Stitch Fix, Inc. (NASDAQ:SFIX) Q4 2023 Earnings Call Transcript

Stitch Fix, Inc. (NASDAQ:SFIX) Q4 2023 Earnings Call Transcript September 18, 2023

Stitch Fix, Inc. beats earnings expectations. Reported EPS is $0.24, expectations were $-0.22.

Operator: Good afternoon and thank you for standing by. Welcome to the Fourth Quarter and Full Year Fiscal 2023 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 call over to Hayden Blair.

Hayden Blair: Good afternoon and thank you for joining us today for the Stitch Fix fourth quarter and full year 2023 earnings call. With me on the call are Matt Baer, Chief Executive Officer; and David Aufderhaar, Chief Financial Officer. We have posted complete fourth quarter and full year 2023 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 the results to differ, in particular, our press release issued and filed today, as well as the Risk Factors sections of our quarterly report on Form 10-Q for our third quarter previously filed with the SEC and the annual report on Form 10-K for our fiscal year 2023, 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. 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. I want to thank everyone at Stitch Fix for such a warm welcome and for your passion and commitment to helping our clients discover and express their style. I also want to thank Katrina and the Board of Directors for entrusting me to lead the Company and for sharing their perspective with me. I’ve spent the last 90 days getting to know our business and our brands, working closely with our executive leadership team to understand the issues and opportunities, and meeting our corporate, stylist, customer experience and warehouse teams to learn about how we serve clients today. I’ve also met with a number of clients, attended several client research sessions and read a lot of client feedback to help me understand our opportunities from their vantage point.

Consistent personalized client service is at the core of what we do, so it was important to me to become grounded in what we’re doing well, how we can do better and where we can do more. These first few months have reaffirmed my conviction about the bright future ahead for Stitch Fix, and at the same time, I fully appreciate the focus, time and resources required to realize our ambitions for the brand and the business. Today, I’ll say a few words about why I joined Stitch Fix, share my initial observations about where we are today, and how that will inform our future strategy, then David will take you through our Q4 and FY’23 results. When I first became aware of Stitch Fix, I recognized right away that it was a unique business model, and as a digital leader, I was impressed.

Stitch Fix presented a compelling, differentiated and innovative experience powered by advanced technology, offering personalization, convenience and service at scale. When the opportunity to join Stitch Fix presented itself, it appealed to me because I saw powerful ideas that hadn’t yet realized its full potential, and I believe that my background, experience and drive could get that done. I’ve always had a passion for retail and an appreciation for the importance of customer service. My first job was at my family’s furniture business which taught me the fundamentals of retail. I took those early lessons to a few retail start-ups where I learned the value of a compelling curated assortment strategy, and then ran digital businesses in some of the most complex and competitive marketplaces for the world’s largest retailer and the country’s largest department store.

What has excited me the most throughout my career is identifying opportunities to provide better experiences for customers. The kinds of experiences that solve their problems but fill their desire for value and exceed their expectations. I’ve always been drawn to digital and tech-forward businesses because I believe customers want and deserve a better way to shop. And with more options available than ever before, at a time when people feel more time-constrained than ever before, I think customers need that better way to shop more than ever before. In most instances shopping offline is cumbersome and shopping online can be overwhelming. The brick-and-mortar apparel shopping experience is time-consuming and at times, frustrating. And although the online experience has gotten better, it is still too focused on session-level conversion and lacks the inspiration and personalization that make great style, great fit and great value attainable.

Part of the magic of Stitch Fix is that we can deliver all of that in a way that is truly convenient, not only in terms of ease of shopping, but also in terms of anticipating our clients’ needs. Of course, we believe the richness of our data also makes it possible for us to leverage our assortment to deliver fresh and compelling style and drive better margins. Stitch Fix is a brand that really means something to people who rely on us to help them find their style and experience a better way to shop. We exist to make getting dressed easier and our model has always combined the power of data science with the personalization of a human connection. As I spent time with our stylist and customer service teams, I’ve heard them talk about the interactions they have with our clients, and it’s clear that these connections are powerful.

One of our stylists shared a message from a client that really speaks to the role Stitch Fix can play in our clients’ lives. She wrote, brought to tears by how special the Stitch Fix made me feel. I have two babies and started working as a teacher last week. I pour from my cup all day and all I can think is that I deserve this. To me that note reinforces how important and integral this Stitch Fix stylist-client relationship is to who we are and what we represent. I read another client note that reinforces the value of making shopping for clothes easier and more convenient. Selection is tailored to my taste and it is very easy to find new items that I like, saves time from going to a store and searching through so much stock that isn’t my style.

Now those are just two of many examples of terrific client experiences, and of course, there are also examples of experiences where we missed the mark, and within both sets our key learnings that will guide us. As a long-time student and operator in the retail space, I am both energized by the challenges and motivated by the opportunities I see for Stitch Fix. As I begin to shape our long-term vision and define our future corporate strategy, some of my early observations informed my thinking. First, personalization algorithms, artificial intelligence, machine learning and data science are fundamental elements of our model. It is clear that these capabilities are changing the way companies create and deepen relationships with customers. And while they have certainly become popular buzzwords among retailers who are investing heavily to catch up, they have been part of the DNA of Stitch Fix since its inception and something we will build upon going forward.

Second, the relationships between our clients and their stylists are amazing, unlike anything I’ve seen before. These connections are built on service and trust. They foster loyalty to the brand and represent long-term value to the business. And I believe these relationships are especially relevant as staffing levels in so many retail stores continue to decline. I expect us to deepen and enrich these relationships in the future. Third, I think the assortment and service we offer today creates a better experience because it solves for many of the frustrations we know people feel about both physical and digital shopping. Because of this, I believe we can and will introduce more people to the Stitch Fix way and I believe we can drive market share gains.

You’ll hear much more from me about our long-term strategy in the near future. In the meantime, we are focused on enhancing the client experience to deliver personalization, strengthening profitability and investing carefully to drive growth. Looking ahead, I am confident that being data-led, customer-centric and technology-driven will continue to be key contributors to ensuring that every client engagement, interaction and solution is personalized. Stitch Fix has already created a model based on a combination of data science and human connection. And as we continue to evolve the application of both AI and human touch, we plan to further advance this key point of differentiation. This will help us constantly look at things through the lens of our clients and think about the experience we provide to someone trying Stitch Fix for the first time or returning for the tenth.

Doing this will ensure we are consistently investing in new capabilities to bring stylists and clients closer together, creating new ways of interacting with clients and continuing to advance our operational capabilities to be optimized for scale. The leadership team and I are aligned and focused on delivering long-term profitable growth. With that I will turn the call over to David who will take you through our Q4 and full year financial results as well as our future outlook.

David Aufderhaar: Thanks, Matt. This is a pivotal time for Stitch Fix, and we’re fortunate to have someone with match retail, digital and operational expertise leading us into the future. He is asking a lot of great questions and has a fresh perspective that’s challenging our thinking in a really positive way. Let me begin with setting some context around FY’23. We made the decision to focus on the core fixed experience which meant changing our inventory product and marketing strategies. To allow time for those strategies to take hold, we focused on near-term profitability and cash flow. This meant restructuring our organization, consolidating our warehouse footprint and making the decision to exit the UK market. Decisions like this are never easy, but we believe these actions were the right ones.

Throughout the course of the year, we improved our inventory position, realized over $150 million of annualized cost savings and achieved our goal of returning to positive adjusted EBITDA and free cash flow. FY’23 net revenue was $1.64 billion, a decline of 21% year-over-year. We ended the year with approximately $3.3 million active clients, a decrease of 13% year-over-year. Despite the revenue decline, we believe we effectively unlocked the leverage potential for our business moving forward. We made great progress through cost savings and restructuring initiatives and ended the year with adjusted EBITDA of approximately $17 million, an improvement of more than $35 million versus the prior year. We also generated nearly $39 million of free cash flow.

For Q4, our performance was better than we expected and reflects the work we have done to improve gross margin and right size our cost structure. We also made progress on a number of key initiatives in the quarter. After a careful review of our operations in the UK, we made the decision to wind down that business. We notified the affected employees in August, and we expect the full closure of our UK operations to be completed this calendar year. Additionally, the plan to consolidate from five US warehouse locations to three is on track to be completed this fiscal year. We believe the consolidation will have immediate cost savings and having inventory in fewer warehouses will make it easier for stylists to build more relevant assortments for clients and we will realize inventory efficiencies as we scale.

We continue to expect the combined annualized cost savings related to the closure of the UK operation and the US warehouse consolidation to be approximately $50 million. Q4 net revenue was $376 million, down 22% year-over-year, but above the high end of our prior guidance due to higher order volume. Revenue per active client declined 9% year-over-year in Q4 to $497 million. Q4 gross margin expanded 330 basis points year-over-year to 43.3%, thanks to the really hard work our merchandising teams did to improve the composition of our inventory over the last year. We ended Q4 with net inventory down 30% year-over-year and down 10% quarter-over-quarter to $137 million as we continue our efforts to align our inventory position with demand and increase the assortment composition of our successful private brands.

Advertising was 7% of net revenue in Q4, down slightly over Q3 and down more than 350 basis points year-over-year as we right-size our marketing spend based on specific payback methodologies. Q4 adjusted EBITDA was $10.4 million, above our range due to better-than-expected revenues and the gross margin and operating leverage I mentioned earlier. We generated $18 million of free cash flow in Q4 and ended the quarter with $258 million in cash, cash equivalents and investments and no bank debt. Turning to our outlook. We remain focused on improving the client experience, retaining and attracting clients, maximizing the effectiveness of our marketing, increasing leverage in our cost structure and driving positive free cash flow. Before we get into the numbers, there are two key callouts in our guidance.

First, I want to remind everyone that FY’24 is a 53-week fiscal year. We will also be providing this guidance in the context of US-only operations as we anticipate reporting our UK results as discontinued operations beginning in Q1. Our guidance provided in the press release details the reconciliation between FY’23 and FY’24 for both of these items. For the full year, we expect total US revenue to be between $1.3 billion and $1.37 billion. We expect total US adjusted EBITDA to be between $5 million and $30 million, primarily reflecting an improved gross margin and ongoing cost savings initiatives. This guidance also assumes we will be free cash flow positive for the full year, though we may see some variability between quarters due to the timing of working capital requirements related to our inventory purchases.

Moving on to Q1, we expect total US revenue to be between $355 million and $365 million, and we expect Q1 US adjusted EBITDA will be between $2 million and $7 million. We also expect revenues from the UK which we anticipate will be reported as discontinued operations in Q1 to contribute approximately an additional $7 million in Q1. We expect both Q1 and full-year gross margin to be approximately 43% to 44%, as we continue to drive improvement in our inventory position with a higher mix of private brands and continued efficiencies and transportation costs. We also expect advertising to be approximately 7% to 8% of revenue, but we’ll continue to be opportunistic if we see the right return on our investment. We do expect inventory balances to rise in Q1 due to the timing of receipts ahead of fall-winter, but expect our inventory turns to improve as the year progresses.

We began FY’24 with an eye to rebuilding, leveraging the cost savings work already accomplished in FY’23. Our unit economics remain strong and we will continue to identify opportunities to improve both fixed and variable costs in order to increase our contribution margin and fixed leverage potential. We expect this continued focus on leverage and profitability, along with the acquisition and engagement of high lifetime value clients will help us maintain profitability today and provide a solid foundation for our future growth strategy. Now, let me turn the call back to Matt.

Matt Baer: Thanks, David. As I said at the top of the call, my first 90 days as CEO have reaffirmed my conviction about the bright future of Stitch Fix. The insight and vision on which this Company was founded are just as powerful and just as relevant today. We are evaluating and assessing every aspect of our brand, our business and our operating model. We are carefully examining what we do and how we do it, optimizing where we can right now while also looking ahead to the longer-term opportunities. Stitch Fix was founded on the belief that the technology meets humanity model could create an individually tailored shopping experience that would make it easy and enjoyable for people define their style and by clothing. The Company’s commitment and investment in that belief has never wavered.

While we have a lot of hard work to do, our clients deserve the best from us, and I am confident in our ability to deliver that. I am determined to unlock every opportunity for us to realize the full potential of Stitch Fix and drive long-term profitable growth. Thank you for your interest in our Company, and now operator, we’ll take the first question.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Youssef Squali of Truist. Please go ahead, Youssef.

Youssef Squali: Hello. Can you hear me?

David Aufderhaar: Yes, we can hear you.

Youssef Squali: Excellent. Thank you, guys, for taking the questions. I have two. So first, Matt, you talked a little bit about how you’ve been on the job now for 90 days. You’ve had a chance to talk to a lot of people internally, externally, et cetera. Maybe can you just summarize for us some of the key learnings that you had during this period? What are kind of the two or three key challenges that are kind of top of mind for you based on those learnings? And then Dave, for the fiscal ’24 guide, can you talk about the assumptions you’re making in terms of active client count and maybe just how you see pricing kind of progressing throughout the year? Thank you.

Matt Baer: All right. Thank you, Youssef. Appreciate the questions. So, yeah, so 12 weeks in and definitely have spent a considerable amount of time onboarding, learning everything that I can, talking to all of our internal stakeholders, as well as external advisors, and also trying to get as close to our clients as we possibly can to truly understand the business from their standpoint as well. And in addition to what I shared in the earnings transcript preceding this, one of the things that I learned was just how strong of a bond our most loyal clients have with our service and that to me is something that really creates a tremendous opportunity for us as we continue to drive growth in our business into the future. It is quite rare to have an e-commerce business or any retail business where you’re able to get such high levels of engagement from your clients.

In the last quarter, as we shared, what is our business down 22% and our marketing spend down nearly 50%, it’s pretty rare to be able to see those kind of proportions. And that speaks to the testament of how we engage our clients in an organic manner and how they continue to come back to us time after time despite any challenges we might see in the macro environment. Another learning that I think is really important to us is the strength of our private brand business. One of the things that becomes really important for us as we go forward is to have an assortment that’s not only exclusive but has a strong desirability from our clients. And if we look at our total brand portfolio, of our top 25 brands, they deliver about 50% of our total revenue and over half of those brands are private brands.

Those private brands are also delivering approximately 5% to 10% higher IMU than the national brands, and our clients absolutely love them with materially higher keep rates than our national brands. In terms of challenges, I really see those as opportunities going forward. As we continue to listen to our clients, we’ll continue to see where we need to tweak our experience, improve our business model, where we need to find operational efficiencies to lock further savings to further improve our bottom line and profitability going forward. And as I continue to onboard further, I look forward to pulling all of that — all those — all of those learnings together and sharing our long-range plan and strategy at a future date.

David Aufderhaar: And then Youssef on the FY’24 guide, a couple of call-outs. First on active clients. We aren’t sharing any specifics on full-year active clients, but it definitely remains a primary focus for the teams to drive towards growth. We do expect Q1 active clients to be negative. You saw for Q4 FY’23, we’re down about 5% quarter-over-quarter and we expect Q1 to be slightly better than that quarter-over-quarter. On the revenue side, a couple of callouts. The active client loss in FY’23 and the Q1 loss I just described are definitely a big contributor to the revenue headwind in FY’24. We also expect the headwind that we’ve recently seen in existing client order frequency to remain in FY’24 with clients still being cautious in the macro environment that we’re in. You touched on pricing. Pricing we expect it to continue to remain stable with what we’ve seen in the past few quarters.

Youssef Squali: Great. Thank you both.

David Aufderhaar: Thanks, Youssef.

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

Simeon Siegel: Thanks. Hey, everyone. Good afternoon. Welcome, Matt. So nice progress on the gross margins. Could you just maybe quantify the moving pieces a little bit more just given there is nuance out there? And maybe how you’re thinking about those moving pieces into the Q1 and full-year guide you gave? And then can you guys say what you are expecting the 53rd week to represent for revs and EBITDA? Thank you.

Matt Baer: Yeah. Thanks, Simeon. I appreciate the question. It’s Matt here. I’ll speak to the gross margin at a high level. David can share some additional color as well as answer your question regarding the 53rd week. A lot of recognition to our merchants and many others within our organization for all the hard work that they’ve put in over the last year to ensure that we have a healthy inventory composition. It’s a strong perspective of mine that more inventory is not better, but better inventory is better. And the merchant organization is truly taking that to heart and that’s evidenced by what we just previously shared with inventory down 30% year-over-year. That also allows us to mix into higher-margin products. As part of that, it’s our reinforcement and our continued investment within our private brands.

And as I just shared, the IMU there is about 5% to 10% higher overall. So I believe that we still — while we still have additional work that we can do in order to improve our overall inventory health, really encouraged by the early signs of success that we’re having already.

David Aufderhaar: And then, Simeon, on gross margin and just to give you a little bit more color around that. For FY’24, we are showing between 100 basis point and 200 basis point improvement, and that really ties back to what Matt was describing that focus on improving our inventory health, as well as sort of the transportation efficiencies that we continue to drive. A couple of other callouts just as you go further down the P&L. There’s also an annualized impact of the cost savings initiatives that we had in FY’23 and then there is also a good portion of the $50 million of annualized savings with the UK and the warehouse closures that we would realize in FY’24 as well. And then on the 53rd week, we do have specifics in the press release as well. So you can see the impact there as well as the impact of the UK, but it’s about a point to a point and a half.

Simeon Siegel: Great. Thanks a lot, guys. Best luck for the year ahead.