Stitch Fix Inc (SFIX) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Stitch Fix first-quarter 2018 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to David Pearce, head of investor relations.

Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2018.

Joining me on today's call are Katrina Lake, founder and CEO of Stitch Fix; Paul Yee, our CFO; and Mike Smith, our COO.

We have posted a complete Q1 financial results and our shareholder letter on the investor relations 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 also like to remind everyone that we will be making forward-looking statements on this call which involve a number of risks and uncertainties.

Actual results could materially differ from those contemplated by our forward-looking statements.

Reported results should not be considered as an indication of future performance.

Please take a look at our filings with the SEC for a discussion of the factors that could cause the results to differ.

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.

Also, during this call, we will discuss certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website.

These non-GAAP measures are not intended to be a substitute for GAAP results.

Finally, this call in its entirety is being webcast on our investor relations website.

A replay of this call will also be available on our IR website shortly.

I would now like to turn the call over to Katrina.

Thanks, David, and thanks to all of you for joining us on the call today.

We are excited to report our first quarterly results as a public company.

First, we'd like to thank our employees, our vendors, and our clients for your support throughout our recent IPO.

Also, we are thankful for our new and prospective investors and we look forward to working together.

I will start out by providing highlights from our shareholder letter currently posted on our website.

Then, before we get into results for the quarter, as this is our first earnings call, I wanted to take some time to share the Stitch Fix story, how the model works, and our strategies for growth.

After that, I will hand it over to Mike and Paul to talk a bit more about our business and our financials.

First, some Q1 financial highlights.

We grew our active client base 30% year over year to 2.4 million active clients.

We drove 25% top-line growth, reaching $295.6 million in net revenue.

And we delivered $13.5 million in GAAP net income and $11.8 million in adjusted EBITDA.

Paul will provide more color on our quarterly financial performance later in this call.

But first, a few minutes to share the Stitch Fix story and how our model works.

I founded Stitch Fix in 2011 because I wanted to work at the apparel retailer of the future.

I love the apparel industry.

It's huge; it consists of consumers making meaningful and thoughtful purchase decisions.

And yet, it's an industry that's largely untouched by technology.

And relative to many other categories, people are buying far less apparel online today than you'd expect.

Looking at the world through the lens of how are people going to buy clothes decades from now, I didn't see a solution out there.

In today's world of convenience, I didn't see the solution as being better stores, but existing e-commerce didn't seem like the future of retail either.

Using keywords to search through millions of products to try to find the right jeans for your body or the right dress for your figure is an enormously difficult problem that e-commerce is not well suited to address.

I saw a solution of personalization, of getting to know clients, getting to know products, and providing individualized recommendations as being the future.

And that's why Stitch Fix exists.

This is a consumer-centric client-first model that leverages technology and data science to help millions of clients discover and buy what they love in a totally new way.

For those of you who are new to Stitch Fix, I will take a minute to walk you through how the model works.

To sign up, clients fill out an online style profile, sharing with us their preferences: their likes, their dislikes, the price points they are looking for, as well as personal information, helping our stylists to get to know each and every one of our clients individually.

Clients schedule a date to receive their shipment, which we call a fix.

Clients can schedule on-demand or choose to do an automatic shipment on a preferred order frequency.

We charge a $20 styling fee, which, for the vast majority of our clients who buy at least one thing in their fix, serves as credit towards their purchase.

Clients are assigned to one of our 3,400 stylists using a patented matching algorithm.

Stylists then use our proprietary technology and algorithms to help them to select items for each client and personalize and humanize the fix through the note and styling suggestions which accompany the items.

Clients try on items in the comfort of their own home, buy what they love, send back what they don't in a prepaid return bag.

Clients provide rich feedback, letting us know what worked, what didn't, and why, which helps our stylists understand how to serve them better and create the foundation for a long-term relationship.

Based on each client's feedback and behaviors, we have a good sense of how we serve clients, enabling us to personalize not only their fixes, but also the ways in which Stitch Fix engages with them over time.

Behind the scenes, what delivers these personalized experiences is our powerful combination of data science and human judgment.

Our philosophy is that leveraging the best of both worlds, allowing machines and algorithms to do what they do best and combining those capabilities with what humans are best at, delivers better client experiences and a more scalable business than either element could deliver alone.

For example, I style fixes myself and I recently styled a teenage client.

While I trusted and found accurate the algorithm's recommendations for leggings with a high likelihood of success, there was a logo jacket that the algorithm had a lower expected success rate for.

But in interpreting the client's Instagram that she had shared with us, I could see that this was very likely to be something that she was going to love.

Even more likely than what the algorithm might have predicted.

Being able to pair both the algorithm's recommendations with human judgment allows us to make more nuanced recommendations.

Not only is this approach of how we combine data science and human valuable, but the data itself is valuable and unique to our model of retail.

The vast majority of our client data is provided directly and explicitly by the client.

This means that the data is high signal, really actionable data.

On average, each client is providing with us over 85 meaningful data points through the style profile, and 85% of shipments have resulted in direct client feedback.

Our clients are motivated to provide us this relevant personal data both at initial sign up and over time as they use our service because doing so helps us to serve them better.

Pairing this client data with a deep understanding of our merchandise means that we can garner insights as to why things are working or not working to understand when products are working disproportionately better or worse with different segments of our clients and importantly why.

Our great scale enables us to have these insights quickly and act on them to drive our business.

These insights come to life in our business through recommendations to our stylists.

Our team of over 3,400 stylists combines algorithmic recommendations with their judgment and human connection to deliver a one-to-one personalized experience that is scalable, efficient, and effective.

We believe that our capabilities around personalization and the scale at which we deliver it is a sustainable competitive advantage, which is a great segue to our growth strategy.

We believe there's a lot of potential in our business for the future.

We bucket this opportunity into three primary ways in which we plan to drive sustainable growth.

First, we plan to continue expanding our relationships with existing clients and share of wallet that we address by developing new and flexible ways for our clients to engage with Stitch Fix, broadening and improving our selection, and advancing our personalization capabilities and our connection with our clients.

Second, we have significant opportunities to acquire new clients through efficiently leveraging our performance marketing capabilities to attract new clients in existing categories and increasing our brand awareness amongst the millions and millions of potential clients who are currently totally unaware of our service.

Third, we plan to continue growing our addressable market.

In fiscal 2017, we launched men's and plus.

In Q1 one of fiscal 2018, we launched premium brands.

But there is still significant opportunity to expand into new categories, product types, and geographies.

Our existing infrastructure and data science platform for personalization allows us to extend quickly and efficiently into new markets and categories.

We have a lot to look forward to in the quarters to come.

Now I will turn it over to Mike, who will walk you through business highlights for the quarter and discuss how we are driving growth.

Thanks, Katrina.

As Katrina referenced, I would like to take a few minutes to talk about our core women's business as well as to discuss the success we've had leveraging our platform of personalization into new categories.

In Q1 fiscal 2018, we saw continued growth in our core women's business year over year.

Behind the scenes in women's, we have added both style and aesthetic variation in addition to some of the price point extensions that I will talk about, which have helped us better serve our core women's client.

Relative to last quarter, the fact that we have greater variation has enabled us to better serve our core women's client, which is evidenced by the fact that these clients are providing more positive feedback on their items, particularly as it relates to style and fit.

One of the benefits of reaching greater scale is the ability to build an assortment that better meets the many needs of our clients.

As recently as two years ago, we would have needed to place small unit orders of premium product.

Today, we are at such a scale that it makes sense for us to build an assortment on both the lower and higher price points to better serve the needs of our core women's client.

As a result, over the last year, we have expanded our assortment in both lower price points and premium brands as enhancements to our core women's business.

In August of 2017, we successfully introduced premium brands in both our women's and men's of businesses to cater to clients seeking apparel from brands that they know and love in the $100 to $600 price range.

We have added more than 100 brands to our platform, including brands like Alice & Olivia, Helmut Lang, Kate Spade, Rebecca Minkoff, and Theory.

We have also seen these clients are providing more positive feedback on the quality of their items.

Over the past quarter, we have continued to expand our lower price point inventory selection, which has served as an important strategy in helping our clients find what they love.

We believe that clients seeking lower price point merchandise -- for example, $20 to $50 per item -- represents a large opportunity for growth and a demographic that we can serve well and profitably.

Given its success, we plan to increase lower price point sales as a percentage of overall sales over the course of this fiscal year.

We have been pleased to see continued success in our core women's business and that our investments in the category are paying off and helping us serve our female clients better.

Now I'd like to move to our new categories, men's and plus size, both which are taking our capabilities of personalization and extending them to new audiences and assortments.

These are both brand-new businesses that we launched in fiscal 2017 and present a significant opportunity to expand to our total addressable market and are laying the foundation for long-term drivers of growth in our business.

We recently celebrated the one-year anniversary of our men's business, which launched in September of 2016, and roughly doubled our addressable client base in the US.

Despite the challenge of building a brand-new business with a brand-new customer base, within six months, we were very pleased to see the men's business reaching parity with women's in the average number of items purchased per fix.

In addition, we continue to see strong active client growth quarter over quarter.

We also continue to see improvements in men's client satisfaction year over year.

We launched our plus size category in February of 2017 to address a historically underserved market.

Even prior to our launch, we had over 75,000 women on a wait list for the offering.

And we have been very pleased with the demand for this business.

We partnered with established plus brands and other brands that used our launch as an opportunity to enter the plus market.

Our broad assortment has resulted in more positive feedback from clients regarding the fit and style of the items they receive in their fixes.

In summary, we are excited about the growth we have delivered, but also the meaningful improvements that we've driven in helping to serve our clients better over time in both our core women's business as well as our new categories.

The ability to take this business of personalization and extend it into new categories is an important testament to the strength and sustainability of our business model.

I will now turn the call over to Paul, who will walk you through our financial performance and outlook in more detail.

Thanks, Mike.

I'm pleased to discuss our financial results with you today for the first time as a public company.

I will start by sharing perspectives on how we manage the business and then go into more detail on our first- quarter performance and our outlook for the second quarter and full year.

In six short years, Stitch Fix has grown to an impressive scale, reaching nearly $1 billion in revenue and over 2 million active clients, all after raising just $42 million in capital.

Four key principles have guided us to this point and will continue to do so as we create shareholder value in the future.

First, we firmly believe that enabling a great client experience is the path to positive business results.

Second, we've run our business with a long-term mindset and confidently invest for growth.

Third, we remain focused on balancing this growth with profitability.

And finally, we leverage the ample data we have on hand and apply ROI framework in decisions we make.

Our first quarter of 2018 results reflect these principles in action.

We delivered another quarter of sustainable profitable growth and continue to make the right investments for the long term.

As Katrina shared, Q1 net revenue grew 25% year over year to $295.6 million.

We saw growth across the business, driven by our newer categories such as men's and plus as well as by our core women's business.

Active clients grew to 2.4 million, an increase of 30% year over year.

Gross margin was 43.7% compared to 46.6% in Q1 of last year.

The year-over-year decline of 290 basis points was expected, given our launch into men's and plus.

While these categories are currently dilutive, we expect their gross margins to improve over time with scale.

Overall, we are pleased with our gross margin for the quarter.

Higher-than-expected gross margin was the primary reason why our Q1 adjusted EBITDA of $11.8 million was slightly above the flash range we shared in the S-1.

There are two drivers of this margin upside.

First, our quarterly inventory reserve adjustment was positively impacted by more favorable clearance trends we have been seeing over the past year.

A second driver was timing-related.

Clearance activity in Q1 was lower than expected, but this activity is simply shifting to Q2.

Looking at expenses, we continue to make strategic investments to best position ourselves for future growth.

Consistent with recent quarters, we are investing in marketing to drive client growth.

Advertising expense in the quarter was $28.2 million or 9.5% of net revenue, up from $15.3 million or 6.5% of net revenue in Q1 of FY17.

Other SG&A, or SG&A including advertising, was 31 [point] % of net revenue compared to 28.9% in Q1 of FY17.

This percent increase reflects investments in headcount year over year, particularly in engineering and data science.

We expect to expand these teams in future quarters as we believe increasing our technology capabilities will strengthen and bring flexibility to our platform.

Meanwhile, we are seeing efficiencies with our variable labor costs.

With our styling and warehouse teams, Q1 labor costs were 50 basis points lower as a percent of net revenue year over year.

Driving this improvement was enhanced styling training and tools, and in our warehouses, the introduction of automation and process improvements.

Q1 net income was $13.5 million compared to $13.2 million in Q1 of FY17.

Excluding the impact of the revaluation of our stock warrant liability, which existed in both this year's and last year's results, non-GAAP income was $4.4 million in Q1 of this year compared to $14.7 million in Q1 of last year.

Adjusted EBITDA was $11.8 million in the quarter or 4.0% of net revenue.

This compares to $28.0 million or 11.9% of net revenue in Q1 of fiscal 2017.

This compression in our adjusted EBITDA margin reflects our strategic decision to invest in marketing to reach new clients, our expansion into men's, plus, and in premium brands, and technology headcount to improve our ability to serve all clients.

We ended the first quarter with $140 million in cash and restricted cash.

The closing of our IPO added an additional $131 million of cash to our balance sheet and will be reflected in our Q2 cash position.

Moving onto our outlook, we will provide our view on net revenue and adjusted EBITDA for both the current quarter and current year.

For the fiscal second quarter, we expect net revenue in the range of $287 million to $294 million, representing growth of 21% to 24% year over year.

We expect adjusted EBITDA in the range of $11.5 million to $15.5 million or a margin of 4.0% to 5.3%.

As noted in our shareholder letter, the second quarter is our holiday quarter.

Unlike most retailers, we are not overly dependent on holidays and don't have the challenge of volatile demand during this quarter, which we believe is reflective of our client's focus on buying gifts for others.

We view this lack of seasonality as a positive.

It makes staffing and planning easier.

In terms of advertising, we don't have pressure to spend as other retailers do to grab consumers' attention.

Therefore, looking at our guidance for adjusted EBITDA, we expect our advertising as a percent of net revenue to be lower in Q2 than it was in Q1.

This is a similar pattern as last year.

Partially offsetting this lower advertising spend will be gross margin, which we would expect to be lower this quarter than it was in Q1.

I already mentioned the timing shift of clearance between quarters.

In addition, in Q2, we expect to have slightly higher shipping and packaging costs due to strengthened sales of our of our seasonal offerings like sweaters and winter coats, which are heavier and larger in size.

For the full fiscal year, we expect net revenue in the range of $1.17 billion to $1.22 billion, representing growth of 20% to 25% year over year.

We expect adjusted EBITDA in the range of $40 million to $60 million or a margin of 3.4% to 4.9%.

Our outlooks reflects our strategy to grow at a sustainable responsible pace and take a thoughtful approach toward our investments.

Over the long term, our goal is to achieve adjusted EBITDA margins in the 11% to 13% range, driven by higher gross margins and leverage on our fixed SG&A costs.

We believe investments we are making today help us toward this path.

We are pleased with the results we achieved in our first quarter and we are still in the very early stages of our growth.

We are excited about our future and look forward to reporting on our progress in the quarters to come.

Thank you for your attention.

We are now ready for questions.

Operator?

(Operator Instructions) Lindsay Drucker Mann, Goldman Sachs.

Thanks.

Good afternoon, everyone.

And I guess I just wanted to start with a question on active users.

This quarter relative to the fourth quarter you added something like 200,000 net users, which is one of the strongest quarterly quarter-over-quarter net adds that we've seen in some time.

Can you talk about first of all what you attribute the momentum to?

And second, how we should think about this as a pace?

Is it conceivable that as we look at the second quarter and the back half of the year that you will be able to sustain that kind of a run rate?

Or what are some of the variables that might cause net adds to accelerate or decelerate from this run rate?

Thanks, Lindsay.

I will start with this question and then Paul, maybe you can fill in if I miss anything.

This was a great quarter for us.

On the marketing side, we saw -- on the customer acquisition side, we saw efficiencies that were in line with what we expected and in some channels actually were better than what we expected.

And so we actually pulled forward some marketing spend to take advantage of some of those efficiencies that we saw and some of those pockets of efficiency that we saw.

So that definitely was part of what drove this very successful quarter on the customer add side.

In terms of overall momentum, I guess what I would say is I think you should take this as indicative of what we are capable of doing.

In terms of like what you should expect in the next quarter and the quarters to come, I think the full-year guidance that we are sharing is probably going to be the best guide for you of what our expectations are.

The second quarter is the quarter that we typically lay off a little bit on the marketing side.

Right now is a time when probably -- you can see it in your inbox today.

This is a time when people are screaming for consumers' attention.

And so this is a time that's very competitive and very expensive on the marketing side.

And so we very deliberately lay off a little bit in this quarter.

And that's definitely something that you will see and you should expect I think in the next quarter.

But I do think that this was a good quarter for us on the marketing side and can be a good signal for you in terms of what this team is capable of doing.

I would just add to Kat's comment.

We feel confident based on Q1 of our ability to use marketing to drive clients and our abilities over all with what we are doing to retain clients.

In terms of the guidance for net revenue, I would just think of active client count as driving that.

We think we have both new businesses with men's and plus to draw in new clients as well as opportunities to bring even more to our core women's business.

So we do expect our overall net revenue to be driven by continued growth in active clients.

Okay, great.

And just a follow-up with two parts.

On the gross margin side, can you address -- and maybe you covered this in your clearance comment.

But how were markdowns in the quarter year over year?

And secondly, can you quantify the benefit to gross margin in this quarter from the timing shift of clearance versus maybe also quantify the detriment to the second quarter from that timing shift?

Why don't I take the first part and then Paul, we'll have you take the part about the benefits and the timing.

On gross margin, markdown is not a big part of our business.

So when we -- we've tested this concept quite a bit, as you can imagine, with a lot of people with retail backgrounds.

And the reality in our model is that if we have a dress, for example, that is not working, a dress that doesn't fit at $98 also doesn't fit at $68.

And we are better off sending someone a dress at full price that they are going to love rather than marking it down.

So markdowns in general are not a big driver.

One of the things we saw -- we had a warmer fall, I would say.

And so we sold through -- we were selling through kind of that summer product later this year than we normally do.

And so we were selling through at most of the time at full price shorts and tank tops through September and weeks that you wouldn't normally see that.

So we saw probably some benefits from that that is reflected in seasonality and gross margin.

And then maybe Paul, you can talk about the timing shift.

Yes, as Katrina noted, we did have lower markdowns -- or rather clearance is probably the term we use.

We cleared less inventory in Q1 because of the success of our ability to sell our summer items.

We think that's largely timing.

And I would say from a magnitude standpoint, roughly a third of our upside in gross margin versus what we expected is just shifting into Q2.

[So hopefully that gives you] the size of that.

But really from a first-half standpoint, we expect clearance to be in line with what we had planned for the quarter and for the two quarters.

Okay, guys.

Thanks very much.

I will hop back in the queue.

Douglas Anmuth, JPMorgan.

Great, thanks for taking the question.

First, you guys talked a lot about just the progress that you are making on both the high end and the low end in terms of women's with premium brands and also lower price points.

And it seems like you will push harder on each of those going forward.

Can you just talk a little bit about how we should think about the trade-off there in terms of average order value?

And then second, was hoping you could just maybe qualitatively help us with anything around trends you are seeing in keep rate, average unit retail, order frequency, any of those kind of metrics.

Thanks.

Sure, thanks, Doug.

First, on progress with kind of the lower and higher price points, I think one of the benefits that we have at the scale that we are at now is that we can really in a fine-tuned way be able to understand what the price preferences of our customers are and make sure that we are matching against those.

So two years ago, we weren't at a scale where it made sense for us to do much on the higher or the lower end.

And now we are at a place where we can invest more there.

And we've been really excited to see that be successful.

So what we share in -- what kind of the data point that we share on that front is that we are seeing higher ratings of us being able to get people's fit and style better.

Those are really good indicators for us is just the health of our ability to serve clients well and seeing those improvements come to life.

In terms of I guess how you can expect those to flow, like our -- the lower price point, they offset each other, obviously.

I think the premium brands that we're doing a lot of that product is at significantly higher price points than we've been historically.

But from a volume perspective, there's a greater opportunity in this $20 to $50 price range.

And that's the price range that we are seeing more and more demand for.

It's a price point that we can serve very profitably and effectively.

And so there's probably going to be greater investment in that lower price point than in the premium one.

And so I think net-net, while they do cancel each other out a bit, the lower price point will probably have a more dominant effect.

How that will --- I guess how you can think about that affecting your inputs, I think that we are able to serve that client very well.

And so from a client satisfaction from how many units are people keeping in fixes perspective, that client is performing very well.

Obviously, though, because the price point is lower, there will be some downward pressure that we'll see on AOV in that segment.

But we are very happy that we are able to serve that client well.

I guess qualitatively in terms of trends that we are seeing, qualitatively we are seeing improvements in our ability to serve our clients better across our business really.

We see it in the core business, we are seeing it in men's, we are seeing it in plus size.

All of that is very positive.

Overall, let's see, with men's, the men's market is about two-thirds the size of the women's market overall.

Men spend less than women do; their wallet opportunity is smaller than that of women.

Data will also tell you that's true about plus size.

I think we are still undecided on if plus size will look exactly like a regular size customer in terms of wallet share opportunity or not.

But I think the market would tell you the plus size opportunity is also less.

And so both of those effects in the aggregate in our business as plus size, as men's in particular, is growing means that you will see frequency a little bit lower in those segments.

In terms of average order AO -- average order volume, I mean, again, these are not metrics that we are sharing.

But directionally, I think the lower price point, for example, will be a little bit different there.

It will depend a lot on segmentation.

But overall, I think we have been very pleased with in particular being able to see our success in serving clients well.

Like, that's really the primary metric that we are focused on and making sure that people are finding things they love in their fixes.

And we are seeing that improve.

Great.

Thank you, Kat.

That's helpful.

Ross Sandler, Barclays.

Congrats on the first quarter.

I just had two questions.

First, on marketing, you mentioned in the letter that you have yet to assign your data science capabilities to marketing.

So I guess what kind of opportunity do you see in driving up efficiency and reducing CAC when you do that?

And what's the timing or what's the thinking around timing on when that might happen, given that you are already seeing some improvement as you mentioned?

And then the second question is on extras.

You recently started testing adding more items to the box above the five threshold that you guys started with years ago.

Can you just talk about the opportunity around extras in driving higher keep rate or higher overall unit economics?

What's the opportunity there?

Thank you.

Sure.

Thanks, Ross.

On marketing, there is a significant -- we think about data science as being pervasive in our business.

And we apply data science very deeply in merchandising and in styling.

And in marketing, I think we are in early days.

We use a lot of data science on the analysis side of kind of understanding after we have set marketing dollars what happened and how to quantify it and how to generate ROI.

So I would say that today we are using data science to think about how to think about our results rather than actually delivering results.

And so I think the next frontier is really for us to be using data science more in the way that we are bidding for clients there.

We could be using data science more in, for example, if we had a client today who was going to generate thousands of dollars of LTV, but that would be a client that we would pay hundreds, like $500, to acquire, that's a client that we don't have the capability today to say that even though this is a client that's expensive to acquire we actually probably should acquire them because they look to be a good client over time.

And so that very personalized capability of being able to look at individual clients that we are acquiring and then have a perspective on what the LTV would be on that individual client is a capability that we don't have today that, for example, I think could be a much more advanced capability that we could develop.

So in terms of timing, this isn't going to be a silver bullet.

There is not going to be like an on-off switch of kind of a before and after.

But I think what I can say is that we are already devoting increasing data science resources.

Today, performance marketing is working really closely with Eric, who runs our data science team, already.

And I think we will see more and more of those capabilities.

In terms of specific timing of when that would have a dramatic impact, I don't think we have a commitment on that yet.

But I think we are already excited and optimistic about what we are seeing so far.

On your question around extras, we don't have any specifics to share on this.

So extras is the idea that today in a Stitch Fix, there's five items and there's a lot of product categories today, such as bras or socks or underpants that people would like to buy that you can't easily buy through the existing experience.

And so this is a concept that we know that there's interest for.

We have done a little bit of testing in it in the last year.

We are optimistic about it as being a really good lever to be able to help our clients find more of what they are loving.

And certainly to have a positive -- as the opportunity to have a positive impact on the unit economics.

But today, we don't have any specific timing on it, but we definitely think it's a great opportunity.

Mr. Sandler, anything additional?

No, I'm good.

Thank you.

Mark Mahaney, RBC.

Thank you.

Three questions, please.

One, could you talk about the impact on your brand awareness or the brand campaigns you have been running since the beginning of the year?

Secondly, could you talk about the impact of the lower price points on customer retention and acquisition?

I ask that since some of the survey work we had done showed that that was kind of one of the biggest pain issues or reasons that people were not shopping as much or not shopping with Stitch Fix.

Did you find that you've already seen an impact on customer retention because of the lower price points?

And then third, could you please just comment on customer acquisition cost trends that you are seeing now?

Are they relatively stable?

Is there a way to get at it, slicing out the big brand advertising spend?

Thank you very much.

Great.

Thank you, Mark.

All right, you've got a few questions there.

The first one on the impact of brand awareness.

So what we had shared and so since -- we've done three waves of TV advertising.

Each wave has been more effective than the last, which is something that we've been really pleased with.

And we were able through those campaigns to drive awareness from -- correct me if I'm wrong, Paul -- but I think it was in the 20s to driving it to being in the 40s on the women's side.

Men's -- we think men's is de minimis.

We actually aren't even measuring that today.

Men's -- we just in the last month or two, I think, just started doing TV that was targeted towards men on men's channel with a Stitch Fix commercial that featured -- more prominently features the male role in that.

And that's actually been effective also.

So we're excited to use that to drive the men's business also.

So I think what we've seen is we've seen a positive impact on brand awareness through the broad-based TV campaigns that we've been doing.

But what we are also seeing is there is still a lot of opportunity and still many people who are completely unaware of the service.

Your question on the lower price point and the impact on retention and acquisition.

That's interesting that your survey work showed that.

Our kind of the feedback that we get from clients also show that there was a big opportunity to better serve clients who are looking for a service like Stitch Fix but wanting kind of more of this accessible price point of that $20 to $50 range.

So that's been an opportunity that we've been aware of.

And really in the last year, year and a half or so, we've really focused on how can we build out a better assortment there?

How can we make sure that we are serving that client well?

We did a very -- we did a kind of longitudinal AB test with the lower price point assortment.

And we did in that test find that we were able to drive better retention, that we were able to drive better -- that we had better client satisfaction in that test.

And that really served to us as kind of the signal that this was a great opportunity for us to continue to build out this assortment.

And we're part way through the way there, I would say, today.

But still with some room to improve.

On the acquisition side, I think what we are finding is -- and it's an interesting segue from the TV side.

In channels like TV, where you are not doing as much personalization or targeting, there are clients who are looking for that $20 to $50 price point that are going to naturally want to try the service that we are going to be acquiring anyway.

And so as we are doing more of that broad-based advertising, it is even more important that we really have the full range of assortment to be able to serve the needs of clients since that's kind of a less-targeted way that we are acquiring clients.

And so that lower price point is more important as we are diversifying that marketing mix.

In terms of customer acquisition and the trends that we are seeing, that's not a figure that we share specifically.

But I think what we can share is that I would say that customer acquisition has been stable and that we have seen pockets of opportunity.

And so in Q1, there were a couple of channels where we actually saw those channels performing more efficiently than how -- than what we expect in those channels.

And so we were able to pull some dollars forward.

But that overall, that number has been pretty stable for us and we have a lot of confidence there is still a lot of firepower and potential as we think about long-term growth.

Thank you very much, Katrina.

Erinn Murphy, Piper Jaffray.

A couple of questions for me.

I guess first, just longer term on your gross margin, I'm curious on how big or over what time do you expect some of your newer categories, whether it's men's or premium, how big do these scale until you are fully optimizing all five of those DCs?

So that those businesses could potentially be at a gross margin level closer to the women's?

I will start on, and then I will have Mike share some thoughts on the distribution strategy.

Right now, as we know noted, our men's and plus businesses are in the early stages.

And that has a dilutive impact on our gross margins.

The drivers are threefold.

One is they are smaller merchandise buys, which affect our initial markups.

Two, our distribution footprint's a little bit more fewer numbers, so the shipping costs are higher.

And three, there's just associated inventory costs as we really build our client base for those new businesses.

But we do expect as those businesses grow to get improvements for margins.

And I think one way to look at this, if you look at the history of Stitch Fix, our gross margins improved 9 points from 2014 to 2016.

And that was just the women's business.

And that's reflective of the benefit of the scale that we saw on that business over time.

So we feel confident that as we grow these businesses, we get clients what they want, we will be able to see benefits on all those fronts.

Then I will turn it over to Mike.

Erinn, we are in, again, two distribution centers today with men's.

And we won't be explicit about sort of the timing of when we feel like we will get to scale because we are not breaking out the categories at the business level.

But I would say in the next 12 months, we certainly expect to get to another one.

And then I would probably say in the next two years is where we will feel like the business is at scale where it's evenly distributed.

And you wouldn't expect shipping to be a driver or dilutive in the men's business as it relates to gross margin.

Okay, that's helpful.

But just staying on the gross margin, you guys did call out 70 basis points of strength as an impact in Q1.

How did that look this time or kind of over the last 12 months?

And maybe talk about some of the initiatives you are working on internally to have that level come down?

I will start out.

So yes, shrink has increased over the past year.

That's reflected in the MD&A we shared in our shareholder letter.

I think there's really two buckets of shrink.

One is client shrink and the other is carrier shrink.

I would say there is definitely opportunities on both fronts we are tackling from sort of a tactical standpoint and strategic standpoint.

On the carrier side, it's just simply just stay on top of it and creating a process for our customer service team to put in claims.

I think it's going to be a very easy win to get that money back into our pockets.

On the client side, there's probably two things going on.

One is we probably haven't been as robust in making sure we are charging for items that have been associated with cards that have been declined.

So we have engineering work going on to kind of just get the processes in place to make sure we are charging enough time to get the money.

I think more strategically, tying back to Katrina's point, as we reach new clients, we probably can use intelligence to find and distill clients who we think are the right fit for us.

And I think right now as regarding our funnel, we are reaching out to clients we see an opportunity perhaps to distill who would be the best fit for us.

I think we are doing that more strategically, investing in system intelligence to make sure we are reaching the right clients over the long term.

Okay.

And just last question.

Paul, sorry.

I think you are on the hot seat; one more for you.

Inventory: what was it up year on year?

I didn't see Q1 of last year in the letter to the shareholders.

I'm just curious on your dollar rate, what was that up.

And how should you expect inventory growth to trend versus sales guidance that you gave for the year?

Thanks.

Sure.

So inventory grew 65% year over year, and really what that reflects is our investment in our new categories.

Our core women's business inventory we actually grew in line with sales.

But as we think about our new categories, we really want to make sure we have the right inventory in place to serve those clients up front.

And I'd also think about our broadening of assortments.

When we think about the anecdote of Katrina sharing in her remarks about being able to have that Tommy Hilfiger jacket for that teenage client, that's what we believe is the right thing to do to provide personalized products for our clients over time.

So I do think over the next year, you will see inventory growth outpace sales.

We think it's the right investment for the business.

But certainly rest assured, we are using all the various tactics from using data science to drive our inventory buys and helping our merchandising teams really manage their inventory over time to help us offset that investment.

But again, bigger picture, we want to make sure we have the right inventory for our clients.

Understood.

Thank you and happy holidays.

Scott Devitt, Stifel.

Thanks for taking the questions.

I had two.

First is, as you've taken more of the marketing process in-house in the past year, I would be interested in understanding what you are learning as you manage more of the process.

And how much visibility do you have in terms of future acquisition cost to be able to plan the business with high conviction around those costs?

Then secondly, on exclusive brands, I think that number was roughly 20% of revenue in 2017.

How should we think about exclusives or private labels as a percentage of the business long term?

Thank you.

Thanks, Scott.

On marketing process, bringing those channels in-house, there's financial benefits and there's also just benefits to the business in the long term.

And I think as we brought channels in-house, there have been some channels where we actually were able to gain efficiency right off the bat bringing them in-house.

And then the bigger thing is actually the learnings of being able to generate those learnings.

And as we think about things like algorithmic capabilities, those are all really only possible when we have those channels and those learnings in-house.

And so there is a lot of benefit there.

In terms of visibility into future acquisition costs, I think right now we have a lot of confidence of where we are and being able to have -- I think one of the reasons having a diverse set of channels that are affected is important is just because firstly, it reduces any liability around being too dependent on one channel.

And so you hear all lots of buzz around I don't know if Google changes the algorithm or Facebook changes the algorithm.

And of course, those impact us also.

But to be able to feel like we have a diverse set of channels means that we won't feel like we are overdependent on one channel.

And it also means that we have many channels for firepower.

And so to be able to find efficient ways to have TV work for men's and to be able to have a variety of social channels that are working, all of that is just important as we think about putting more and more dollars to work.

And being able to put more and more dollars to work in an efficient way and having avenues for that.

So in terms of visibility in the future, I would say that today, I think we've been very pleased to see that cost be pretty stable and in some cases be more inefficient in a channel-by-channel basis than where we expect.

And I think what that says to us is that there is still a lot of scale ahead of us and that there is still a lot of opportunity ahead of us.

And so I think we are pretty confident in our marketing capabilities right now and our ability to use marketing to continue to drive growth.

On exclusive brands, so yes, what we shared in the S-1 was that exclusive brands represented about 20% of our revenue.

There are a couple places in our business, like kind of behind -- like on a category-by-category basis, there's actually significant differences in how much we rely on exclusive brands.

And so for example, in shoes, there is a lot of great branded partners.

And so we do 0% exclusive brand in shoes.

In actually two of the categories that are important, which are men's and plus size and important because they are growing and kind of outpaced and will represent a larger proportion of our business over time, those are two businesses where we didn't find that there was as strong of a vendor base as we did in the core women's business when we started.

So even off the bat, we have a higher reliance on exclusive brands in both men's and plus size.

And so over time, more as just a function of our business evolving and having a more diverse customer base, we will expect that we will do a little bit more in exclusive brands.

But it's not -- there is not kind of an overwhelming strategy to drive more of that it's really more of that.

It's really more that we see men's and plus size are growing and that those are businesses where we have been able to use exclusive brands really successfully to satisfy our clients well.

And so we will expect some modest growth there.

Thank you.

Ralph Schackart, William Blair.

Good afternoon.

Just in terms of men's client satisfaction, I think in the letter you talked about it being up year over year.

Can you sort of walk through what were some of the main drivers of this?

And how do you further drive men's satisfaction rates?

And then a follow-up to that is how would the men's satisfaction rates that you are seeing today compare to core women's at a similar stage?

And how much of the previous learnings within core women's, either from the algorithms or data, have you been able to leverage in terms of driving men's satisfaction?

Thank you.

Great.

My one anecdote is just that the men's -- where we are in the men's business now one year in is so, so, so far above where we were at women's one year in or even actually women's at the volume scale that it is right now.

Men's is far, far outperforming on every metric.

I'm going to have Mike probably explain a little bit of the why and how we were able to do that.

Yes, I mean, you touched on some of them.

I think one, it starts with the learnings that we had from the women's business early on.

And this power of a platform of personalization, it's real.

You get so many learnings from the algorithms.

You get real leverage from the existing infrastructure that we've built.

And it really comes down to, quite simply, like product matching with the client base and understanding our clients really well.

So one, Katrina referenced sort of exclusive brands being a little bit more prevalent in men's because we didn't see it in the vendor base.

We've actually done a really nice job of developing our exclusive brand business in men's and that certainly helps a lot, too.

So we are excited about what we've seen in men's in client satisfaction.

We think there's still, just like the rest of the business, room to improve and get better.

But so far, it got there, like Katrina said, faster than we had almost expected.

And it's been very positive in the business.

I think in particular, I've been very impressed with what the team has done around fit and price point.

I think those are two areas that the team focused on really early.

And fit, in particular, we find is very, very important for driving men's customer satisfaction and to be able to iterate really quickly on fit blocks and react really quickly to things that we are hearing from clients within the first three, four months of launch.

And bring that back into the assortment and improve the product.

I think that had a significant impact.

And really investing in seeing where people are looking, where people are launching assortment in certain price points and really focusing on that.

I think those are two areas in particular that I see the team be really successful on.

Yes, one quick add to that is we are able to help other even market brands by noticing fit trends.

And extra-extra-large is an example where we take point of measurements on every piece of clothing.

And we can see what's working and what is not working and we end up sharing that back to our market brands to help them make better products.

So it helps make better product for us and for the ecosystem, but we want them to be a long-term partner of us.

So that's kind of where you see the data science really influence our relationship with our market brands.

Great, thank you.

Thank you.

I'd like to turn the conference back over to Katrina Lake for any additional or closing remarks.

Great.

Thanks again for joining us today.

We look forward to seeing analysts and investors at conferences in the months to come.

And we will keep you updated with our quarterly calls and press releases.

Have a wonderful holiday break, everybody.

Thank you.

Ladies and gentlemen, again, that does conclude today's conference.

Thank you all again for your participation.

You may now disconnect.