Dan Jedda: Yes. That will be realized in our fiscal year. That’s how we €“ that’s why we are quoting it the way we do because a lot of it is advertising. And when you model out that 5% to 6% of revenue, you will see that. And then of course, the remainder is a combination of fixed and variable efficiencies and leverage, which on the €“ to answer your second part, on a go-forward basis, as we mentioned on the advertising, that will be €“ we will look at that very closely. We will look at the ROI on that. We will spend into where we have near-term positive ROI and we are not €“ we are going to pull back where we don’t. And so we will manage that very closely for the rest of the year and, of course, into our fiscal €˜24. And then the €“ on the variable and fixed, obviously, that is indefinite and won’t continue going forward as we see those efficiencies and take advantage of them.
Trevor Young: Great. Thanks.
Operator: Thank you. And our next question comes from the line of Dana Telsey with Telsey Advisory Group.
Dana Telsey: Good afternoon everyone. As you are talking about the customers delaying spending, is there any particular cohorts that you are seeing it from more or less? And then can you talk about product trends in terms of what you saw and in terms of pricing, both on Freestyle and what you are seeing requested and fixes? And lastly, with the advertising spend moving from 9% this year to 5% to 6%, what made 5% to 6% the right number? And what are you looking for to see if you need to increase advertising given what the revenue impact may be? Thank you.
Dan Jedda: Yes. I will start with that, and I will ask Elizabeth can take the second part of that question. When we look at €“ it’s a good question on the cohorts, and we looked at this in many different ways across our cohorts. And we €“ I mentioned in my prepared remarks, we did see a broad spending reduction across all our cohorts. So, clearly, the macro environment is impacting spend, whether it’s a client who has in 50-plus fixes or a client in their first 15 fixes and regardless of tenure, we looked at it every which way. And while we had seen increasing spend quarter-on-quarter in these cohorts, for many quarters back, and even a couple of quarters back, we saw an increase. We clearly saw the spending go down across the broad set of cohorts in this latest fiscal quarter. And we do expect that to continue just given the high inflationary environment, the competitive landscape and the overall macroeconomic factors.
Elizabeth Spaulding: And Dana, I can touch on the trends question and the marketing question. So, maybe I will start with some of what we saw in the quarter and some of the trends we are seeing and then we are about to release our style forecast, our annual style forecast will come out next week, so I can give a preview of some of what we are hearing there from our 3.7 million clients, from our stylists, from consumer surveys and industry data, which are sort of our €“ some of our predictions for the coming calendar year. But in terms of what we saw this quarter, I would say in particular, for women’s back to work, clients shifting into workwear over more of that casual end use that we saw a year ago. So, structured blazers was an area where we saw particular growth, a real sweet spot in the sub-$100 blazer price point.
Those were up north of 120% year-on-year. We also saw a shift to address your outerwear with a variety of kind of workwear styles and silhouettes. We also saw strength within booties and heels against last year, up over 25% year-on-year. So, clearly, a female consumer who is going out again, night out and workwear styles that can transition into the evening. We also saw with men some similar, I would say trends in terms of going back to work, very strong velocity within our Workwear segment and with outerwear seeing strength in things like shirt jackets. And then kids have stayed more casual, I would say, with graphics and cozy attire. Within our forecast, some of the things that we are seeing now and coming forward is a real focus on getting back to holiday parties and holiday trends, brighter and bolder colors is something we are expecting in the future.
And then a tendency towards wide leg bottoms, which started several seasons ago, but we are beginning to really see that shift occur in a more meaningful way. And then on the marketing spend, the 5% to 6%, I would say it was kind of a combination assessment of really being very focused on our free cash flow and EBITDA ambition for the year and really holding ourselves to this very strong threshold of the timeframe of payback, together with the belief that there is opportunity for us to be doing more in areas that I mentioned on the prepared remarks, like reactivation of clients who have not shopped with us as recently and being more productive going after those segments as well as that group of clients we often call our signed up prospects.
And so together, that was our estimate of what we could do to still create momentum with clients but be able to really be more efficient in the back half of the year.
Dana Telsey: Thank you.
Operator: Thank you. And our next question comes from the line of Mark Mahaney with Evercore ISI.
Mark Mahaney: Thanks. I think most of my questions have been answered. So, I will just ask one. Just on free cash flow and the ability to sustain positive free cash flow going forward, outside of the macro recovery, what would be the key factors that will cause that to happen or not to happen? Like what are the variables that you can most control outside of macro that will allow you to sustain positive free cash flow over the next several years? Thank you.
Dan Jedda: Yes. I can take that. I mentioned towards the end of the prepared remarks, just our overall contribution margin which is very healthy at 25% to 30% ex marketing. And so really, it is that inflection on revenue, of course, getting €“ growing again at some point. We do feel like our order and unit economics are very strong. We are rightsizing our cost structure. We do have a lot of opportunity for variable productivity all of these work streams are in process and part of the cost savings initiative $135 million that we stated on the call. So, we feel good about the second half in terms of €“ and obviously, our EBITDA guide, our adjusted EBITDA guide shows that, that we feel good about the second half. And going forward, we do think there is leverage on top of that.
So, it’s a combination of continuing on these areas that we €“ that we have embarked upon to streamline our cost structure. And of course, we will €“ we need to get the revenue growing again at some point, whether that’s through category expansion and/or all the initiatives that we are working on right now, inclusive of the new marketing, the new advertising models that we have talked about.
Elizabeth Spaulding: Mark, I would just €“ I think that really sums it up in terms of where we see that long-term return to free cash flow. I guess a couple of other things I would add on that gross margin side of things, the majority of our goods are exclusive brands, Stitch Fix only, and those have very meaningful gross margin kind of delta between those and national brands, and that’s just continuing to be a strength for us. There is a several hundred basis point difference where just continuing to make sure that we are investing in the right brands, the right price points that we are building exclusively for our clients. And then I think that marketing piece that we are making the shift on we really do believe that we can get stronger over time with a combination of these newer channels were less penetrated in, but also doing more with keeping our clients happier longer, better conversion, better retention, better reactivation that should drive more productivity in the P&L as well.
Mark Mahaney: Thank you, Dan. Thank you, Elizabeth.
Operator: Thank you. And our next question comes from the line of Aneesha Sherman with Bernstein.
