels, and improve acquisition economics. Specific to our assortment, the freshness of our inventory is driving improved results across multiple categories, like at leisure, social and special occasion, and in both our private and national brands. As we shared last quarter, the retail market and our clients' expectations evolved over the past few years, and we did not adapt our assortment quickly enough. To address this, we have been focusing on improving our inventory by building best-in-class strategies for buying, assortment planning and allocation. Additionally, enhancements to our proprietary AI inventory management tool are helping to preserve our healthy inventory position. In Q1, we infused more…

Thanks, Matt. As Matt said, Q1 was a strong start to this fiscal year and we continue to expect a return to revenue growth by the end of FY26. As we continue our transformation, we're focused on driving long-term growth while maintaining the solid foundation we've worked so hard to strengthen. The positive results we are seeing, including healthier client engagement, improving top line performance, and continued leverage across the P&L are all indicators that this approach is working and give us confidence to continue making targeted investments towards sustainable, profitable growth. Now, let's dive into the results. Q1 net revenue came in at $318.8 million, down 13% year-over-year, and flat quarter-over-quarter. Revenue was above our guidance range due to our focused efforts in driving Fix AOV up 6% year-over-year and a 11% quarter-over-quarter. This AOV work consisted of three main factors. Our methodical efforts to capture upside from an earlier-than-expected shift into fall product, the expansion of fixed flexibility, and our ongoing optimization of our pricing architecture. Net active clients ended the quarter at 2.4 million clients, representing our lowest sequential decline in active client count in two years, down 19% year-over-year, and down 3% quarter-over-quarter. Revenue per active client for the quarter was $531, up 5% year-over-year, and relatively flat quarter-over-quarter. Gross margin for the quarter came in at 45.4%, up 180 basis points year-over-year, and up 80 basis points quarter-over-quarter. Both year-over-year and quarter-over-quarter improvements were driven by improved product margins and transportation leverage. With a contribution margin of approximately 34%, Q1 was our third consecutive quarter delivering a contribution margin above our historical range of 25% to 30%. This was driven by the healthy gross margins highlighted above, as well as sustainable leverage in our warehouse and styling organizations. Cost per order in warehouse ops was…

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

Thank you. [Operator Instructions]. And our first question for today comes from the line of Maria Ripps from Canaccord. Your question, please.

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

Hi, Maria. It's Matt. I appreciate the question and the kind words. The first question in terms of the contributors for the spend per client, I would reference back a lot of what we shared in the prepared remarks and happy to share a little bit more information as well. One of the things that was a really strong driver for us in terms of our share per client was the continued improvements that we're making in our inventory and in our assortment. We've continued to increase the penetration of newness to ensure that we're on trend and in style for our clients, as well as having the right seasonal inventory available at the right time. We saw a lot of strength starting in the middle of September in terms of our fall and winter goods. We saw really strong sales performance from sweaters, jackets, and other seasonally appropriate inventory that really helped drive spend per client. In addition, creating more flexibility in the Fix, as you noted, is helping us increase our average order value pretty considerably for those clients that have taken advantage of this optionality that we've created for them. And as you noted too, the work that we're doing in terms of pricing architecture, we identified and spoke to this work a few calls ago where we had this great opportunity to really go back and take a holistic look and understand the elasticity of our opening price points for our inventory across the board, recognizing that net-net we had an opportunity to capture more value in terms of our initial pricing. And that's helped us drive up both AUR and ultimately AOV. In addition to those, something else that we've been really focused on is creating more moments for engagement with our clients. How can…

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

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

Thanks, Maria.

Thank you. And our next question comes from the line of Jay Sole from UBS. Your question, please.

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

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

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

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

And I think, Jay, I would just add that, I think to Matt's point, we're definitely very pleased with where we are this quarter, slightly beating our expectations. And for Q2, we expect to see continued improvement in terms of sequential growth. I think we had called out a little bit more than 3% down last quarter. This quarter, roughly, I think we expect to be down somewhere between 2% and 3% from a quarter-over-quarter standpoint. And I think back to Matt's point, this is about being methodical, about making sure that we're bringing in the right clients, and certainly seeing that in some of the 90-day LTV numbers that we're seeing that are sort of the highest we've seen in almost three years. And all of that gives us confidence to sort of reiterate what we said last quarter, where we expect to see a quarter-over-quarter increase in active clients during FY '26.

Got it. Okay. That's helpful. Thank you so much.

Thank you.

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

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

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

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

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

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

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

Really appreciate it. Thank you.

Thank you. [Operator Instructions]. And our next question comes from the line of Simeon Siegel from BMO Capital Markets. Your question, please.

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

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

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

Appreciate it. Thanks for the call. Happy holidays.

Thank you.

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