Good day, and welcome to the Second Quarter Fiscal Year 2025 Stitch Fix Earnings Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Ms. Cherryl Valenzuela, Head of Investor Relations. Please go ahead.

Thank you for joining us today for the Stitch Fix second 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 second 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. On today's call, Matt and David will share their prepared remarks. We will then move to Q&A before concluding with Matt's closing remarks. Before we begin, 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 most recent quarterly report on Form 10-Q 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 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.

Thanks, Cherryl, and good afternoon, everyone. Thanks for joining us today. Our team delivered another strong quarter, as we further advanced our transformation strategy. We exceeded our expectations in Q2, with revenue of $312.1 million and adjusted EBITDA of $15.9 million. The team achieved a 710 basis point sequential improvement in year-over-year revenue comps and a contribution margin of 33%, our fourth consecutive quarter above 30%. In addition, both our men's business and our Freestyle channel returned to year-over-year revenue growth. We are encouraged by these results and remain focused on the work ahead to return Stitch Fix to overall revenue growth. Based on our current performance, we are also raising our annual guidance for the current year, which David will detail shortly. We attribute our progress to a number of improvements we've made to reimagine our client experience. These include increasing newer, more on-trend styles in our assortment, expanding fixed flexibility, and strengthening client stylist relationships. In addition, we are investing in Freestyle, our personalized direct e-commerce platform. All of these enhancements are resonating with clients, let me touch on each and the impact we're seeing. First, the investments we've made to improve the quality of our assortment and ensure a healthy inventory position are working. In Q2, we delivered AOV up 9% year-over-year, driven by broad-based strength in keep rate, AUR and items per Fix. We are seeing particular success with new styles. We finished Q2 with keep rates for new inventory up 7% year-over-year. We also continue to leverage our proprietary AI merchandising tool for improved inventory management. As a reminder, this tool utilizes our client transaction and feedback data to predict demand at the individual style and client level, so that our merchandising team can make buying decisions that are more effective and efficient. It also…

Thanks, Matt. To reiterate, we are encouraged with the momentum we're building. The team delivered a strong Q2, which gives us greater confidence in a return to overall revenue growth during FY '26. We can see the impact of our transformation strategy across the P&L. Our year-over-year revenue comps continue to improve each quarter. And while they are currently smaller areas of our business, the return to growth in Men's and Freestyle indicates that we are on the right path, we are making the right investments and we have the right team in place to deliver on our commitments. We are applying learnings from the success of these two areas across our entire business. Now let's dive into the results. Q2 net revenue came in at $312.1 million, down 5.5% year-over-year and 2% quarter-over-quarter. Revenue was above our guidance range due to sustained strength in AOV which was up 9% year-over-year and 4% quarter-over-quarter. January was a particularly positive month for us as we were well positioned from an assortment perspective to better meet our clients' apparel needs. As Matt noted, the AOV upside in the quarter was driven by higher keep rate, AUR and items per fix. This contrast with last quarter's growth in AOV, which was primarily due to AUR. This quarter, we saw strength across all three of these AOV drivers. Our AOV has now increased year-over-year for the last 6 quarters, which is encouraging, and we believe there is additional opportunity. On the client side, active clients ended the quarter at $2.4 million, down 16% year-over-year and down 2.6% quarter-over-quarter, in line with our expectations. Return to client growth is a big opportunity and one we're focused on. Though progress may not be linear, and we still have work to do to get there. Within the…

[Operator Instructions] And that will come from the line of Aneesha Sherman with Bernstein. Your line is open.

Thank you so much for taking my question. Matt and David, I was wondering if you could start by telling us reminding us a little bit about your customer demographics in terms of household income and any other demographic features you think are relevant given the current changes in consumer sentiment across income bands. And then I have a follow-up regarding some of the comments that you've made previously in your presentation around market size, you're under 1% of the total accessible market as you define it in U.S. apparel. Do you think that you need free style in order to expand that TAM? Or do you think there is continued opportunity for expanded TAM with just the fixed model in terms of driving brand awareness and penetration. Thank you so much.

Aneesha, it's Matt. I appreciate the question. So first, in terms of who our clients are, we really think about our clients from more of an attitudinal or behavioral standpoint. And we see that client base really span across all different levels of household income. And what's really important and noteworthy within our client base, the Stitch Fix and why our core value proposition is built uniquely to serve them. So our clients are coming to us. They are looking for help or advice or solutions or additional convenience when it comes to shopping for apparel and accessories when it comes to understanding what is in style or on trend, when they need help putting together outfits. And one of the things that's really exciting and compelling about the Stitch Fix value proposition is that's the majority of this country. When you look at the data that exists out there, there is a recent article in the Wall Street Journal actually, only about 10% of U.S. consumers are satisfied with the in-store shopping experience for apparel right now. And similarly, and along those lines, about 90% of people feel stressed when deciding either what to buy or what or when they're getting addressed each day. And then stress and anxiety, really coupled with the challenges that they have with the alternative shopping methods is why the core value proposition of Stitch Fix is one that resonates so strongly. We are able to provide the service that we offer, that's what makes it possible for these folks to really find the styles that match their style preferences, that's what enables us to service them within their value proposition. And it's also what enables us to make sure that the apparel that we send them is going to fit and you really…

Very helpful. Thank you.

You’re welcome.

Thank you. One moment for our next question. And that will come from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Hi, good afternoon everyone. As you think about the dynamic world of tariffs that we're in, how are you thinking of that impact on your pricing and own brand versus national brands? And then as you've expanded the number of brands that you carry, what categories are you seeing that are performing? What categories are being adjusted. Thank you.

Alright. Hi, Dana, I appreciate the questions. The first question really around tariffs, I think the second in terms of the mix within our different brand portfolios and then also in terms of the category penetration that we are seeing. I think we talked about it a little bit in the prepared remarks and happy to share a little bit more details in terms of how we're approaching the current environment with the reality of tariffs and the continued kind of volatility of what tariffs might be in the future. So we have a tariff task force in place. This is a team of folks that have a proven track record of doing a really good job mitigating the impact of tariffs previously. And they put together, I think, a really good tariff mitigation strategy that will enable us to protect the profitability within our private brands. Our private brand portfolio consists of several vendors, many of those vendors have production across multiple countries. It gives us optionality to be very strategic if necessary, in order to reduce what would be a longer-term financial impact from tariffs. It's a bit of an overlap with the second part of your question, but as a multi-brand retailer, we also really benefit from the vast matrix of national and market brands in addition to our private brands. So if necessary, in order again to mitigate any potential impact from tariffs, we are able to shift within that portfolio or within that matrix of brands, I think, really strategically as well. And I think, ultimately, I'll just reiterate what we said in the prepared remarks, that as we are looking at the balance of this fiscal year, we're not currently anticipating any impact to our margin or any required increase in cost-client facing. And…

And Dana, I would just add really quickly that when we look at that expansion, we look at those investments, it is also really encouraging to know that we can do that and still maintain the gross margins that we have and that we guided to in our prepared remarks, still being in the back half of the year, from a full year perspective in the 44% to 45% and still having really healthy contribution margins. We had 33% this quarter, and we believe that, that's sustainable going forward. And so just really encouraged with the leverage that we are driving the business to allow those investments as well.

Thank you.

Thank you. And that will come from the line of Jay Sole with UBS. Your line is open.

This is [indiscernible] on behalf of Jay. Congrats on a nice quarter. My first question is on gross margins. Just wondering if you have any outlook for 3Q, right? In 2Q, it looks like gross margins expanded about 105 basis points. So I was just wondering what were some of the drivers of that? And similarly, do you have -- like what are you expecting to drive gross margin expansion or contraction in 3Q.

Yes, Serge thanks for the question. In Q2, it was really more about typical seasonality in gross margin, we tend to see a quarter-over-quarter decline between Q1 and Q2. Certainly, promotions play a part in that. But we're still very comfortable with the 44% to 45% that we have for the full year guide. And I think thinking about the back half, I would still think about the back half in that same range.

Got it. Got it. And then just one more quick one, if I can. You briefly mentioned that March was strong, but just wondering if you can give any more color on sort of quarter-to-date trends. anything you are seeing in February and March? Is it similar to what you were seeing in 2Q? Is it a little stronger?

Yes. Maybe I'll jump in at a very high level. And David, if you want to follow up with a little bit of detail. It's nice to chat again. Look, I mean we're just incredibly encouraged by the momentum that we are seeing. We were really encouraged by the results that we had in Q2 that exceeded our expectations. And the initial response I think based on the very significant increase in our guidance over the back half of the year, we're looking to see that momentum, not just continue, but also accelerate over time, which I think is just a really good way to be thinking about what that performance was in February and what we've seen March to-date. The piece that I think is also maybe worth just reiterating a bit from the prepared remarks, I shared that since August, when we both launched the rebrand of Stitch Fix, as well as the first set of changes around our client experience or the reimagination of that client experience. We just continue to see tremendous success with all of the clients that we have been acquiring over that period of time. And normally, when you launch a rebrand and you launch so many net new updates to your client experience, often, you actually see a bit of a short-term setback in your performance metrics. And then often also some initiatives will take root and perform while others might not take route or might not perform to expectations. I think in credit to the team for having the right strategy and credit to the team for really great execution of that strategy. Since that moment in August, nearly every initiative that we've introduced as part of that reimagination of the client experience has performed well. And nearly every initiative has also exceeded our expectations. And that performance is what enabled us to achieve year-over-year revenue growth in men's. That is what has enabled us to achieve year-over-year revenue growth in our free style channel. And although not noted in the prepared remarks, I think also really important to share, that's also what enabled us to drive significant improvement in trend in our women's business, and it's also what enabled us to drive significant improvement in trend within the Fix channel. So I think, ultimately, we've really focused on strengthening the foundation of our business and instituting retail best practices across the board. And now with the reimagination of the client experience layered on top of that, we are really starting to see that outsized improvement in trend in our business overall. And we expect that momentum to continue. And as I noted, I believe that should be quite evident in the raised guidance that we shared for the balance of the fiscal year.

Yes. And Serge, just to add a little bit more detail around some of the numbers. For this quarter, we saw a 9% year-over-year increase in fixed AOV, and that was a big part of the outperformance and certainly the performance versus expectations. And there were a couple of things going on there. First, we saw higher-than-expected adoption of that Flex Fix offering, which increases the average number of items sent in a Fix. Fixes with that extra flexibility increase as a percentage of total fixes by almost 40% from the end of Q1 to the end of Q2. Second, we also saw higher-than-expected keep rate in the quarter. Historically, we've seen a pretty significant decline in keep rate coming out of the holidays. But the teams, the merchandising teams, the technology teams, the styling teams really took a number of actions to make sure that improved this year, and we saw that come through and we saw it build throughout the quarter. a stat just to sort of show that build is AOV in January was 16% year-over-year. And so just a really strong quarter. And to Matt's point, we played forward some of that AOV upside and also some of the volume benefits we've been seeing recently and played that forward in our overall guidance for the year. The other thing I would call out is sort of the active client side. We're definitely encouraged with what we're seeing from active client standpoint. And when you play that out into future quarters, for Q3, we expect active clients to be down quarter-over-quarter, but improving from last quarter. So roughly sort of approximately about 1% down quarter-over-quarter. The only call out there is there is seasonality to active clients as well. And so Q3 tends to be a stronger quarter than Q4 for us. And so because of that, we probably expect Q4 to be down slightly more quarter-over-quarter than Q3, but still much better than what we saw last year.

Thank you. One moment for our next question. And that will come from the line of Dylan Carden with William Blair. Your line is open.

Thanks. Maybe, David, just following from that line of thought. The comments that AOV go forward might present kind of a headwind to growth. Can you just unpack that a little bit? Thanks.

Yes, definitely. Thanks for the question, Dylan. I mean basically, AOV has been a really strong thing for us. AOV has been up six quarters in a row. And really, as you start comping that, and if you think about the two-year stacks, I mean, in Q2, this quarter, it was 9% of this Q2. Last Q2 was up 4%. So that's a 13% stacked comp over the last two years. And so what I was alluding to is with those increases, certainly comping that going to next year just creates a little bit more of a challenge. And certainly, in the environment that we just described around active clients as well, active clients we do expect active clients to continue to decline into FY '26. And that, along with sort of harder comps from an AOV perspective, are just things that we're certainly taking into account as we start looking at FY '26.

Got it. And so I guess the flip side of that is that the growth that you're kind of forecasting at some point next fiscal year is more of an active client growth story then and kind of continuing to push on spend per?

I think we've actually talked about this the last couple of quarters is I think we have opportunity in both areas. And certainly, what we are seeing right now is strength in existing client engagement. And really offering them a lot more value and different ways to engage. And so we've been seeing that. But I think what we've said historically is that we really want to see both to talk about long-term sustainable growth. So I think there is a path to growth without that inflection active clients. But certainly, when you have both, that's when you get to that sustainable long-term growth that we're really driving towards.

Got it. Thank you both.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Matt Baer for any closing remarks.

Okay. Thank you. To recap, I think I just want to reiterate how encouraged I am by our recent results. For the second quarter, we exceeded our expectations for both revenue and adjusted EBITDA and we also raised our full year outlook for both metrics. And that momentum that we're seeing in our business, that momentum is undeniable. The improvements our team has made to our client experience are clearly resonating. We are getting great feedback from our clients on these changes, and our clients are telling us that we are increasingly delivering on our mission. The mission to help them discover the styles they will love it fit perfectly, so they always look and feel their best. Importantly, we're also making progress toward active client growth, and we've already returned top-line revenue growth in both our men's business and our Freestyle channel. And all this progress wouldn't be possible without our team, and the team continues to build a stronger operational foundation for our business to grow upon. That foundation will enable us to scale and move towards the growth phase of our transformation. I continue to believe that a judicious and disciplined transformation is one that will lead to profitable and sustainable growth in the future. Given Stitch Fix's compelling value proposition, which we just discussed, the innate strengths of the business model and all that we've accomplished in the first half of fiscal 2025. And I'm more confident than ever in Stitch Fix's future and our ability to be the retailer of choice for an expanded base of clients. We very much appreciate your interest in Stitch Fix and look forward to sharing our continued progress with you on our next call.

Thank you for participating in today's conference. This does conclude the program. You may all disconnect. Have a great day.