Stitch Fix Inc (SFIX) 2020 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Stitch Fix Second Quarter 2020 Earnings Call.

Today's conference is being recorded.

At this time, I'd like to turn things over to David Pearce, Vice President of Investor Relations.

Please go ahead, sir.

Thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2020.

Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix; and Mike Smith, President, COO and Interim CFO.

We have posted complete Q2 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 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 our 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.

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 thanks for joining us.

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

I'm pleased to share our second quarter results with you today and to provide color on our Women's category and the margin glide path with Men to date.

I'll then give an update on our direct buy platform, which we believe will drive even greater client engagement over time, before providing some color on our updated FY '20 outlook.

But first, I'll take a moment to highlight our results for the second quarter.

In Q2 '20, we generated net revenue of $452 million, in line with our guidance and reflecting 22% year-over-year growth.

We delivered $11.4 million in net income and $14.3 million in adjusted EBITDA at the high end of our guidance.

Adjusted EBITDA, excluding SBC, was $30.1 million.

During the quarter, we grew our active client count to 3.5 million, an increase of 504,000 clients and 17% year-over-year.

In addition, we grew net revenue per active client by 8% year-over-year, our seventh consecutive quarter of growth and a reflection of our ability to expand wallet share and deliver value to our clients.

I'd now like to take a minute to discuss our growing Women's and Men's offerings.

Stitch Fix has generated positive adjusted EBITDA every fiscal year since 2015, which has allowed us to reinvest in our business and in new category growth.

Our strategy is to drive leverage across our existing offerings, while using the cash from those offerings to invest in newer categories.

Over the years, we've demonstrated our ability to expand into new categories, geographies, price points and even form factors, enabling us to better serve the needs of clients across our large addressable market.

To illustrate this reinvestment strategy, I want to provide more detail around both our Women's category and the progress we've made with Men's.

In past years, we've reinvested those dollars to fund our Men's category.

And today, these cash flows fuel the growth of newer offerings such as Kids, U.K. and direct buy.

Women's currently represents a large majority of our business.

Not only do we serve millions of active clients in this category, we've also delivered year-over-year growth in both Women's active clients and revenue every quarter on record.

In addition, we've demonstrated year-over-year growth in women's revenue per active client in each of the last 7 consecutive quarters.

When you pair this with our strong inventory management capabilities, we've seen U.S. women's gross margins in our first 2 quarters of 2020 surpass our 45% to 46% long-term target, which helps us to consistently deliver our positive cash flows.

We continue to see opportunities to drive further growth in Women's.

One area in particular is Plus, which comprised less than 10% of our U.S. Women's revenue last year but which we believe represents a total U.S. market opportunity of approximately $20 billion.

We see potential to better serve Plus clients by expanding our assortment across end uses and price points, creating additional avenues for engagement through more relevant marketing campaigns and leveraging our data feedback loops with clients and vendors to better address clients' fit needs.

Plus is just one of several areas where we're focused on driving growth within women's.

The balance of growth and profitability in our Women's category reflects the type of profile we seek to build for each of our offerings.

At just over 3 years old, we believe our Men's category is still in the early stages of growth, but has already achieved significant margin scale in a short period of time.

With new categories, we use a launch-and-learn approach, making smaller early inventory buys, concentrating inventory at fewer distribution centers and taking risks and experimenting to learn quickly about buying preferences.

Over time, we apply those learnings to make smarter, larger buys, extend inventory to multiple distribution centers and strengthen our personalization.

While Men's is still maturing, we're pleased with the progress we've made in executing on this strategy so far.

We've now expanded our Men's assortment from 2 distribution centers to 4, resulting in more than 300 basis points of shipping leverage in fiscal 2019.

We also continue to strengthen our exclusive brand portfolio, which is approaching half of Men's revenue, driving higher margins.

All together, our strategy has resulted in Men's revenue quadrupling and gross margins increasing by more than 1,500 basis points from fiscal 2017 to fiscal 2019, and we believe there is still room for additional scale.

In fiscal 2020, we expect our consolidated gross margin to remain relatively stable with strength in Women's and Men's margins, enabling us to support our seedling Kids and U.K. categories.

To briefly update you on our Kids category, we continue to be pleased with its performance.

In Q2 '20, we introduced Shop New Colors to approximately 1/3 of Kids' clients, giving parents an opportunity to not only stock up on more of the items their kids love, but also find previously purchased items and new sizes as kids grow.

While we're excited about the opportunity to continue growing and extending the offering in new ways, Kids is still a young category, and we remain in launch-and-learn mode.

So we have plenty of headroom to scale the offering over time.

Now an update on the exciting initial results we've seen in our direct buy platform, which we believe is highly complementary to our fixed offering and will play a key role in unlocking additional market opportunity as we seek to attract new clients and drive stronger relationships with current clients.

As a reminder, our integrated direct buy platform allows clients to shop and select the items they love based on our hyper-personalized recommendations and understanding of the pieces they have already purchased from us.

Style Shuffle data, in particular, has been valuable in achieving this early direct buy momentum, specifically in how it informs our personalized outfit-generating algorithm.

As of the end of Q2, we've collected over 4 billion Style Shuffle ratings with well over 80% of our active clients providing detailed feedback.

This rich data informs our styling recommendations, and we plan to continue leveraging it across our direct buy platform and Fix offering to deliver enhanced client outcomes and experiences.

In Q2, we also began collecting client feedback data on shipped, direct buy items, which will enable us to further strengthen our personalized recommendations.

In addition, we enhanced our algorithms to further diversify the looks we present to clients, resulting in increased conversion and items sold per client.

What's really exciting about direct buy is we have observed its incrementality in terms of both client spend and unit economics.

During our Shop Your Looks beta test, which ran from October to January, we found that clients in the beta spent more money with Stitch Fix overall than clients without access.

And we saw, in the aggregate, no reduction in the number of Fixes they ordered as they engage with our new Shop offerings.

Looking at unit economics, the direct buy margin profile is already comparable to the Fix profile, even though currently, each direct buy item is shipped separately.

We're able to deliver these strong unit economics through the combination of very low return rates because of the accuracy of our algorithms and variable cost savings tied to direct buy's recommendations being fully algorithmically driven.

As we grow direct buy, we see opportunities to continue to drive even stronger margins and client outcomes.

In line with our plan to introduce Shop Your Looks more broadly in fiscal 2020, we rolled out the functionality to all U.S. Women's and Men's clients in Q3.

While we're excited to continue growing adoption as we expand direct buy, it's still early days, and we continue to take a launch-and-learn approach with this offering.

As a result, we plan to make ongoing improvements to direct buy as we build on our learnings and seek to unlock more opportunities for clients to engage with us over time.

Before I hand it over to Mike, I'd like to discuss our updated FY '20 outlook.

Now that we've seen a few company specific but also macro themes play out in Q2 '20, we're leaning more conservatively in the back half of 2020 and shifting our full year outlook.

First, in Q2 '20, we drove healthy active client growth.

However, due, we think, to the heightened promotional activity across retail, those clients spent less with us in their Fixes in the quarter on average, resulting in lower order value than we anticipated.

We think it's responsible to reflect this trend in our second half forecast.

Our strategy to continue to grow our assortment of lower-priced products to serve a broader universe of clients also impacted guidance.

Next, while we expect our customer acquisition cost in the second half of FY '20 to be approximately flat year-over-year, we've seen costs rise in some key digital channels.

We're working on both product innovation as well as experimenting into new and emerging channels to offset this, but we are applying more conservatism in the way we are thinking about our marketing spend in the second half of the year.

In addition, we are evolving our product and messaging given direct buy's early success.

And now plan to redeploy brand marketing dollars in the future, once our messaging fully incorporates direct buy and our offering can appeal to an even larger audience.

As a result, we plan to modestly lower our overall marketing spend through the end of fiscal 2020.

I'd also like to spend a moment on macro themes that lead us to approach the back half of FY '20 with more conservatism.

First, our U.K. revenue has been lower than anticipated as we adapt our offering to the market and because of the macroeconomic climate tied to Brexit, which has sustained longer than we had expected.

In addition, the coronavirus continues to be a fluid situation that we are watching closely.

To date, we haven't yet seen a material impact on our business.

That said, we continue to monitor development and are working closely with our brand and manufacturing partners to mitigate future impacts.

We recognize this is a dynamic situation.

And while it's too early for us to quantify total potential supply chain or client demand impact at this point, it's reasonable to expect we'll see some impact.

We are evaluating trends as the situation continues to develop, which contributes to our conservatism as we approach second half guidance.

Stepping back, we remain really excited about our future.

We see a lot of potential in direct buy to capture a greater share of our addressable market.

And as a company, we're focused on our mission to help people find what they love and our capabilities to deliver against that mission have grown stronger.

With that, I'll hand it over to Mike to share more on our financial performance and outlook.

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

Before I share our Q2 '20 performance, I'd like to take a moment to share my excitement about stepping in as interim CFO.

As some of you may know, I've been part of the Stitch Fix family for nearly 8 years and have held multiple executive roles during that time.

Being here from the earliest stages of growth to overseeing our category and operational expansion in the U.S. and internationally has given me the opportunity to wear many hats at Stitch Fix, and I plan to draw on this knowledge as CFO.

As I step into this role, I'm eager to add more color and additional context to risks and opportunities that drive our business and help inform our strategy to help investors understand our business better.

With that, I'll discuss our Q2 results.

Our Q2 net revenue of $452 million represented 22% growth year-over-year, in line with our guidance.

This reflects growth in both Women's and Men's as we continue to build out our Kids and U.K. categories as well as early progress in our direct buy functionality.

Active clients grew to 3.5 million or 17% year-over-year.

Net revenue per active client grew 8.3% year-over-year, representing our seventh consecutive quarter of growth.

Note that the net revenue per active client calculation is based on the last 4 fiscal quarters and benefits from the extra week in Q4 '19, while active clients is measured over 52 weeks.

The 53rd week contributed approximately 2% to net revenue per active client.

Q2 gross margin was 44.8%, 70 basis points higher than Q2 of last year.

This was driven by improvements in merchandise costs and operational efficiencies, partially offset by an increase in shipping costs.

Q2 advertising was $35.6 million or 7.9% of net revenue, with brand spend representing approximately $3 million in the quarter.

Other SG&A, excluding advertising, was 35% of net revenue in the quarter, reflecting investments in payroll and stock-based compensation to attract and retain top talent.

Q2 adjusted EBITDA was $14.3 million or 3.2% of net revenue, driven by investments in advertising, talent and our U.K. expansion.

Adjusted EBITDA, excluding SBC, was $30.1 million or 6.7% of net revenue.

Our Q2 net income was $11.4 million and diluted EPS was $0.11.

In the first half of 2020, we delivered free cash flow of $27 million and ended Q2 with 0 debt and $397 million in cash, cash equivalents and highly rated securities.

Our healthy cash flows continue to enable us to self-fund our growth while maintaining flexibility.

I'd like to take a moment to provide more visibility into our self-funded investments and the impact they have on our adjusted EBITDA.

We believe these investments widen our personalization moats and fuel our business.

First, we continue to invest in U.K. merchandise styling and operations, which we expect to be between $25 million and $35 million in fiscal 2020, having already deployed $13 million in the first half of the year.

Our track record of successfully scaling categories gives us conviction behind this investment and the broader opportunity to internationalize.

Second, we continue to execute against our 2020 plan of investing approximately $75 million in stock-based compensation to attract and retain technology talent that will enable us to enhance our product and fuel our long-term growth.

In 2020, these self-funded investments across U.K. expansion and SBC will total $100 million to $110 million.

While we are absorbing the impact of these expenses in our full year adjusted EBITDA guidance, we believe they will enable us to fuel further growth and drive meaningful market share gains over time.

Now to our outlook.

As Katrina mentioned, we are lowering our guidance for the full year.

For fiscal 2020, we are now expecting net revenue in the range of $1.81 billion to $1.84 billion, representing growth of 15% to 17% year-over-year.

Adjusting for the impact of the 53rd week in 2019, this range reflects growth of 17% to 19% year-over-year on a 52-week comparable basis.

With the flow through from our revised guidance, we are updating our adjusted EBITDA to be between 0 and $10 million, with adjusted EBITDA, excluding SBC, in the range of $75 million to $85 million.

Our SBC forecast for fiscal '20 remains unchanged at $75 million.

In the first half of fiscal '20, we spent $28 million in SBC, resulting in $47 million expected in the second half of the year.

For Q3 '20, we expect net revenue in the range of $465 million to $475 million, representing growth of 14% to 16% year-over-year.

We anticipate that this will be driven by continued growth in revenue per client as well as year-over-year growth in active clients in the period.

In the quarter, we expect SBC of $23 million as we continue to invest in our technology teams to support growing initiatives like direct buy.

As a result, we expect Q3 adjusted EBITDA in the range of minus $10 million to minus $4 million.

Adjusted EBITDA, excluding SBC, is expected to be in the range of $13 million to $19 million.

In summary, we continue to be excited about the opportunity ahead of us as we make investments across product, international expansion and talent, which we believe will fuel our personalization capabilities and allow us to capture greater market share over time.

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 Ross Sandler with Barclays.

Katrina, you rattled off a couple of factors influencing the guidance for back half.

So I guess, first, can you talk about, from a macro perspective, what you're seeing in terms of the supply side of your business?

Is there any disruption in terms of inventory coming in from China or elsewhere?

And then second, from the demand side here in the U.S., how much of the deceleration is from recent drop off in consumer spending related to coronavirus versus some of the other items you mentioned, like the marketing cost inflation in the U.K. running a little bit below plan?

Any color there in terms of parsing out would be helpful.

Thanks, Ross.

And yes, good questions.

I think on the first, just on the factors that are influencing and how much of this -- what are we seeing on the supply chain side, the honest truth is, like, we're really still in the middle of this.

We -- I think, thankfully, due to -- not quite thankfully, but when we did a lot of the work around tariffs, we really got a handle around our kind of understanding of our dependence on China.

But the reality is, like the supply chain is really deep.

And then there are fabrics, there are components, and so we're really right now in the middle of working with our vendors.

We really -- we do anticipate it will have some impact on our business.

But the reality is we don't quite have an exact number at this time, but we do anticipate it will impact our business.

On the demand side, what we said in the call, which is that we don't see any -- it hasn't impacted our results to date.

That being said, it would be reasonable to expect that there's a lot going on, on the macro world right now.

And definitely, the combination of some of the trends that we talked about in the call, in addition to what we're seeing in the world, really leads us to take a more conservative approach to guidance.

And so I think long term, we're still super excited for all the reasons that we talked about.

We're really excited about what's happening in direct buy.

We feel that we're really well positioned, I think, in a range of potential external outcomes.

But we also felt like we needed to acknowledge the short-term state of affairs.

We'll hear next from Doug Anmuth with JPMorgan.

This is Cory Carpenter on for Doug.

Two questions, if we can.

First on direct buy.

Now that it's rolled out to all Women's and then clients in the U.S., where do you still see the most opportunity to innovate as we go through the year, especially as it relates to direct buy as a potential customer acquisition channel?

And then on the U.K., I was hoping you could expand some on where you've seen more challenges relative to your expectations?

And how does this impact how you think about investment here going forward?

Thanks, Cory.

I'd like to do your U.K. question first and come back to direct buy.

On the U.K., simply, I think there's some expected -- we always launch and learn into a new business.

And in the U.K., we're still doing some of that learning.

And so our guidance reflects some of that.

And then the macro environment in the U.K., I'd like to be clear, we launched into an environment that we knew was macroeconomically challenged, but that has definitely sustained longer than I think any of us would have thought.

At a high level, we're still really excited about the opportunity for international, in general, for Stitch Fix.

And I think in the U.K., really being able to personalize the offering from an assortment perspective, but even from a product perspective, is an opportunity that we're really excited about.

And then relatedly, I guess, on direct buy, I think we're still in the very, very early stages of what the impact of direct buy can be on our business.

I think today, our product, it's a great product, but it also -- it's not totally optimized yet.

And the user flow is not totally optimized, even for the feature for our existing clients.

And then to your point around thinking about this as a way to be able to broaden the easily accessible market opportunity for us to capture more of that opportunity, that's absolutely one of the things that we are most excited about is to be able to allow people to engage with personalization in a new way and one that doesn't necessarily depend on a Fix.

And so we're actively working on that.

No news to share yet, but it's -- I mean, it's really, really exciting opportunity for our business.

We'll hear next from Erinn Murphy with Piper Sandler.

A couple questions for me.

I guess, first on the promotional activity, Katrina, that you referenced.

You also referenced that the Women's business, in particular, was already over your long-term target of 45% to 46%.

So just trying to reconcile kind of what you're seeing out there.

Is this something you're expecting to hit really in the third and fourth quarter, just reconciling those 2 comments?

And then I have a couple of clarifications.

Sure.

Yes.

On the Women's side, we wanted to share a little bit more on the margin profile, just to really be able to add some specificity to the color that we've been sharing around our business model being one where we can use the cash flows from our businesses to reinvest into new businesses.

And so we're really proud of the women's gross margin.

It has been at a really healthy point.

And that gross margin is -- it's a bunch of things.

It's the leverage that we have with our vendors.

Our vendors are very happy partners with us.

And so being able to have high initial markups contributes to that.

Being able to use the data to drive down clearance to be able to drive up success rate and having more likely that clients are finding the products that they love, that helps that minimizing clearance over time help.

And so those are kind of the inputs into that long-term margin.

It's a little bit different than maybe what we were referencing in terms of the promotional activity, and that's really that we saw -- in this last holiday season, we experienced it to be especially promotional, both in terms of kind of the depth of discount, also in terms of the length of time of promotional activity.

And so we believe that that impacted our business more on the demand side during that time period.

And so we -- while some of those trends may not kind of continue through the rest of the year, we felt that it was appropriate to kind of factor in some of that, just making sure that we are using the best available knowledge that we have as we set out expectations for the rest of the year.

And Erinn, this is Mike.

The only thing I would add quickly is, I actually think they're very related, the promotional activity and the gross margin that we talked about in Women's, and that we are not promotional or a full price retailer.

We're one of the few retailers, as you know, that has gross margin expansion.

Again, we're 70 basis points higher year-over-year, and a lot of that's driven by kind of the investment that we have and the success we have in our Women's business.

And so they are linked, I think, in a very positive way for long-term kind of success of the model.

Okay.

And then just 2 follow-ups for me, really, maybe, first, on inventory, just as we're talking about the gross margin.

It seems a little high at 43%, when I look at the mid-teens guidance for the third quarter.

So just curious on what is -- if you believe you have any actions to take, what will those look like?

I know you'll start -- will you start to see inventory and sales kind of link up a little bit more?

And then the second clarification on the guidance, Mike, this is probably more for you.

Q4 revenue guidance has implied around mid-single digit.

Can you just talk about what your assumptions are for revenue per client and active clients in the fourth quarter?

Yes.

So 2 things.

First, on the inventory, it is a little higher than what we had expected.

And a lot of that comes from just having taken sales down a little bit.

And the investment that we made last year that we talked about, where we missed Q2 sales in last year and want to make sure that we had enough inventory to take care of kind of sales demand this year.

I would say that because we're not a huge fashion-forward kind of company, I'm not overly concerned about inventory risk or actions that we need to take in the short term.

I think in the back half of the year, I do expect there to be some misalignment with sales versus inventory, but I expect that -- we're not talking too much about 2021 yet, but I expect that to be more in line in future years.

And then on your comment about sort of single-digit guide.

I think if you look at it on an adjusted 52-week basis, it's still double digits in terms of both Q3 and then implied Q4.

And from Goldman Sachs, we'll hear from Heath Terry.

Great.

Katrina, you mentioned, you're seeing a more severe competitive environment in the most recent quarter having an impact on keep rate.

Wondering if you could delve into that just a little bit deeper.

I mean keep rate has been one of the breakpoints in terms of driving AOV over the last few quarters.

And so just relative to what you had been seeing in prior quarters, what really changed here?

And how you're expecting that to continue?

Or sort of what's factored in relative to competitive environment in your forward guidance?

And then, Mike, when we look at the shift in profitability guidance, you mentioned the change in marketing -- expected spending in marketing in the next couple of quarters.

Can you give us any more detail on some of the other major line items in terms of where the rest of that change in spending level or profitability is going?

Yes.

Thanks, Heath.

On the first was keep rate, one of the benefits of being this really great data-driven business is that we have a lot of ways that we can really look at what we're seeing and try to parse out how much of this is pricing, how much of this is the customer.

And so I think what we did, we've taken a lot of pride in the fact that we've been able to get a lot of -- a lot better with recommendations over time.

You see that with the revenue per client growth that we've had, and we anticipate we'll have more of.

On the keep rate front, what we could isolate was that we saw some element of that keep rate.

That was kind of not something you could attribute to, as an example, lower price point.

So lower price point has been something that we have continued to invest in.

And so you could imagine that would have an anticipated kind of impact on something like AOV.

And with keep rate, we saw -- it's highly -- like kind of part of the time frame.

But I think we can isolate that to say that this is likely something that has to do something with a competitive environment.

And so we feel it's responsible to kind of map that into the kind of the full year.

That being said, we still feel really strongly about the strength of the personalization capabilities that we have.

We're excited that we have had revenue per client growth and continue and plan to have that continue.

And so we think it probably was more related to just an exceptionally promotional time period.

Yes.

And this is Mike, Heath.

I mean, on the exceptional promotional activity, I mean, I do think a shortened holiday season, in terms of selling, had some influence on that, too, where I feel like some apparel folks were probably more promotional than they even wanted to be because they had to get rid of inventory in a shorter selling period.

So I think that had some impact on what we saw on our business.

On the profitability, the biggest driver is, in addition to sort of the marketing call out that you've made was, SBC U.K. and the flow through of the revenue guide.

And so those are the big ones.

It is not a heavier investment that we're making.

It's the same investment that we talked about at the beginning of the year, our commitment to the U.K. and our commitment to talent.

And it's just -- it's like we said, $25 million to $35 million in the U.K. and $75 million in SBC, and we're still committed to both of those things because we know it's right for the long-term value of the business.

We'll move on to Edward Yruma with KeyBanc.

I guess, first, just really quickly to follow up on the SBC.

Are you starting to see kind of more favorability in trend from a hiring perspective, given what's going on the private side?

Second, just -- I don't know if you're willing to doing it more clearly, but how incremental is direct buy for the balance of the year?

And then really, finally, any other learnings from U.K. international?

I know macro is tough there, but any kind of operational issues you're sorting through would be helpful.

Yes, thanks for the question.

On SBC, I think we have benefited a little bit, and I anticipate that if kind of current trends continue, we'll really benefit a lot.

But we -- our position from a hiring perspective has probably kind of increased in strength as people are looking for strong, healthy businesses to join.

And so we anticipate that will hopefully continue to be favorable for us.

On the direct buy, I mean, one of the things that we're most excited about with direct buy is that it's so incremental.

And so what we're seeing with direct buy is that clients who in the beta test that we did, which is an A/B-Test, we found that clients just by having access to direct buy those cohorts were spending more with us, and at the same time, not getting fewer Fixes.

And so we're really, really excited about that.

And we talked earlier in the call about how excited we are about kind of continuing to invest in that capability and really opening up potentially new clients as well in the future.

And then lastly, your question on the U.K., I mean, we're learning a lot.

And just as an example, being able to serve a multitude of shipping partners.

And so in the U.K., people want to be able to choose their shipping partner, whereas in the U.S., people care less about that functionality.

And so that's something that we launched, we learned.

We were able to incorporate those learnings into a better product.

And so I think we're really -- we're still -- we continue to be super optimistic about the U.K. and we're excited that we can take those learnings and very quickly put those out to market.

And Youssef Squali with SunTrust has our next question.

So 2 quick questions.

Maybe the first for Katrina.

On the Shop Your Looks, have you started engaging dormant accounts already?

If not, why not?

Is the product ready to also be trying to engage the dormant accounts.

And if you can maybe quantify the number of dormant accounts that you've had over the years, maybe at least over the last 2 or 3 years.

And then, Mike, not to beat the dead horse here with the guide.

But as you look at the macro versus company-specific issues, any -- how did you go about kind of coming up with the new guidance?

Is there a way to kind of at least directionally help us is the majority, primarily driven by that unknown macro issues that you referred?

Or is it majority, basically, company-specific issues like competition, you've talked about lower marketing spend?

Yes.

Thanks for the great question, Youssef.

On the -- on Shop Your Looks, I mean, honestly, today, Shop Your Looks is really only oriented against current clients who get Fixes.

And so currently, Shop Your Looks has an anchor piece of an item that you have already kept from Stitch Fix.

And so if you hadn't kept something in your Fixes and Stitch Fix, you're not going to have Shop Your Looks.

And if your items are very old, as somebody who's "dormant" might be, it's not going to be very effective.

That being said, that's an area that I think is really interesting for us.

I think there's both people who engage with Stitch Fix a long time ago and haven't engaged recently.

There's also this category of clients who have signed up, shared a lot with us about who they are, but haven't yet gotten the Fix.

That is also a potential audience.

And so I think those are -- as we think about where do we take Shop Your Looks and direct buy and what are the kind of next lowest hanging fruit that are interesting opportunity.

Those 2 are definitely significant components there.

In terms of the guidance in macro, I mean, I think what we can say is that we saw these trends in the business, and that, coupled with the uncertainty and the risk of the macroeconomic environment, leads us to lean in a more conservative place.

And so we saw these trends in the business in a much more optimistic macro environment, you might actually be able to feel like you can make things up with initiatives and kind of lean to the more optimistic side.

And I would say in our case, given what you see in the macro side, like, we felt it was prudent to be more conservative.

And from Wells Fargo, we'll hear next from Ike Boruchow.

I guess the first question I had was on the AOV trends.

Either Katrina or Mike, could you maybe remind us where AOV is today?

And then maybe just where that had been trending over the prior 6 to 12 months?

And then what's most important, I guess, is what kind of AOV decline are you now baking into the revised 2H plan?

Ike, we have not shared AOV in the past, and that's not a metric that we plan to share going forward, and that's really because, as our business evolves, you can imagine that as we're doing direct buy as there's many other ways to engage with our business.

The kind of the way that you think about that denominator really changes over time.

Directionally, I think some of what you can look at is revenue per client, revenue per client has been something that we've grown over time, and we've shared in disclosure at the end of FY '19, what keep rate trends have looked like over time.

And so as you can imagine, like our keep rate goes up, that is a positive.

That is a -- what a positive potential current towards AOV.

And so I guess, we continue to be super excited about kind of our ability to personalize for clients, our ability to be able to continue to drive healthy engagement with Stitch Fix.

And so we believe that we will continue to drive revenue per client.

But I think our definition of AOV is going to fluctuate as the business becomes more personalized and have other channels.

And so I think revenue per client growth is going to be the best way to think about our business.

Well, maybe if you don't want to disclose AOV, that's fine.

Is it possible just to say embedded in your guidance, what type of year-over-year decline?

I'm just trying to get an understanding of the magnitude of the AOV decline that's now baked into the back half?

To be clear, I don't think we've shared -- I don't think we've said that we're planning on an AOV decline.

Got it.

Okay.

Just moving on to the marketing.

So I think you said in the prepared remarks, modestly lowering marketing in 2H.

Are you talking about lowering total marketing dollars, should we expect those to be down in both 3Q and 4Q.

I'm just trying to make sure I understand what you mean by that.

So on the marketing side, there's -- I think there are 2 things.

So one is that we've seen within -- we're still planning to have kind of our year-over-year customer acquisition cost be about flat.

And so we share that in our remarks, and that will continue.

The -- I think the underlying thing is that we are seeing some digital channels be more -- be more competitive.

And so Facebook, as an example, is a great channel for us, in general.

We've seen that channel get more competitive.

We've been very lucky or good that we have consistently had this diversified marketing strategy, so that we're never overdependent on 1 channel.

And so we believe that we can invest in other channels.

But I think that being able to think about kind of our marketing and knowing that there's risk in kind of this 1 channel that's growing, like that's something that we want to be more conservative on.

And then the second piece is brand marketing, and that is something that we anticipate we are going to -- that we are planning to push out.

And so we had some brand marketing spend that we had anticipated in the back half of this year.

The reality is we're evolving our product, incorporating direct buy and Fixes.

And having a new marketing messaging is a really important way to think about kind of the new products and how we engage with clients.

And so we are postponing that spend and plan to spend that in the future.

Got it.

And one more, if I can.

Just on the 2H, the top line, around 15%.

I mean you obviously targeted 20% to 25% since you guys been public, and you've been hitting those plans.

Should we assume this kind of more moderate growth is kind of the plan going forward?

I mean I'm just kind of curious how we think about the top line algo when we think out multiyear on the business?

Yes.

Ike, this is Mike.

No, I don't think you should assume the plan has changed in the 20% to 25% algo.

We're trying to reflect kind of current trends that we're seeing to earlier question, more macro than sort of company-specific challenges, and we feel very confident in things like direct buy and how, in the future, how big an opportunity that is for us.

So no change in the outlook.

We'll move next to Janet Kloppenburg with JJK Research.

I had a couple more questions on the promotional environment and what's embedded in the full with guidance.

I think, Katrina, you said, it was -- you think that the holiday season is a promotional one.

So I'm wondering if you're seeing promotions abate now and become less of an impact on the business or if you can continue to incorporate that into the guidance.

And then secondly, as we look forward to next year's holiday season, I was just wondering, besides lower opening price points, what some of your strategies might be to combat what is always a very promotional environment, particularly for apparel in the holiday season?

And I have a follow-on as well.

Sure.

Thanks, Janet.

In terms of the holiday season and forward guidance, I mean what we saw was less AOV growth than we anticipated.

And so we attribute some of that to just people seeing a lot of really steep deals elsewhere.

And that's kind of what we saw within that holiday period.

We didn't anticipate that that would sustain through the whole year, but we also felt like we couldn't -- that we needed to reflect at least some of that as we thought about the rest of the year.

And so we didn't kind of extrapolate exactly what we saw and put it to the full year, but we did -- it did kind of give a pause and helps us to see a more conservative approach there.

In terms of kind of next season or even just like broadly speaking, what's great about our business, as Mike started out is that we are -- we're not a promotional business.

Like we don't win for having the steepest discount or for having kind of like the cheapest jeans out there.

Like the way that we win is by having the right jeans that fit you.

And that's something where I think that you're not going to have as much elasticity around and that's a product category, the whole product categories that we're in, we feel really excited about because they are the pieces that you wear over and over and over again, and you really care about some of those features, and you're not necessarily buying it because it's the cheapest.

And so yes, of course, our investment in lower price point, which we have been investing in, and we continue -- we plan to continue to invest in, that certainly will help.

But we really believe that the way that we win long term is by being able to deliver the most personalized experience for people and the 1 that is most able to be able to help people find what they love.

Okay.

Great.

And then just on the U.K., incorporate a lot of macro issues, which I totally understand.

But also, when you look at the business there now and the growth plans and the scale time frame that you had for that business, has any of that changed, given what you know today?

Should we think that perhaps that the U.K. scaling to profitability may take longer than you had originally expected?

Yes, we haven't shared any specific plans around profitability in the U.K., but our business in the U.S. generates a lot of cash flow.

That's a very good thing.

It gives us a lot of optionality.

And I think even sharing the color that we did around Women's and how profitable Women's is and then Men's and the glide path there, that really is to show examples of what that looks like.

The U.K. is our most fledgling of all of the businesses.

And so it's not quite at the place where we're seeing economy of scale and that margin in cash yet, but we're very committed to showing that glide path.

We're very committed that that glide path exists.

And showing that we've done that in Women's and Men's, I think, is evidence of the way that we think.

And from RBC, we'll hear next from Mark Mahaney.

Okay.

The outlook for the next 2 quarters, this deceleration in revenue growth, do you think we'll see greater deceleration in active clients or in annual revenue per client?

Those have been pretty consistent the last couple of quarters.

Which one is more likely to see deceleration?

And then maybe 1 question on marketing spend.

My first reaction was, with the direct buy functionality rolling out, and my guess, my assumption would be that there's not great awareness of it yet, that this would be an opportunity to spend materially more on marketing or spend more on marketing to get that -- to let people know about the features and functionality of direct buy.

But Katrina, is your point that you still need to figure out the messaging.

You haven't got that airtight yet, so that's why you want to postpone -- or the product isn't exactly where it is, why the delay in putting marketing wood behind the direct buy arrow?

Yes.

I mean we definitely agree with you.

It's like there's -- I think there's a big opportunity to grow awareness of it.

And I think in the longer term, there's a big opportunity in terms of using that to be able to bring people into the Stitch Fix family.

We are super, super excited about those things.

That being said, to your point, I think right now, we feel like we want the product to be in a little bit more of an evolved state.

We want kind of the shop experience to be better integrated.

I think we have some work around how do we position it.

And so I think -- we think that billable that we have that we probably want to use in the future.

And we do anticipate that there's a lot of benefit to putting more marketing dollars behind that.

I'll probably have Mike to talk about right.

Mark, yes.

So we'll still have year-over-year growth in both active clients and revenue per active client.

But to your point, just taking down revenue, we expect some deceleration as it relates to kind of what we saw in Q1 and Q2 and active and some in our pack, and so we can talk through that when we talk to you.

(Operator Instructions) We'll move on to Dana Telsey with Telsey Advisory Group.

As you think about the direct buy program and the reduction in the number of Fixes that you had.

How do you think about that algorithm and the profile going forward versus what you know what their Fixes have been and what you think about the opportunity for direct buy, is there an average order value that could be higher on direct buy versus Fixes over time and how you're thinking about it?

Thanks, Dana.

Yes.

And just for clarification, when we launched direct buy, we did our A/B-Test, we found was that people spend more with us and that they actually order the same number of Fixes.

We didn't see -- we saw no decline in the number of fixes that clients were getting.

And that's a trend we're really excited about because I think it shows the incrementality of this feature, and it shows that we are able to actually capture greater wallet share with that feature.

In terms of AOV and we actually -- we actually believe that people will engage with direct buy and Fixes in very different ways.

And so we'd love to be able to have a product experience that can allow somebody to be buying more in direct buy.

That's the way that they would prefer or somebody who might be buying more in Fixes.

And so to be honest, I don't really have a perspective that AOV should be higher in one place or another, but what we want is a product that really is able to have a cohesive personalized styling journey for people -- for a range of different people that want to engage with us in lots of different ways.

Got it.

And as you think about inventory levels going forward, and you mentioned that obviously will be next year when it's more unbalanced, it would be -- as you think about just the next 2 quarters, does it stay at this type of these metrics going forward?

Or do you think it comes down at all a little in terms of your planning?

It comes down a little, but it's not as much as.

It is Mike, Dana.

But not as much as we had expected when we sort of plan the year.

But again, as we look at the quality of inventory that are underneath those numbers, we don't have big concerns as far as not having the right inventory to serve our clients.

We'll hear now from Mark Altschwager with Baird.

To start off, I was hoping you could talk a little bit more about the gross margin puts and takes for the back half of the year.

I think it's in the prepared remarks, I'm expecting similar margin for the full year, and that is following some expansion in the first half.

And then bigger picture, could you update us on the long-term margin targets and how you're thinking about that glide path over the next, call it, couple of years?

Sure, Mark.

Hey, this is Mike.

So yes, the puts and takes.

I mean it's similar to what we talked about on the call.

We expect the same kind of behavior in the second half of the year in terms of Men's and Women's being really healthy gross margins and helping fund some of our seedling businesses like Kids and the U.K. As far as long-term margins, we look forward to kind of talking in future quarters about kind of what the fiscal '21, obviously, looks like in the future.

But given that we're already at our long-term targets, almost even with the seedling businesses, you can expect that we feel really good about kind of how gross margin can trend over time and more to come in future quarters.

Just a quick follow-up there.

Could you talk about what levers you have in the near term to protect EBITDA margin should some of these AOV pressures persist given the uncertain macro?

Yes.

I mean we have a lot of control, I think, over our kind of expense base.

And so the investments that we've made, specifically kind of in talent and SBC and the U.K., we feel good about those long-term targets, but the things where we can get costs more in line with revenue, if we experience kind of a tougher recessionary period, we feel good about our ability to kind of react to those.

Today, though, we feel good about the guidance we've given and good about the long-term prospects of the business.

And just to jump in on the kind of what is behind this question is like what -- how are you thinking in the case of a recession.

I mean we think we're very well positioned in a case like that.

And being in this personalization, digital commerce business, we see this as a fundamentally better business model than stores and long-term leases.

Our inventory turns really quickly.

To Mike's point, we have best-in-class data to be able to make decisions about that inventory.

We've had strong cash flows and history of profitability.

And just like at a high level, I think in these moments of turbulence is when you're seeing the accelerating of kind of market share shifting.

And that's something that we're excited about, and that's something that we feel like we'd really benefit in.

And at this time, I'd like to turn things back to Katrina for closing remarks.

Great.

Thanks again for joining us today.

We look forward to connecting with many of you in the coming weeks.

And again, that will conclude today's conference.

Thank you all for joining us.