Yahoo Finance Stitch Fix, Inc. (NASDAQ:SFIX) Q3 2024 Earnings Call Transcript
Stitch Fix, Inc. (NASDAQ:SFIX) Q3 2024 Earnings Call Transcript June 4, 2024
Stitch Fix, Inc. beats earnings expectations. Reported EPS is $-0.15, expectations were $-0.25.
Operator: Good afternoon and thank you for standing by. Welcome to the Third Quarter Fiscal Year 2024 Stitch Fix Earnings Call. At this time, all participants are in a listen only mode. After the speaker's 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. And now I'd like to hand the call over to Hayden Blair, Senior Director, Investor Relations and Treasurer. Please go ahead, sir.
Hayden Blair: Good afternoon, and thank you for joining us today for the Stitch Fix third 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 third quarter 2024 financial results and 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 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 annual report on Form 10-K for fiscal 2023 previously filed with the SEC and the quarterly report on Form 10-Q for our third quarter of fiscal 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. Reconciliation 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 UK 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.
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Matt Baer: Thanks Hayden, and good afternoon everyone. At Stitch Fix, we are on a journey to transform our business and our efforts remain focused on two areas. First, we are working to strengthen the foundation of our business across all disciplines. This includes embedding retail best practices across the enterprise, identifying operational efficiencies, and ensuring we have the right organizational structure in place to enable our future success. Second, we are reimagining the client experience and taking a holistic approach to rethink how our clients engage with Stitch Fix. I am particularly encouraged by the progress we've made on our foundational work, which outperformed our expectations, as well as delivered results earlier than anticipated, resulting in our revenue and adjusted EBITDA coming in ahead of our guidance for the quarter.
In Q3, we achieved net revenue of $322.7 million, and adjusted EBITDA of $6.7 million. We also achieved gross margin of 45.5%, our strongest quarterly result in more than two years. While we are still in the early days of our transformation efforts, our Q3 results reaffirm my confidence that we have the right strategy in place. In addition, our financial position continues to be solid. We have a healthy balance sheet and no debt. This, in combination with our enviable order economics will enable us to invest in the areas of the business that we believe will drive sustainable, profitable growth in the future. Now, I'd like to talk through some of the specific foundational efforts that contributed to our results this quarter. Stitch Fix's unique business model allows us to know more about our clients on day one than many retailers could aspire to know over the course of their entire relationship.
This advantage, combined with the AI and data science that have been fundamental to our DNA since day one enables us to create better client experiences, as well as identify business efficiencies. In Q3 we leveraged our analytics capabilities to improve the profitability of fixed transactions while strengthening client satisfaction. Following a robust analysis of client interactions, we found opportunities to reduce underperforming shipments. As an example, we currently offer quick fixes, which provide clients the option to schedule an additional fix immediately following checkout. Utilizing our proprietary demand algorithms, we improve the performance of Quick Fix’s by only offering them to clients when we know the new fixes have a high likelihood of success.
Within three weeks of this change, Quick Fix average order value improved by 25%. Another example of work to improve profitability is we recently completed a comprehensive review of our pricing architecture to ensure price points within each of our lines of business are aligned with the value we offer. Within each category, we tested the elasticity of price to ensure we are priced appropriately while still serving our clients needs. The results of these tests indicated more than $20 million of annualized contribution profit opportunity. Building upon our effort to increase client engagement, we're utilizing improved CRM to drive more frequent freestyle transactions and engage our current clients outside of their fixed schedule. As part of this, we are testing new promotional capabilities to drive incremental sales and manage our inventory more efficiently.
Looking ahead, we will take a more data-driven approach through the use of targeted offers and promotional events. In addition, as part of our broader approach to embed AI across our business, we continue to scale our AI inventory buying tool to inform a larger set of buying decisions. This tool sifts through our proprietary transactional and client data to predict demand at the individual style and client level, empowering our merchandising team to make buying decisions that are more effective and efficient. This enables our merchants to spend more time on the art of merchandising, including trend identification, vendor partnership, and private brand development. In Q3, the tool informed nearly half of all inventory receipts, and that merchandise outperformed the items selected without the use of the tool.
Moving forward, we will further leverage this capability and expect it to increase the productivity of our inventory while delivering our clients the styles they will love. These examples demonstrate the recent progress we've made to strengthen the foundation of our business. As we advance our foundational work, we believe these efforts will continue to increase wallet share and improve profitability. Now, despite this progress, new client acquisition remains a headwind. And we are addressing the challenge of reaching the right client acquisition targets in order to build a healthier and growing client base. In the immediate term, we are making sure we have the right media mix and improving the effectiveness of each marketing channel. Our opportunity remains to improve our conversion metrics as we further optimize our marketing and reimagine our client experience, which together will help us acquire, retain, and reactivate a growing number of highly engaged clients over time.
Next, I'll speak to our work to reimagine the client experience, which we believe is critical to ensuring we can better serve the clients we have today, as well as those we plan to acquire in the future. This work continues to progress on schedule. As we have shared before, one of our key differentiators is how well we know our clients. And our success has always been tied to our ability to deliver a convenient and personalized experience that helps clients discover the styles they will love. As we work to reimagine the client experience, we're rethinking every interaction. This includes how we serve clients through the number of items in their fix, how we approach fix discounting, and the more dynamic and visual onboarding we discussed last quarter.
We have a number of tests in the market tied to these areas, and we are encouraged by the results we are seeing so far. We expect the first of a series of experience updates to launch this summer. The end result will be a more modern and dynamic Stitch Fix. I'm excited by our progress this quarter. We are seeing the impact of our efforts to strengthen our foundation and are advancing our work to reimagine the client experience. We are on a mission to help people discover the styles they will love that fit perfectly so they always look and feel their best. When we do that, when we nail our clients style and fit, we win. And that's what our transformation is grounded in. With that, I'll turn the call over to David to talk about our Q3 financial results and future outlook.
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David Aufderhaar: Thanks Matt. As Matt indicated earlier, we're seeing signs of progress on our transformational work, driven by detailed analytics that helps us identify opportunities to improve multiple facets of our business. These efforts drove successful client outcomes, strong AOV and product margins, and improved freestyle performance in the quarter. Additionally, within our operations, our ongoing focus on carrier diversification further supports our expanding gross margins and cash flow. As a result of these efforts, we expect FY 2024 transportation costs as a percentage of net sales will be lower than any year since FY 2020. We also completed the closure of our Dallas distribution center in the third quarter and expect to continue to optimize our warehouse and transportation costs.
Because of the work all of our teams have done to drive gross margin and variable labor efficiencies, our unit and order economics continue to improve. This quarter marked our highest contribution margin since Q1 of FY 2022. We are now above our historical 25% to 30% range in contribution margin. We believe all of the work we are doing across merchandising, pricing, client analytics, transportation, and operations will provide opportunities to further invest in areas that will drive sustainable, profitable growth in the future. Now let me get into the Q3 results. Q3 net revenue was $322.7 million, down 16% year-over-year and down 2% quarter-over-quarter. Revenue per active client for the third quarter was $525, up 2% year-over-year, and up 2% quarter-over-quarter.
We saw stronger AOVs, both in terms of AUR and keep rate due to the cumulative impact of the ongoing work to improve our inventory health, our pricing science, and our focus on improving the profitability of our transactions. Net active clients ended the quarter at approximately 2.6 million clients, down 20% year-over-year, and down 6% quarter-over-quarter. Gross margin for the quarter was 45.5%, up 280 basis points year-over-year and up 210 basis points quarter-over-quarter, driven by strong product margins and the transportation leverage discussed earlier. Q3 advertising was 9% of revenue, up 7% year-over-year and up 18% quarter-over-quarter, due to our typically stronger seasonal spend versus the second quarter. Q3 adjusted EBITDA came in at $6.7 million, or 2% margin, down 140 basis points year-over-year and up 80 basis points quarter-over-quarter.
This result was above the guidance range we provided due to top-line leverage, improved gross margins, as well as our ongoing cost management discipline. Net inventory decreased 20% year-over-year and 9% quarter-over-quarter. We continue to expect inventory balances to remain at these lower levels for the remainder of FY 2024 as we align our inventory position with demand and further utilize our AI inventory buying tool to drive efficiencies. Free cash flow was $18.9 million in the quarter, and we ended Q3 with $245 million in cash, cash equivalents and investments and no debt. Turning to our outlook, for Q4 we expect total net revenue to be between $312 million and $322 million, which increases our full year revenue range to between $1.33 billion and $1.34 billion.
This reflects continued strength in AOV with expected year-over-year improvements in both keep rate and AUR. We expect Q4 adjusted EBITDA will be between $5 million and $10 million, which increases our full-year adjusted EBITDA range to between $25 million and $30 million. We expect gross margins for Q4 to be between 45% and 46%. And we expect Q4 advertising to be between 9% and 10% of revenue. We also continue to expect to be cash flow positive for both Q4 and the full year. As our transformation progresses, our team is galvanized by the significant opportunity ahead to address a large retail market. We have a healthy balance sheet and we continue to actively manage our expense base. Because of this, we are well positioned to transform our business and invest in the areas that will drive sustainable, profitable growth in the future.
With that, I'll turn the call back to Matt.
Matt Baer: Thanks, David. At Stitch Fix, we have a powerful value proposition that combines a strong team of stylists, carefully curated merchandise assortment, and advanced AI and data science capabilities, which together create an experience that only we can deliver. I'm encouraged by how we are advancing our efforts to strengthen our foundation and reimagine the client experience in support of our transformation. While we still have work to do, I'm confident that the strategy we have in place will enable us to deliver sustainable, profitable growth in the future. We look forward to continuing to share our progress with you along the way. With that, I will turn it over to the operator for Q&A.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Youssef Squali from Truist Securities. Your question, please.
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