Stitch Fix, Inc. (NASDAQ:SFIX) Q2 2024 Earnings Call Transcript

Stitch Fix, Inc. (NASDAQ:SFIX) Q2 2024 Earnings Call Transcript March 4, 2024

Stitch Fix, Inc. misses on earnings expectations. Reported EPS is $-0.29 EPS, expectations were $-0.21. SFIX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2024 Stitch Fix Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, you will be invited to participate in a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Hayden Blair. Sir, you may begin.

Hayden Blair: Good afternoon, and thank you for joining us today for the Stitch Fix second quarter fiscal 2024 earnings call. With me on the call are Matt Baer, Chief Executive Officer; and David Aufderhaar, Chief Financial Officer. We have posted complete second quarter 2024 financial results in a press release on the quarterly results section of our website, investors.stitchfix.com. A link to the webcast of today’s conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance.

Please review our filings with the SEC for a discussion of the factors that could cause results to differ. In particular, our press release issued and filed today as well as the Risk Factors sections of our annual report on Form 10-K for fiscal 2023, previously filed with the SEC, and the quarterly report on Form 10-Q for our second quarter of 2024, which we expect to be filed later this week. Also note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations website.

These non-GAAP measures are not intended to be a substitute for our GAAP results. In the first quarter of fiscal 2024, we began to report our U.K. business as a discontinued operation. Accordingly, all metrics discussed on today’s call represent our continuing operations. Finally, this call in its entirety is being webcast on our Investor Relations website, and a replay of this call will be available on the website shortly. And now let me turn the call over to our CEO, Matt Baer.

Matt Baer: Thanks, Hayden, and good afternoon. As we have said for the past few quarters, we are committed to managing our business with financial discipline to drive profitability in the near term and growth over time. We delivered second quarter results in line with our outlook on both revenue and adjusted EBITDA. While these fell within our outlook, there is additional work to be done to improve the trajectory of our business. The original Stitch Fix vision to create an easier and more enjoyable way for people to shop for clothing and accessories is as compelling and relevant today as when the company was founded 13 years ago. Our leadership in personalization technology, combined with our passionate and skilled stylists continues to create an innovative and exciting way to shop.

Our transformation efforts are grounded in fully realizing our vision and evolving the Stitch Fix experience. As we stated on last quarter’s call, we are focused on three priority areas. First, we are working to strengthen the foundation of our business across all disciplines. This includes embedding retail best practices across the enterprise and ensuring we have the right organizational structure in place to enable our future success. Second, we are reimagining the client experience in order to attract and retain high lifetime value customers. Third, and simultaneously, we are developing a long-term strategy to build upon these areas and ensure we best serve our clients as their needs evolve in the future. We believe the execution of these priorities will enable the company to return to sustainable, profitable growth.

In the second quarter, we made progress on several initiatives to strengthen the foundation of our business across merchandising and marketing. These actions contributed to our expanding gross margins year-over-year and will provide the opportunity for us to realize additional efficiencies in our operations. In merchandising, a robust offering of national and private brands is one of the ways we best serve our clients. So we continue to enhance our assortment of both. Extensive ongoing client feedback enables us to offer private brands that perform better and more profitably than our national brands. And we plan to further strengthen our private brand portfolio by making enhancements to our existing brands and introducing new ones. At the same time, we continue to deepen relationships with the national brands that resonate most with our clients.

In marketing, we continue to evolve both program and channel strategies to optimize media mix and efficiency and to strengthen brand affinity. We know that when we reach clients for whom our offering resonates, they have a higher order value and purchase frequency as we saw with our newer client cohorts in the second quarter. While we have invested in new upper and mid-funnel tactics that help increase traffic, we continue to have an opportunity to improve our current levels of client conversion, which have not met our expectations. We are focused on improving the performance of our full funnel media. And as we move through the back half of the year, we will adjust our media mix and spend levels in an effort to improve conversion and retention of clients.

Now let me shift gears to describe how we are reimagining the client experience, which we believe will help us attract and engage the right clients and drive higher lifetime value. We are taking a holistic approach to rethink how our clients engage with Stitch Fix and going forward, we are prioritizing a reimagination of the client experience to focus on long-term growth. A few initial areas guide our thinking about how to reimagine the client experience. First, we want to create a more fun and visual experience that better engages clients beginning at their sign-up and creates ongoing confidence that we will deliver for them on both fit and style. In the coming months, we plan to introduce a new onboarding experience that will be a more dynamic and interactive way for clients to begin their relationship with Stitch Fix.

Second, we plan to deepen engagement by developing new ways to inspire and empower clients as they discover their personal style through our service. This includes creating new social connections that help clients visualize their style and give them reasons to return to our platform. Third, we plan to offer new touch points for clients to interact and develop more personalized connections with stylists. Our stylists play a critical part in our value proposition and our clients have told us they want to get to know the stylists behind their fixes. By enabling more direct ways to connect with stylists, we believe these relationships will become deeper and more meaningful. While some of these initiatives will begin to roll out in the coming months, it will take time to accomplish our ambitious plans to significantly evolve the Stitch Fix client experience.

I look forward to sharing updates as our work progresses. Finally, we have a powerful value proposition that combines a strong network of stylists, carefully curated merchandise assortment and advance the data science and technology to create an experience that only Stitch Fix can deliver. We believe that these strategic priorities tied to strengthening our foundation and reimagining the client experience will lead to sustainable, profitable growth over time. With that, I’ll turn the call over to David to talk about our Q2 financial results and outlook.

David Aufderhaar: Thanks, Matt. In Q2, we continued to focus on driving leverage in our P&L while also funding initiatives that position us for long-term growth. The actions we took in Q2, including negotiating cost savings throughout our business, optimizing our carrier mix, implementing efficiency measures and ensuring we have the right organizational structure in place to enable our future success. Taking a step back, since Q3 of fiscal 2022, we’ve undertaken detailed reviews of our business and cost structure to identify savings opportunities and the resulting actions have allowed us to expand gross margins and reduced total annualized SG&A spend by over $370 million. The work our teams have done to improve gross margin and variable cost leverage continues to produce enviable unit and order economics and our contribution profit is nearing the high end of its historical 25% to 30% range.

And our work here is not done. We believe there are additional opportunities for us to operate more efficiently and drive more leverage in both our fixed and variable cost structures. Now let me get into the Q2 results. Q2 net revenue was $330 million, down 18% year-over-year and down 9% compared to last quarter Net Active clients ended the quarter down 6% compared to last quarter at approximately 2.8 million clients. Revenue per active client ended the quarter at $515, down 3% year-over-year, but up 2% quarter-over-quarter. As Matt said, we continue to see strength in our newer client cohorts with both order value and fixed frequency up year-over-year for those clients. Additionally, our 90-day revenue per active client had its third consecutive quarter of sequential growth.

Gross margin for the quarter was 43.4%, down 20 basis points quarter-over-quarter and up 250 basis points year-over-year, driven by strong product margins, improvement in inventory health, and transportation leverage. Net inventory decreased 22% quarter-over-quarter as expected due to the front-loading of our inventory at the beginning of this fiscal year. We continue to expect inventory balances to these lower levels for the remainder of fiscal 2024 as we align our inventory position with demand, rationalize our assortment, and focus on our successful private brands. Advertising was 7% of revenue in the quarter down 19% quarter-over-quarter due to our typical lower seasonal spending around the holidays. Q2 adjusted EBITDA came in at $4.4 million and reflected our ongoing cost management discipline.

As expected, free cash flow was negative, $26.1 million in the quarter due to the timing of receipts related to our inventory purchases in Q1. We still expect to be free cash flow positive for the full year and ended the quarter with $230 million in cash, cash equivalents, and investments and no bank debt. Turning to our outlook. We are updating our full fiscal year outlook to reflect the current trends we are seeing in our business. For Q3, we expect total net revenue to be between $300 million and $310 million. We expect Q3 adjusted EBITDA will be between negative $5 million and breakeven. In the back half of the year, we expect gross margin to increase to between 44% and 45% as a result of the ongoing efforts to drive improvement in our inventory position and efficiencies in our transportation costs.

We expect Q3 advertising to be between 8% and 9% of revenue. As we’ve said in the past, we will continue to be methodical about our approach when we are investing in marketing and may adjust up or down based on the ROI we are seeing. For the full year, we are lowering our expectations for net revenue to reflect the current trends we are seeing in active clients. We now expect revenue to be between $1.29 billion and $1.32 billion. We expect adjusted EBITDA to be between $10 million and $20 million. For the full fiscal year, we expect gross margin to be approximately 44% and advertising to be approximately 8% of revenue. Overall, I am confident in our ability to maintain profitability today and I’m excited about the work we are doing to strengthen the foundation of our business and reimagine the client experience.

We will do so by remaining focused on leverage and profitability, along with acquisition and engagement of high lifetime value customers. Now, let me turn the call back to Matt.

Matt Baer: Thanks David. As you heard me say earlier, I believe that we have the right strategic priorities in place to generate sustainable, profitable growth over time. We are strengthening the foundation of our business. We are reimagining the client experience to attract and retain high lifetime value customers, and we are developing a long-term strategy to build upon these areas and ensure we best serve our clients as their needs evolve in the future. While some of these initiatives will begin to come to life later this year, we know it will take time to accomplish our ambitious plans to re-imagine the Stitch Fix client experience. I look forward to sharing updates as our work progresses. Thank you all for joining today’s call. And now, I’ll turn it over to the operator so we can take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Youssef Squali with Truist Securities.

Youssef Squali: Great. Thank you very much. Hi, guys. So, I guess a two-part question. Active client count was down about 17% year-on-year. I think that’s deterioration from the prior quarter’s growth. What’s baked into your Q3 and 2024 guide? And can you maybe just flesh out kind of the key initiatives that you have line of sight into that should help reverse or at least stabilize client count in the near to medium term? Thank you.

Matt Baer: Hey, Youssef, it’s Matt. I appreciate the question. I’ll let David answer first in terms of what’s baked into the guide. Any additional color that he wants to share in terms of the initiatives and then I’ll add additional color to round out on those initiatives that we’re focused on.

David Aufderhaar: Yeah. Youssef, I think you asked a couple of questions around active client count. First, Q2 specifically, I think you called out and just a couple of call outs there. First, Q2 is typically our softest quarter for active clients. And second, as Matt mentioned in the earlier comments, client conversion was below our expectation, and we continue to have an opportunity there. And both of those factors are really what’s at play there. And we had gross adds and reactivations that were down quarter-over-quarter. And so that’s Q2 specifically. In the back half of the year, we don’t specifically guide to active clients, but we do expect the sequential decline in active clients to continue in the back half of the year.

And that said, returning to healthy client growth continues to be a priority focus for the company. We’re still very encouraged by the results we’re seeing in the new clients we’re acquiring that have higher order value and higher frequency. And I think we mentioned in our remarks earlier that 90-day RPC is up again for the third quarter in a row. And so as Matt said earlier, we’re really focused on improving the performance of our full funnel media, while also leaning into prioritizing the re-imagining of our client experience. And we’re really excited about that work and believe that it will attract and retain more of those high-value clients. And that’s why we continue to have really a methodical approach around this. We’re taking the time needed to make sure we focus on returning to healthy, sustainable long-term active client growth.

Matt?

Matt Baer: Yeah. Maybe just a quick build on that. It’s absolutely right that in terms of optimization within our media spend and our media mix, in order to make sure that we’re acquiring the right clients that as I’ve noted in previous calls that our focus is just a really judicious spend of our marketing dollars, to make sure that the clients that we’re targeting are ones that demonstrate all of the strong likelihood and characteristics of being high LTV clients for us. And over time, we’ll continue to be methodical around an expansion of those client segments that we’re targeting. I feel really confident in terms of the work that our marketing team is doing there. They’re really focused on making sure we’ve got the right message in front of the right perspective clients at the right time, we’re testing into new mediums as well and increasing spend there so that we can continue to test and learn.

We’re doing a good job within video right now in terms of storytelling that calls out the unique differentiators of our business model and the manners in which we can uniquely serve clients relative to other retail options that might be at their disposal. So that gives me a lot of confidence. The other piece that’s just really important is what David noted in terms of the reimagination of our experience. We have just a really, really phenomenal asset where on day zero, we know more about our client than many retailers could aspire to know about their clients over the entire course of their relationship with them. We know their style preferences, we know their value orientation, and we can nail their fit as early as their very first transaction.

And that’s an extremely powerful differentiator and asset that we have. And as we reimagine the experience, we’re going to make sure to embed that within everything that we do. As I noted in the prepared remarks, one of the first areas of focus for us is on that onboarding experience. We have an opportunity to make that more fun, more dynamic. And at the end of the day, inspire more confidence in prospective clients, so that they convert with us at much higher levels. As we increase that conversion through the funnel, we’ll be able to optimize our media dollars even more and be able to — and hopefully then be able to increase the number of new clients they come through the funnel. That optimized or reimagined experience is also one that helps us deepen the relationship with our existing clients as well, so that we can better understand how their style preferences, value orientation and fit changes over time, so that we can continue to keep our active and loyal clients for a longer tenure and generate even greater revenue from them.

I’m already encouraged by the increase in revenue per active client that we’ve seen of recent, and now our opportunity remains to continue to improve our conversion metrics. And as we reimagine our experience and optimize our media investment, I’m confident that we’ll be able to do that over the long-term.

Youssef Squali: Great. All right. Thank you both.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Your line is open.

Simeon Siegel : Thanks. Hey, everyone. Good afternoon. Did you say whether there’s an ideal percentage of total sales that you’d like to take through private brands and maybe what’s the ASP and margin differential for private versus national? And then I just wanted to confirm something. I think so at this point, 90-day RPAC, I think you said has now been up for three straight quarters. The trailing 12 months is still down. So it’s just safe to say that that should give you some strong confidence that next quarter is trailing 12 months should be up, right? So just any color around that and order of magnitude if possible? Thank you.