Stitch Fix Inc (SFIX) 2018 Q4 法說會逐字稿

Good day, everyone.

Welcome to the Stitch Fix Fourth Quarter 2018 Earnings Conference Call.

Today's conference is being recorded.

At this time, I'd like to turn things over to Mr. David Pearce.

Please go ahead, sir.

Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year for 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 complete Q4 and full fiscal year financial results in our shareholder letter on the IR 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 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.

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 obligations 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 shareholder letter on our IR website.

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

Finally, this call in its entirety is being webcast on our IR website, and a replay of this call will be available on the website shortly.

I'd now like to turn the call over to Katrina.

Thanks, David, and thank you for joining us.

After the market closed today, we issued our quarterly shareholder letter with more details on our results, which I encourage you to read.

I'll take a moment to highlight our results from the fourth quarter and full fiscal year and discuss how we are executing against our strategic road map.

In the fourth quarter, we delivered net revenue at the high end of our guidance range and adjusted EBITDA that exceeded our guidance for the quarter.

We grew our active client count to 2.7 million as of July 28, 2018, an increase of 548,000 and 25% year-over-year.

We generated net revenue of $318 million, representing 23% year-over-year growth.

In Q4, we generated $18.3 million in net income and $11.1 million in adjusted EBITDA.

These results demonstrate our continued focus on delivering disciplined growth while making significant investments in future categories and capabilities.

Stitch Fix is transforming the way people find what they love, one client at a time and one Fix at a time.

We're proud of what we've accomplished in our first year as a public company and the momentum we've built as we enter fiscal year 2019, and we're excited about the growth opportunities ahead.

In the last year, we've delivered over $1.2 billion in net revenue, reflecting 26% growth year-over-year while generating approximately $45 million in net income and $54 million in adjusted EBITDA.

During this period, we also extended our total addressable market with our July launch of Stitch Fix Kids and introduced new innovations to our core services through efforts such as Style Pass and Extras, adding flexibility and enabling us to further personalize our offering.

The capital efficiency of our model enabled us to make these investments while also generating $56 million of free cash flow in the year and end fiscal year 2018 with a cash balance of approximately $300 million and no debt.

In past quarters, we've discussed 3 growth pillars that serve as the foundation for our strategic road map: firstly, expanding relationships with existing clients; secondly, acquiring new clients; and thirdly, growing our addressable market.

Today, I'd like to spend a moment on the first and third pillars with updates from Q4.

First, I'll share an update on Style Pass, a service that we rolled out in December 2017.

It offers select clients unlimited styling for a $49 annual membership fee.

To date, Style Pass has outperformed the results from our pilot as we continue our disciplined rollout of the program.

As of Q4 2018, the number of Style Pass clients grew nearly 60% compared to the prior quarter, Q3 2018.

In addition, we have found that Style Pass clients spend more per Fix, receive Fixes more frequently and have higher satisfaction ratings compared to non-Style Pass clients.

Services and new initiatives such as Style Pass add flexibility to our offering, allowing us to drive increased client satisfaction and also serving as a strong catalyst for client reengagement.

At the time of our IPO, we shared that, from the beginning of fiscal 2014 through the end of fiscal 2017, over 650,000 unique clients have been reengaged by checking out a Fix after more than 16 weeks of inactivity.

Updating this figure to include fiscal 2018, we've now successfully reengaged over 1 million unique clients.

In Q4, we also expanded our addressable market through the launch of Stitch Fix Kids.

The offering allows us to effectively serve the entire household and comprises both market and exclusive brands in the offering.

To date, we receive strong interest from our existing clients who've signed up their children with early positive feedback on the offering.

While Kids remains a small portion of our business today, we look forward to providing you with updates in future quarters.

As we look ahead to fiscal year 2019, we are excited to announce our plan to launch in the U.K. by the end of the fiscal year.

Our successful previous category launches across Men's, Plus and Kids gives us confidence in our ability to execute on this international growth opportunity.

Based on our consumer research and planning, we believe that our personalization capabilities will resonate with U.K. clients and that we can be a strong partner to international brands with whom we don't already work.

Our engineering and data science capabilities will allow us to build a localized presence to effectively serve U.K. clients with the same highly personalized approach we've used in the U.S. We look forward to sharing more information and updates on this initiative in the quarters ahead.

Now I'll turn it over to Mike who will walk you through some operational highlights from the quarter.

Thanks, Katrina, and hello to everyone joining us on today's call.

I'd like to take a moment to provide an update on our Q4 marketing initiatives and learnings as well as discuss a few ways we began using Style Shuffle data during the quarter.

One key marketing focus in Q4 was to drive channel learnings associated with [TVE] and to better determine channel efficacy through a series of incrementality tests.

To achieve this, we temporarily ceased our national TV campaign for 10 weeks to measure channel efficacy.

Through this testing, we learned that TVE was a more effective acquisition channel than we had previously modeled as measured on a cost per acquisition basis.

The tests also enabled us to evaluate and quantify the interaction between TV and other advertising channels, which we believe will help us better determine the optimal ratio of advertising spend between TV and our other portfolio channels in future quarters.

Last quarter, we shared details on Style Shuffle, an interactive mobile and web-based game, in which participants rate an assortment of Stitch Fix merchandise.

This game enables us to collect significantly more client preference data on each apparel item than we could have before the game was introduced and allows us to improve our personalization capabilities.

We've begun leveraging the Style Shuffle data to enhance the overall client experience and drive business results.

In Q4, we began incorporating the data into our Women's stylist-client matching algorithm, which drove an increase in average order value as compared to the prior algorithm.

Style Shuffle data not only improves outcomes for clients who play the game, it also helps us better serve those who have not yet played.

In Q4 of '18, we used the data to drive increased revenue per client and engagement among both playing and nonplaying clients, which we believe highlights the network effects of our data and the broad applicability of the Style Shuffle data.

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

Thank you, Mike.

In December on our first earnings call as a public company, we shared a commitment to grow the top line in a responsible, profitable manner to reinvest free cash flow in improving the client experience and expanding our addressable market.

Looking back at 2018, I'm proud to say that we've delivered on this promise.

We expanded our client base and generated strong revenue growth.

We drove positive adjusted EBITDA in free cash flow, and we invested in talent, marketing and new categories with the long term in mind.

As we look ahead to 2019, we're committed to propelling this cycle of growth and reinvestment.

Our shareholder letter provides details on our financials for the fourth quarter and full year but here are highlights.

In Q4 '18, we started delivering another quarter of revenue growth of more than 20%.

We expanded our gross margin, our adjusted EBITDA margin, our EPS and our free cash flow year-over-year.

These results reflect the cumulative benefit of the investments we've made over the past few years and our efforts across the company to drive scale, efficiencies and working capital rigor.

Net revenue for the quarter was $318 million, representing 23% year-over-year growth.

Our performance is primarily driven by an increase in both Women's and Men's active clients.

This launched at the end of the quarter and did not meaningfully contribute to our active client count or net revenue.

Gross margin was 44.4%, our highest quarterly gross margin of fiscal 2018 and 90 basis points higher than last year's Q4.

This improvement was driven by a decrease in inventory reserve, lower clearance expense and reductions in shrink, all reflections of our initiatives to strengthen our operation and inventory management.

We also continue to scale Men's, which in Q4 saw improved gross margins as we expanded from 2 to 3 warehouses and increased initial markups, or IMUs, across all merchandise subcategories.

We also drove leverage in SG&A.

Other SG&As, excluding advertising, was 32.8% of net revenue in the quarter, a 140 basis point improvement year-over-year.

Variable labor drove 90 of these basis points, reflecting warehouse efficiencies enabled by system enhancements.

The balance is due to leverage of nonpayroll expenses such as professional fees and facilities.

These efficiencies more than offset our investments in our technology and talent.

We ended the fiscal year with 180 engineers and 100 data scientists.

We also drove leverage on our advertising spend this quarter, realizing a 10 basis point improvement year-over-year as we continue to invest responsibly in our marketing programs.

Adjusted EBITDA for the quarter was $11.1 million or 3.5% of net revenue.

This is adjusted above the high end of our guidance range, driven by higher net revenue, gross margin expansion and variable labor savings.

Q4 net income was $18.3 million, and diluted EPS was $0.18.

These results reflect a credit of $9.4 million in the income tax provision line to the P&L, primarily due to stock-based compensation deductions associated with shareholder activity in the quarter.

We also realized tax benefits from R&D credits with certain other deductions.

Finally, we delivered free cash flow of $55.6 million in fiscal year 2018.

We finished the year with capital expenditures representing less than 1.4% of net revenue.

On the working capital front, we continued to narrow the gap between our inventory growth and our revenue growth with year-end inventory up 26% year-over-year, inclusive of investments in categories like Kids.

For the year, we turned inventory 6x on a merchandise cost basis.

Looking ahead to fiscal 2019, I'll now provide our guidance for Q1 and the full year.

For Q1 '19, we expect net revenue in the range of $354 million to $360 million, representing growth of 20% to 22% year-over-year.

We expect adjusted EBITDA in the range of $5 million to $9 million or an adjusted EBITDA margin of 1.4% to 2.5%.

For full year fiscal 2019, we expect net revenue in the range of $1.47 billion to $1.53 billion, representing growth of 20% to 25% year-over-year.

We expect adjusted EBITDA in the range of $20 million to $40 million or an adjusted EBITDA margin of 1.4% to 2.6%.

Finally, we expect CapEx to represent approximately 2% of net revenue for the year as we invest further in warehouse automation, headquarter space and proprietary software.

Please note, our revenue guidance does not include any impact of the U.K. launch, which we expect to occur at the end of the fiscal year.

Our adjusted EBITDA guidance, on the other hand, reflects the people and infrastructure investments we're making to support our international expansion.

These investments combined with the launch of our Kids category represent the vast majority of the decrease in our adjusted EBITDA year-over-year.

Finally, please note that 2019 is a 53-week fiscal year and that Q4 '19 will include 14 weeks.

Our 2019 guidance reflects the impact of this additional week.

With that, we're now ready for your questions.

Operator, I'll turn it over to you.

(Operator Instructions) We'll hear first today from Chris Merwin with Goldman Sachs.

Just 2 questions for me.

I think, last quarter, we saw that the growth acceleration in the business, one of the reasons you all gave was improving customer retention, and I was wondering if you could just talk about the underlying trends that you're seeing for retention for core Women's and also how we should be thinking about the incremental contribution of Men's, Plus and Kids in the context of your fiscal '19 guidance.

And then I've got a follow-up.

Great.

Thank you, Chris.

In terms of underlying trends in retention, I think there are 2 data points I would point you to.

One is we saw really strong revenue per client numbers this quarter, and I think that's really a testament to the cumulative efforts of retention and reengagement.

We also shared a new reengagement number, updating our number to 1 million clients who have been reengaged between 2014 and 2018, and I think both of those are a testament to kind of the strength that we're seeing in the retention side and what we're excited about.

And I guess, in terms of like the contribution of the businesses, I can have Paul take that.

Sure.

So our 20% to 25% revenue growth guidance for 2019 reflects sort of the trend we saw in 2018, which is continued strength in our core Women's business as we've added flexibility to the offerings, as we've added Style Pass to engage clients more often as well as scaling our newer businesses.

So Men's hit its 2-year anniversary this past year as well as Kids are just sort of early out the gate.

So we see sort of momentum in both fronts, and that's reflected in the full year guidance for the year.

Got it.

And just on gross profit on, I guess, gross margin specifically.

Obviously, you saw very strong quarter, and I think you called out, I guess, reduction in inventory reserve and clearance expense.

I guess, as we look into fiscal '19, should we think about a continued improvement in gross margin as you continue to scale the Men's and Plus businesses and become more official with those as well?

What is contemplated within the guidance that you've given?

Sure.

So our EBITDA guidance for 2019 reflects the same dynamics that we saw in 2018.

So underlying our businesses, we have the dilutive impact of new categories.

So Men's, Plus, and now Kids have lower gross margins today than Women's given that they're still very early in the journey.

But what's exciting that we saw in Q4 and again, sort of something we're focusing on for the next year is we're going to strive to soften those impacts in 3 fronts.

The first is our inventory management capabilities are really, really playing out, and our ability to buy product upfront correctly and getting through to the right client has really helped us reduce clearance over time.

So that's things like tools we're giving our merchants to rebuy and to size the inventory correctly and also the algorithms that drive our stylist tools to match products and clients.

Secondly, we're really excited that we're able to reduce shrink year-over-year and quarter-over-quarter, and that's been a big focus for us and a capability we're going to continue to build into the new year.

And then finally, while we're investing in new categories, we're seeing scale.

So Men's hitting its second year has allowed us to increase op margins for the business both quarter-over-quarter and year-over-year.

We added a third warehouse this past quarter for Men's.

That's going to be shipping cost.

So all those dynamics are really helping us mitigate the impacts of new categories.

And again, we're excited about the TAM expansion as a result of that, and the gross margin dynamics are reflected in the guidance I've given for 2019.

We'll hear next from Douglas Anmuth with JPMorgan.

I had a couple questions.

Maybe you can provide a little bit more clarity just on the 4Q revenue growth, trajectory just relative to what we saw in the third quarter, the 29% versus the 23%.

Second, on Style Pass, Kat, you talked about some of the early metrics at least qualitatively.

Just curious if that changes or perhaps accelerates, in any way, how you roll that out and expand it to more users.

And then just third, on marketing, you're seeing better returns on the TV side than you expected.

Any more color that you can add on kind of the plan around marketing as you go into '19 -- or your fiscal -- yes, your fiscal '19?

Great.

Yes, I think in terms of just the overall revenue growth, I mean, we're really focused on the full year here.

And so what we always shared, I guess, at this point and very consistent, I think, for a couple of years around kind of the 20% to 25% range and we were looking at that on an annual basis and really proud of the consistency that we've shown this year and I think, reflects kind of the way that we're thinking about next year.

And so driving this profitable growth and balancing between profitability and growth is something we've been committed to, and I think the results share that -- or the results reflect that.

And your question on Style Pass, we've been really excited about the early results.

I think these are clients who are performing in a really, really healthy way.

They're contributing a lot to the business.

And I think right now we feel like the program has rolled out to the proper audiences, but absolutely over time, as we see that our business is getting better, as we see that there's ways that we can lift all tides, it gives us optimism that there might be a broader opportunity for Style Pass.

But for now I think we're really pleased with what we've seen with the rollout and just really excited that this has been a way to really continue to keep clients excited over a long period of time.

Lastly, on the marketing, I think that what we've learned from the TV dark test is really more around how does TV actually perform in terms of delivering clients and also how does it impact other channels.

And I think the way to think about that is just that it's really us fine-tuning, understanding how all of our different marketing channels contribute to our portfolio.

Marketing diversification is something we've talked about for a long time.

And we always knew that TV was an important component of that, but I think having gone through this test and having really understood more granularly how TV impacts, I think, we feel like it's a really important part of the portfolio and you'll continue to see us invest there.

From Barclays, we'll move to Ross Sandler.

Hearing no response, we'll move next to Mark Mahaney with RBC Capital Markets.

Three questions.

One, just a follow-up on that -- Doug's advertising question.

Is the idea then that you've already turned back on that TV advertising.

I know you've talked about having turned it off.

Is it already turned back on?

Secondly, in terms of the -- reducing the wait times for Kids that you talked about, has that challenge already been addressed?

Or is that TBD, to be figured out?

And then maybe the last question, just in terms of the fiscal '19 guidance and maybe this one is for you, Paul.

The guidance implies the potential for acceleration as you go through the year, but you're not including a U.K. contribution.

Like broadly, what would cause that to happen?

What would cause the high end of the growth range to be higher as you go through the year than beginning of the year?

Or is that just the additional week?

Great.

Thanks, Mark.

I'll start out with the advertising question, and then also, I'll have Mike and Paul chime in on the other 2. I get the easiest question.

The answer is we have -- we will be turning -- we have turned TV back on.

TV is an important part of that portfolio.

It is pretty easy to turn back on, and the great news is that now it's even more measurable.

We understand its contribution even deeper, and you'll see us on the air.

I'll have Mike talk about Kids.

Yes.

So Mark, to your point, we have improved every week in terms of solving more demand than we expected in the Kids business.

It really was focused more on older kids and girls specifically, and we've been able to [chasten] the inventory to improve that situation week over week.

So it's in process, but we're really close to having it back to the normal wait times that we expected when we started the business.

And Mark, in terms of your question on FY '19 guidance, the 20% to 25% growth rate reflects the impact of the 53rd week, which is approximately 2 points of growth for the year but also reflects a whole series of initiatives we have laid out from a product and marketing perspective.

And we think that growth rate is a healthy growth rate.

It allows us to kind of deliver great client experience and also maintain profitability and be able to invest in new geographies like the U.K. So the ability to kind of hit the high end of the range is really just sort of the impact of those initiatives we laid out, and certainly, we'll give you an update.

We're 2 months in, and we'll give an update on future calls.

I'm sorry.

If I could, any particular reason why you chose the U.K. as your first international launch versus other markets?

Yes.

The U.K. -- the -- I think there are a lot of reasons that we're really excited and optimistic about the U.K. and maybe to step back, in general, international, I think, overall would be -- it has been a opportunity that people have asked us quite a bit about and one that we have spent a lot of time looking at and, I think, internationally broadly is an opportunity we're excited about.

And then looking specifically at the U.K., there's a couple of attributes of the U.K. consumer that I think are especially interesting.

One is really that it's already a very apparel e-commerce heavy audience and so clients there and the customers there are spending more online in apparel than they are in the U.S. And so that's definitely an element that we like.

It's also an audience that is a little bit less discount-oriented than the U.S. There's just not as much discounting there as there is here, and so that is also a helpful attribute.

And then lastly, I think just from a product market perspective, the idea of personalization, of having a personal shopping alternative to other e-commerce players is a really differentiated model in the U.K. and I think one that consumers are really excited about.

And so I think us being able to take an approach that truly is personalized and localized to the market allows us the greater possibility of success there, and I think we're really excited about the market for all of those reasons.

And from Piper Jaffray, we'll move to Erinn Murphy.

A couple of questions for me.

I recognized you took the TV off during the majority of the quarter.

But if you were to -- knowing what you know now about how effective that is, if that had been throughout the quarter as you may have had in the past, what would customer net adds have looked like?

Is there a way to kind of back into that?

And then, I guess, the second question as it relates to the advertising spend, it still went up year-over-year despite not having TV.

Maybe share some of the medium or kind of other areas that you're spending on within the ad budget.

Yes.

I can take those.

I mean, I think, on the first question around TV and just the specifics of it, unfortunately, we don't have that data to share.

And I think what we -- the TV dark test was really less about -- was less about volume in the quarter as much as it was really understanding and learning the impact.

And from that perspective, it was really successful and really important for us to run that test in order for us to run TV with confidence in future quarters and really understand how it contributes to our business.

And so I think that's really what we were looking for in that test.

On the latter question, year-over-year, our advertising spend was up, but actually our client growth is also -- we're at 25% net adds on the client side, and so we're really happy with kind of the returns that we're seeing on the advertising and marketing side.

That continues to be true.

And again, just as a philosophy, like, this is not a company where we are throwing all of the fuel and the kitchen sink in the fire on the marketing and advertising side.

We really operate with an ROI mindset.

We look for quick payback on those marketing dollar spend.

And that is still -- continues to be true this quarter, and certainly the learnings that we had in this quarter help us to make sure that, that's even -- it's even more accurate and true in future quarters.

And then just 2 more if I can.

One, I guess, for Paul.

On the guidance for Q1, you are expecting it to decelerate a little bit further even though you'll have a full quarter of the impact of Kids.

I guess I'm curious if you're being conservative on how you're planning Kids to ramp.

Or is that reflecting more of a deceleration in Women's?

And then a bigger picture question, my last one for you, Katrina, is just on VoIP commerce.

I'm curious kind of what role you see that playing in wardrobing.

And is that an area of investment that you're thinking to lead the team towards?

I'll take the Q1 question and turn it to Kat.

So our 20% to 22% revenue growth guidance for Q1, it fits into the broader full year guidance, the 20% to 25% growth.

We had made a series of choices in terms of the investments we're making in our core business as well as new categories.

And it's [going to put the cost] between quarters, but there's nothing specific to call out to Q1 versus the rest of the year.

We think it's a good growth rate and one that, I think, sure plays out for the long term.

And Erinn, thank you for your question on the voice side.

I think, voice commerce is in the bucket of a lot of other technologies that we see that we're certainly keeping an eye on, but I think, today, a lot of the voice commerce applications that you've seen have really been around the value proposition of like cheap, fast and convenient.

And I think what we found more broadly is that with apparel there's so much more nuance.

There's so much more to understand, and that, that cheap, fast and convenient value proposition just really isn't enough to help solve the true discovery element of how do I find clothes that fit me and my style and my occasion.

And so we look at a lot of the technologies that are being adopted out there in the market or haven't yet been adopted in the market, and this is certainly one of them.

But I think when we think about what are the most powerful tools that help people to discover the things that they love, this isn't one that we see as being kind of a primary tool in the toolkit yet.

We'll go next to Ryan Domyancic with William Blair.

So regarding the Kids launch, have you begun putting meaningful advertising dollars behind that new vertical yet?

Or are you marketing to that client base?

I think about half your client base currently have Kids.

And then if you haven't started putting paid advertising dollars behind it yet, when do you intend to put more dollars behind that new vertical throughout the 2019?

Yes.

This is Mike, Ryan.

I'll take that.

We have not put a lot of paid advertising against that.

We have a -- as you referenced, 1 in 2 of our existing client base has Kids, and they understand Stitch Fix and are excited about Stitch Fix.

And so it's not an easy sell to kind of convert them, but it's cheaper, obviously, to grow organically our existing client base.

We just look at the Kids business as trying to build it just like we have in all of our businesses, grow it the right way, meaning from a profitability standpoint, balancing growth and profitability primarily to deliver a great client experience.

So unclear on when we'll kind of put a lot of paid against it, but I think we're comfortable with the growth plans for Kids and really excited about the organic demand that we're seeing in Kids.

And we'll hear now from Ross Sandler with Barclays.

Great.

Can you guys hear me this time?

We can.

Okay.

All right.

Just 2 questions.

First, on the gross margin cadence.

So you guys have talked about how new categories take a while to kind of build up to where the core Women's business is.

Do you feel like the mix shift to Plus and Men's has fully cycled through at this point and we should be in a position to see steady gross margin improvement into the future kind of permanently?

And given that the U.K. is more of a geography rollout, not a new category, and you guys have a lot of history with the existing Women's category, how will the U.K. rollout impact gross margin, if at all, once that gets up and running?

And then the second question is just back to the retention kind of net adds earlier question.

So if we look at client net adds quarter-on-quarter, they were only up about 54,000 from last quarter.

That cadence was a little bit lower than the previous trend line.

So is that mostly just cutting back the TV program?

Or is there a different mix of one and dones from these new categories that are growing fast?

And any other color on the net adds would be helpful.

Ross, I'll take the gross margin question.

So looking ahead to 2019, we do expect the penetration of our newer category, namely Men's, Plus and now Kids, to be increasing at a higher rate than it was in 2018, and therefore, there will be a mix shift impact resulting from the higher penetration.

That being said, we're really excited to see sort of the strength of Men's, in particular, of the scale we're getting from that as well as being able to offset some of the dilution from the various cost efficiencies and other COGS focus areas that we've shown in Q4 frankly.

So certainly, we'll see those future business dynamics playing out.

But just to the U.K., I mean, we do expect the gross margins to be lower early on just like Men's and so forth.

It's going to be a smaller scale business, obviously, early on and so our buyers are going to be smaller.

We'll also be investing in inventory upfront to make sure that we kind of really are able to serve our new clients well, and that will probably translate to higher clearance.

So we have a road map here as we launch new businesses in new geographies that we'd certainly derive benefits over time as we scale and learn along the way.

And then, Ross, I can take your question on retention.

I think we're looking good in terms of kind of a year-over-year rate and we saw active clients grow 25% year-over-year.

We're really happy with kind of the foundational fundamental that really helped us to achieve that higher end of our guidance range.

We don't have any of -- we wouldn't say that this is a quality issue of like -- that we have more one and dones.

I mean, if anything, I think this is a business where we're really focusing on client quality and really focusing on ROI and LTV and how clients are demonstrating value over the long term.

And the more that we're able to learn through things like the TV incrementality test, the more we're able to hone that and really improve that over time.

And so I think these are -- our top line revenue is consistent with where we shared that we would be and consistent with where we plan to go in the future, and I think the underlying fundamentals are ones that we're happy with.

Anything further, Mr. Sandler?

No, that was great.

We'll move on to Youssef Squali with SunTrust.

One clarification, couple of questions.

So as you expand into the U.K., do we know whether you are going to be going with Women first or with the entire offering?

That's the first clarification please.

Yes, thanks for the question.

We're planning to go with Women's and Men's.

So Kids is still a newer business for us, so Women's and Men's will be part of the offering.

And would that include Plus as well or just Women and Men?

I think -- we're a little bit early, I think, to share the really specific sizes -- the really specifics around kind of which sizes we're going to cover.

There are also sizing differences between the U.K. and the U.S. And so I think we'll probably wait to share more details around that when we get closer to market.

Okay.

That makes sense.

And then I know you don't break out growth by segment.

But could you just help us maybe gauge the health of growth in core Women either on year-on-year basis or whichever just to kind of get a sense of how your oldest business continues to perform.

That's one of the questions we often get.

And then lastly, just broadly speaking on the competitive landscape, maybe you can just update us if there are any changes that you've seen out there that may make you change your mind either on the TAM or whatever.

Amazon obviously made a lot of noise last week with Scout.

Just for example -- as you take that as an example, how much of a threat is that to your -- to the growth in the business over time?

Yes, this is Mike.

I'll take the core Women's question.

The core metrics of the business had been healthy, and I can give a couple of category stories, I think, that kind of help demonstrate that.

We had mentioned in past quarters that we were expanding our offering in Premium Brands and lower price point brands, and we're seeing increased satisfaction scores and success rates in both of those offerings.

The other thing in Premium Brands that I continue to be excited about is this idea of evolving the conversations that we have with our Premium Brands.

For example, over 50% of our product now in that category is exclusive to us.

And I would say all of our conversations with contemporary brands and Premium Brands is around doing special products for us.

So the business is very healthy, and the underlying metrics are healthy.

But we do believe there's a TAM opportunity to continue to expand in Women's and believe that our investments in adding assortment as well as probably using some marketing against that will help realize that TAM expansion.

And then to answer your question on the competition, I mean, apparel has always been a pretty competitive space, and I don't think that's changed too much in the 7-or-so years that we've been doing the business.

In particular, I think a lot of the innovation that we've seen over the years has really been around this kind of cheap and fast value proposition, and we really haven't seen anybody address the really hard part of shopping for apparel, which is the discovery element of which jeans are going to be right for me, which dress is going to be right for the occasion.

And those are still things that we don't see a ton of -- we don't see a lot of other businesses that are really approaching it with a similar solution that's truly personalized and really incorporating each human element.

Specific to your question on Amazon, look, I mean, we obviously watch Amazon closely.

They also have 8% of the apparel market share.

And so if you think about kind of how much market opportunity there is out there, 92% of that opportunity is out there.

A lot of it is in stores.

A lot of it is in a pretty dispersed set of retailers, and we really think it's differentiated to be focused on how do we help people find what they love and really applying a truly human element to this very nuanced category.

And so we think we, of course, keep an eye on what's going on competitively.

We are very aware that it's a competitive industry, but at the same time, we have a lot of confidence in the differentiation of an approach that is a very human personalized approach.

(Operator Instructions) At this time, we'll go next to Ike Boruchow with Wells Fargo.

Two questions.

First, on the U.K. investment.

Maybe can you explain a bit what's behind the additional spend that you're making this year?

And then just putting some of that commentary together, is it a fair assumption to say that, all else equal without this U.K. push, EBITDA dollars this year would actually be higher year-over-year?

This is Paul.

I'll take that question.

So as is the case with a lot of our investments, it flows to the P&L.

So with our investment in the U.K. and launch by the end of this year, a lot of that will be on talent.

We know, as a personalization company, we need to have an ability to understand our clients well.

So we are building a buying team in-country, and also, we'll be ultimately building a styling organization over there.

So the -- sort of build out that capability next year and we'll be hiring ahead of the launch and making sure we have the right assortment and capabilities to do a very successful launch.

In terms of your question around broader EBITDA impact, as I noted in my comments, a lot of our year-over-year decline in EBITDA, as implied in my guidance, is due to the launch of U.K. and to a lesser extent, Kids.

I would also note that, as you look at marketing, we really see that as an opportunity for us to drive returns, and in 2017, we spent 7% of revenue.

We increased that to 8% in 2018, and we do see an opportunity to step that further in 2019.

Not only do we have a diverse set of channels on which we can communicate our offerings.

We're also -- with Deirdre Findlay, our new CMO onboard, we're just trying to think about brand and how do we continue to build out love with both our existing and future clients.

So we see certain opportunity to expand our marketing spend and also through -- embed it in the EBITDA guidance for 2019.

Got it.

And then just a quick follow-up.

So sticking with the U.K. How do you think about -- I guess, higher level, how do you think about scaling that market relative to the U.S. market?

Because I believe the U.K. is a much smaller apparel market and online penetration rates are lower than in the U.S. So again, trying to -- just curious how you're going to frame the ultimate opportunity there versus what you guys are working on here in the U.S.

Yes.

I mean, we've been really -- I think the data, to us, is really optimistic in terms of the size of the market.

It's a market where there is 50 million people.

Yes, that's smaller than the U.S., but it's a really sizable opportunity, I think, relative to some of the other markets out there.

And actually, what we found is that there's a lot more -- there's a much higher penetration of e-commerce shopping in the U.K. than in the U.S. I think it's a smaller country.

Shipping times are faster.

People are much more used to shopping apparel at an e-commerce format than they are in the U.S. And so I think both of those give us some really positive signals that the U.K. is a really right kind of opportunity for us.

And we'll hear now from Edward Yruma with KeyBanc Capital Markets.

I guess, first on the U.K. spend, how should we think about the shape of the U.K. spend through next fiscal year?

Is it back-end weighted?

And then, I guess, second, you used to give some detailed cohort performance data in terms of that Women's -- core Women's spend.

I guess, when you look at that core female that's maybe 3 or 4 years customer at Stitch Fix, I guess, kind of how has her spending changed?

And are you starting to see some better results from things like Extras that can include -- that can increase that take rate?

Great.

I'll probably have Paul start out, and I'll jump in on the cohort.

I think, directionally, given a good portion of our investments in U.K. is talent, we'll be increasing it over the course of the year.

We've hired a general manager and a head of buying, and they'll be starting to fill out the team now that we've publicly announced the launch.

So you will see that ramp up over the course of the year.

Yes.

The question on cohorts, I think, when you're looking at 3 to 4 years out, I mean, firstly, we are operating on an ROI like mentality when we're thinking about marketing.

And so we're really looking for quick payback, and as cohorts get to those 3-, 4-, 5-, 6-year marks, they continue to add value to the business.

That's all really incremental to the spend that -- the kind of initial spend there, and that's something that is really important to the business.

I think, revenue per client is probably one good place to look at, is to really think about how we've been able to generate more value from those clients.

Extras definitely has something to do with that.

Style Pass, which we shared some enrollment numbers or kind of enrollment expectations around in being able to see a lot of opt-in on Style Pass, and those are clients that are spending more, that are higher value clients.

I think these are all initiatives that really help us certainly in those first few years but definitely in those years, 3, 4, and 5 as well as we're -- as we're kind of looking at cohort health and continue to be excited about what we see there.

Great.

And one final if I may.

I know that you've had some favorability from a shrink perspective.

Is that tied to kind of how you would have initially thought the new categories would have progressed?

Or is that against the core Women's business?

And I guess, if we think about all the new categories and then soon, I guess, the new geography, how do we think about your opportunity to kind of continue to move that shrink number lower?

So I'll take that.

So yes, we've seen shrink increase over the past 1.5 years.

And while we've seen that across the board, as we've expanded in new categories, [mainly] Men's, the Premium Brands, we have seen a correlation there.

And I think you're seeing results that are sort of concerted efforts across the organization to be very tenacious on managing that through engineering work to make sure we validate credit cards as well as helping our customer service agents upfront identify clients who are likely fraudulent.

So as we expand to new geographies as well as new categories, rest assured we see this as a capability.

We either continue to bolster and strengthen, but again, I think Q4 is really exciting to kind of see the -- sort of the results of our efforts today.

And with that, I'd like to turn things back to Katrina Lake, Founder and CEO.

Great.

Thank you again for joining us today.

We look forward to seeing you on the road and keeping you updated on our performance.

And that will conclude today's conference.

Again, thank you all for joining us.