Earnings Call: Q3 2021

Jun 7, 2021

Good day, everyone, and welcome to the Stitch Fix Third Quarter 2021 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. 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 Q3 of fiscal 2021. Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix Elizabeth Spalding, President and Dan Jetta, CFO. I I would also like to mention that we are joining you remotely today from our home offices. We have posted complete Q3 financial results in a press release posted on the IR section of our website, investors. Stitchfix.com. And starting this quarter, we will not be issuing a shareholder letter. 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 and 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. Also, note that the forward looking statements on 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 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 thank you for joining us. After the market closed today, we issued a press release with details on our quarterly performance and outlook. As you'll hear on today's call, We delivered strong 3rd quarter results with active client growth accelerating to 20% year over year and outperformance across net revenue and adjusted EBITDA. This was a function of strong demand and improved client outcomes across both our fixed and direct buy offerings and was reinforced by an improving apparel retail market backdrop. As Elizabeth will discuss later, We continue to roll out new product features in Q3 to enhance both offerings and drive greater client adoption. We believe these new experiences drove momentum in the quarter, which will continue in Q4 as we capitalize on the demand strength and relevance of our fixed offering and introduced DirectBuy to new clients by the end of the quarter. Now let me discuss our Q3 results in more detail. In the Q3, we generated net revenue of $536,000,000 reflecting 44% growth year over year. During the quarter, we grew our active client count to over 4,100,000, representing a year over year increase of 689,000 clients or 20% growth. And on a quarter over quarter basis, we added 234,000 active clients, our 2nd highest client addition ever. In Q3, we delivered a net loss of $18,800,000 and adjusted EBITDA of $11,600,000 Dan will review our results in more detail later on this call as well as share our updated outlook for fiscal 2021. Over the last decade, we've delighted millions of clients and formed lasting relationships and feedback loops that underpin our unrivaled personalization capability. Our radically different client experience is built on getting to know every client and gathering feedback around their detailed preferences, resulting in our rich Through our powerful combination of data science and creative human judgment, We've shipped over 50,000,000 fixes to date. And while fixes have been incredibly successful, we know that this form factor alone doesn't address all consumer use cases. As such, we're now embarking on our next growth horizon through our introduction of DirectBuy, which expands our ecosystem of experiences and opens up a total addressable market that we estimate to be multiple times larger than fixes alone. We believe that this more personalized way to Shop is universally appealing and one we are uniquely positioned to address. How we shop and live, work and interact with each other has changed dramatically in the past year, and we believe that consumer shift to shopping online will be a lasting one. Apparel retail is at a pivotal point With market share moving online at record pace and consumers seeking more highly personalized and authentic experiences, Stitch Fix was purpose built to address this evolution with our unique multi touch point model. And as we shared in April, This moment of transformation in our industry and our business make it the right time for the next generation of leadership at Stitch Fix to lead us into the future. With that, I'm very excited for Elizabeth to assume the CEO role starting in August. Working alongside her, We have an experienced and talented leadership team that shares relentless energy, passion and optimism for the potential possibilities ahead in our business. Since joining us as President, Elizabeth has made significant broad based contributions across our business and demonstrated outstanding leadership. She challenged us to think differently, accelerated our pace of innovation and outlined an ambitious vision for our future. To be clear, I won't be going anywhere and I'm as committed as ever to Stitch Fix. I'll be transitioning to the role of Executive Chairperson and will remain a Stitch Fix employee while I'll be focusing my impact on our sustainability and social impact efforts that will drive long term value for all of our stakeholders. I am deeply confident in Elizabeth and our entire team and can't imagine anyone else assuming the CEO role. I look forward to her continuing to innovate on behalf of our clients and taking us from over 4,000,000 clients today that we serve today to the tens of millions more that we plan to serve in the future. And with that, let me turn it over to Elisa. Thanks, Katrina. I look forward to our continued partnership as you transition to the role of Executive Chairperson. I feel both a great sense of responsibility as well as optimism for all of the possibilities that lie ahead for Stitch Fix. Our mission remains the same since our inception, to transform the way people find what they love. We are a relationship based brand, Creating a more curated and discovery led ecosystem of personalized shopping experiences that is truly transformational. Whether a client prefers to have items handpicked by our talented stylists, select their own pieces or both, Clients can trust that Stitch Fix has a shopping experience that uniquely caters to them. With vaccination rates increasing And COVID restrictions easing, we are seeing the overall market for apparel beginning to rebound as more consumers can leave their homes to eat out, Attend social gatherings and return to the office. These consumers are turning to us for fresh inspiration and our radically convenient, Personalized shopping experience. And in Q3, we saw robust first fixed demand and reactivation rate. Our fixed and direct buy offerings have allowed us to meet consumers in this moment and position us to further capitalize on this improving Apparel demand backdrop in the quarters ahead. With our fixed offering in Q3, we drove Strong client acquisition trends and improved client outcomes. In the 1st 3 quarters of fiscal 2021, We've already added more net active clients than any full year since 2016. And in Q3, we saw strong client demand From first time and reactivated clients that resulted in our 2nd highest quarter over quarter client additions on record. In line with recent quarters, nearly 80% of our first time fixed clients in the quarter purchased at least one item and shared that they look forward to their 2nd fix, which is a strong indicator of future client engagement and retention. Our ability to delight clients was evident across all categories, including women's, men's and kids, with success rates in each growing both year over year as well as quarter over quarter. As client preferences began to shift in Q3, the rich insights we've collected around product and client preferences allowed us to match clients with the most relevant and personalized items for them. For example, Within our women's category, she's excited about newness and dressing up again. For work or going out, and we saw a shift out of loungewear And back into dressier, more tailored looks. Rompers and jumpsuit sales increased 60% year over year And midi skirt sales increased over 80% year over year. She's also traveling again, and we've seen an increase in requests for vacation related items and fixes, and bright seasonal colors in particular are doing exceptionally well. In men's, Key is beginning to venture out of leisurewear and seeking more structure with button up shirts trending recently in our fixed request notes. These positive underlying demand and client satisfaction results reflect our differentiation in being able to collect early signals to identify trends and react to deliver great client outcomes. In Q3, we also continued to expand the availability of Fix Preview, which has allowed us to begin to reimagine our fixed experience, deliver stronger client outcomes and build deeper trust with clients. As we previously discussed, Fix Preview allows clients to engage more directly with their fix before it ships and have more agency in selecting the items they receive. Based on the positive impact fixed preview has had on client outcomes in the U. K, where it has been rolled out to all clients, We began to scale the experience to U. S. Clients in Q3. As of the end of May, we've offered it to over half of our U. S. Client base and we will continue to roll it out. Across the U. S. And the U. K. To date, we've seen roughly 3 quarters of clients opt in to fixed preview with strong repeat engagement, which has driven higher success rates and higher average order values. With these gains and the broader expansion of Preview, we believe it will improve client retention as well as conversion rates over time. With Fix Preview clients feel increasingly confident that they're going to love their fix before it even ships, and they appreciate the tighter communication with their stylist. The additional feedback dimension also helps us get to know our clients sooner and better as they share more nuanced personal preferences, specific requests and information regarding the contents of their closet. To give you a couple of examples, after previewing her items, One client shared that her closet already contained taupe suede shoes and that she preferred another piece. So we refreshed her basket resulting in a higher keep rate. Another client who used Fix Preview to discover new styles was excited to purchase a jumpsuit and a floral dress, Pushing her style in a new way that the traditional fixed experience might not have. Now turning to DirectBuy. In Q3, we evolved our DirectBuy feed based experience and considerably expanded the feature set to deliver a more holistic shopping solution. Most notably, our new shop by category offering was launched to all existing clients in March, giving them the ability to browse and discover a range of categories Meeting more of their everyday needs and supplementing our more serendipitous trending for you and complete your looks offerings. Following the Shop by category launch, we saw a meaningful increase in client engagement that led to the average weekly units ordered per client reaching a record high in the 3rd quarter. In addition, we've noted that our newest fixed clients are purchasing through direct buy at increasing rates, thereby meeting more of their needs and increasing their average spend with us. In fact, we've seen that each quarterly cohort of new fixed clients Who have been with us for 30 days or less has purchased through DirectBuy at a higher rate than those cohorts that preceded it. Seeing clients engage earlier with DirectBuy highlights how the experience is becoming an immersive part of our ecosystem and allows us to grow client value sooner and expand our share of wallet. The success and incrementality that DirectBuy has demonstrated to date Gives us high conviction that our personalized shopping experience will significantly broaden the appeal and reach of Stitch Fix. We look forward to more fully unlocking our nearly $500,000,000,000 total addressable market opportunity over time. By the end of fiscal Q4, we plan to open up direct buy to new Stitch Fix clients and we will begin scaling our advertising efforts in fiscal 2022 to build greater awareness and mind share. With that, I'll turn it over to Dan. Thanks, Elizabeth, and hello to everyone joining us on today's call. While I've only worked with Cat for the last 6 months, I want to echo Elizabeth's remarks. Cat has built an amazing and highly differentiated client centric business over the past decade with so much potential still ahead. I look forward to continuing to partner with her in her new role as Chairperson and with Elizabeth as CEO. In the Q3, we generated net revenue of $536,000,000 representing 44% year over year growth compared to the same period last year, which was the COVID-nineteen trial. We grew active clients to over $4,100,000 an increase of 689,000 clients and 20% year over year. This also reflected an increase of 234,000 active clients quarter over quarter and our 2nd highest quarterly client addition ever. The momentum in active client growth was driven by strength in fixed demand, Lower dormancy rates as we lack year ago COVID softness and reengaging past clients. Net revenue per active client of $4.81 Increased 3% quarter over quarter compared to $4.67 in Q2 2021 and declined 3.4% year over year. As we shared in past quarters, this year over year decline is driven primarily by our increasing new client growth. With an influx of new clients that are early in their spending journey with us, revenue per client may be lower until these new cohorts of clients have more time on our platform. Q3 gross margin grew to 46%, which marked our highest quarterly gross margin since fiscal 2017. It represented a sequential increase of over 3 10 basis points from Q2 and a 5 20 basis point increase from the same period last year. Year over year, these gains are primarily driven by improvements in inventory health and lower merchandise cost. Quarter over quarter, these gains were largely driven by lower merchandise costs and improved transportation costs. Q3 advertising was 9.1 percent of net revenue, a sequential increase of 80 basis points from Q2 and a 110 basis point decrease from the same quarter last year. Other SG and A excluding advertising 41.4 percent of net revenue in Q3, a sequential decrease of 120 basis points from Q2 and a 160 basis point decrease in the same period last year. Despite our progress in the quarter, like many others, we are seeing continued labor market competition And we'll continue to invest to attract and retain the best talent to support long term growth and enhance the client experience. Q3 adjusted EBITDA was $11,600,000 and reflected the flow through of higher revenue, improved gross margins And efficient advertising spend in the quarter. Q3 net loss was $18,800,000 and diluted loss per share was $0.18 We ended the quarter with no debt and $303,000,000 in cash, cash equivalents and highly rated securities. And earlier this month, we renewed a 3 year $100,000,000 revolving credit facility to provide us with greater flexibility to invest and accelerate growth. We are pleased with our outperformance in Q3 and are excited for the improvement in the apparel market backdrop to continue. With that, let me now share our updated outlook for the remainder of the fiscal year. In Q4, we expect net revenue in the range of CAD540 the range of $15,000,000 to $20,000,000 or 2.8% to 3.6%. To wrap up, Our 3rd quarter results and outlook underscores our strong business momentum and enduring secular trends. We're continuing to innovate on behalf of our clients and are focused on driving long term growth By bringing more consumers into our ecosystem of personalized shopping experiences, we remain very excited for both our fixed and shop offerings going forward. With that, we're now ready for your questions. Operator, I'll turn it over to you. Thank you. And we'll take our first question today from Edward Yruma with KeyBanc Capital Markets. Thanks for taking the question and congrats on the momentum. I guess first you guys called out a couple of categories that were working from an apparel perspective. It sounds like a lot Tired to kind of travel and reopening. I guess, how would you characterize performance and where to work? I assume that's going to become a tailwind at some point. Have you started to see it? And then as a follow-up, as it relates to direct buy, I think you once commented that the gross margin was comparable and you expected that to go higher over time than fixed. Just kind of curious where you stand with that today? Thank you. Thanks, Ed. Great questions. I can start with the first one and then I'll hand it to Dan on the Directed by gross margin question. Yes, I think we're really pleased with what we're seeing in terms of consumer preferences. It's interesting because active and athleisure continue to be Highest growth categories, so I think those are here to stay. I do think we'll probably see those decelerate over time. And we are seeing a growth in client Fixed requests as well as just overall trends back into workwear and work categories, but we do think there's kind of a trend towards more comfortable Attire, given the hybrid work environment. So we do believe this is a tailwind. We're particularly excited about our men's business, because we think this is a set of categories that's going to bring him back shopping again more often, as well as within our women's segment. So we're starting to see that. Within direct buying the gross margin, let me hand it to Dan for that. Hi, Edward. Thanks for the question. Yes, what we said in the past Is that we thought they were very comparable and we look at this pretty close and on a gross margin basis that's accurate. They're very comparable. We do like what we see on a contribution margin basis as we look at the units, the contribution profit per unit in SHOP, just because there's less costs Associated with styling and the pick, we pick 5 items for a fix, 10 for kids. But both are we like the profitability of both and SHOP is going to continue to expand in that area. And so we're excited about that about what we see on a contribution profit per unit in the SHOP Next, we'll hear from Mark Mahaney with Evercore ISI. Okay. Let Let me try two questions. One, Cat, I think you talked about the ability to get tens of millions more customers in the future. Just a high level, you built this business from scratch. When you think about getting to those kind of numbers, which would be materially higher than where you are today, what are the bogeys or the proxies that make you think How can you go from 4,000,000 to tens of 1,000,000 of customers? And then Elizabeth, on the reactivations, what do you think, if you Peel back what drove that? Was that just people finally coming back out and wanting to shop again? Or to the extent that Some of the personalization things you've done or the way you reengage with clients. So how much of those reactivations were kind of market driven versus company specific Thank you. Thanks for the questions, Mark. I'll start out. I mean, honestly, Elizabeth will be, I think, Justin is a lot more equipped, I think, to answer that first question. But I think that thinking about DirectBuy and thinking about what a different case it is. And I think some of the examples that Elizabeth shared in the earnings call kind of show light on those where Fixes really are, it's an amazing vehicle to be able to have more of like a lean back and have the shopping done for me experience. But there's a lot of market opportunity both in being able to help people to discover in a more active shopper and somebody who's looking more for Something specific and somebody who wants more of a say in what they're receiving. And this is a really amazing The kind of point in time when a lot of people are really shifting market share onto online channels and that, and where people really are looking for really differentiated And I think Stitch Fix is really well suited for that. Elizabeth, why don't you take the rest of this? Yes. I think I captured it well. I mean, if you think about just 100% share of wallet of consumers in their purchase occasions, we can just address even more by opening up And so I think it's a lighter weight entry point, but also just a greater share of purchase occasions. So I think Cat answered that well. And we're already seeing that in terms of the incrementality with our Current clients, but also just as we've asked clients on their interest level, we know that it appeals very, very widely. And then on reactivations, we're really Excited about what we've been seeing there. I think there's lots of reasons to be starting to get dressed again. So I'm sure that's part of the tailwind, but we're also just seeing Really strong strength in our organic channels, whether people are coming directly to stitchfix.com or organic search. We We've also seen strength within some of our media channels that are building awareness. But I think when we see things like reactivations, what gets us excited is That typically means like there's a lot of promoters out there of what we're doing, and people, frankly just wanting to shop again and coming back that maybe We're shopping as much during COVID and are coming back to us. And then I think we've just seen All the channels that work well for us in marketing just continue to work hard. So overall, just real strength in our customer demand and people kind of voting for their feet for Next, we'll hear from Mark Altschwager with Baird. Good afternoon. Thanks for taking my question. So on the quarterly net adds, the 2nd time this year we've seen the over $200,000 Obviously, we're cycling a period of Some easier compares with some clients not engaging in the categories much and perhaps some pent up demand here. But maybe just help us understand, What role do you think Stimulus played in this, if any? And to what extent do you think there's been a bigger unlock here in terms of how you're approaching Both acquisition and reactivations that could potentially drive a faster pace in that kind of quarterly net add figure as we move forward to the next several quarters here. Yes. Thanks, Mark, for the question. Why don't I let Dan Take that one. I'm happy to chime in after. Yes. Thanks for the question, Mark. We looked at the stimulus and to see if we See anything in there and there was nothing that we came to any conclusive analysis that had where stimulus played an impact on us. As we mentioned previously, the sequential adds for this quarter was a combination of new to Stitch Fix, Customers that have lapsed that have reengaged, which makes a lot of sense since we know those customers and they're ready to buy again. And as you mentioned, as well as The lower gross adds a year ago during the COVID trial. Going forward, as we go into Q4, There is the summer season that we see ahead of us, and so we will continue to watch our ads closely. But the tailwinds we see, we're happy with. That's great. And maybe Dan, if I could follow-up just kind of more broadly. I In the investor deck, the most recent investor deck that was posted, we're still talking about the kind of 11% to 13% longer term margins. Any high level guideposts you can provide on how we should be thinking about just the level of profitability in fiscal 2022? Yes. So again, we're in a unique position to expand our addressable As we talked about, so we are in growth mode. We see an incredible opportunity with us in expanding our adjustable market with the launch with DirectBuy And we're excited about that. And at the same time, we're focused on operational efficiencies in all the areas you would expect, including on our upside, Making sure our marketing is very efficient, but we're going to continue to invest as we grow depth and selection on inventory, as we hire new tech and product people for the client as we build out new warehouses. So we're not providing guidance going forward, but we're focused on operational efficiency where we have it and we're going to continue to invest As we focus on growth and have a real focus on long term free cash flow, given this addressable market that we think is quite expansive and enormous in front of It's really helpful. Thanks for all the color and best of luck. We'll now hear from Ross Sandler with Barclays. Hey, nice job on the quarter. Just two questions here. The keep rate historically has been around like 2 items per fix, I believe. And the question is, With the new fixed preview product, are you seeing a noticeable increase for people that use that Versus not use it in terms of the keep rate? And then the second question, any color on The gross margin, Dan, you listed a couple of things, but is your own exclusive brands Having an impact there and how do you feel about the sustainability of the that 46% looking forward? Thanks a lot. Thanks, Ross. Great questions. I can start on the first one with fixed preview and then I can hand it to Dan to add on and take the other on gross margins. Yes, I think one of the things we're very excited about with fixed preview is that we have seen positive momentum on AOV as a result of actually kind of a combination improving as well on our traditional fixes. That's something that we saw improved quarter over quarter year on year across all of our Categories of women's, men's, kids in the UK. So I think in general, we just continue to improve across the board, but fixed preview It does have an extra boost, we think in part because clients get kind of 2 bites of the apple, so to speak, of giving us input on their fix. Let me hand it back over to Dan. Yes. On the gross margin question, we did see strong gross margins in Q3 at 46%. We do have some seasonality going into the summer season where our ASPs will come down as people are buying More summer versus fall versus spring merchandise. And so that might have a small impact on gross margins. We are seeing tremendous momentum with Private label, we're happy with it. It is strong gross margins and we're going to continue to add, as I mentioned earlier, depth in selection. So we will continue to add inventory For our direct buy experience, we think selection matters tremendously. How that plays out in gross margin? Again, we don't guide to that, But we don't see anything that is negatively impacting gross margins except for seasonality and of course, as we grow our selection for inventory for our Directfix customers. Mr. Sandler, do you have anything further? No, that was great. Thank you. Thank you. We'll now hear from Cory Carpenter with JPMorgan. Great. Thanks for the questions. I had 2 maybe first, could you talk a bit about where you are With fixed cycle times, and are those kind of back to the pre COVID levels. And then, wanted to talk a bit about the U. K. Where you recently had your 2nd anniversary. Maybe if you could just talk about the progress you've made there in the state of the U. K. Business today? Thanks. Great. Thanks, Corey. I can start I'll actually start with your second question on the U. K. And then I'll hand it over to Dana on the fixed cycle time. We're really pleased with what we're seeing in the U. K. You're right, we just had our 2nd anniversary, which is very exciting. We've seen triple digit growth year on year and just continued momentum in that business of acquiring new women's and men's clients. And As you know, we incubated the fixed preview experience there, which has a bit had a very positive impact on average order value. So everything we're seeing just gives us a lot of optimism, both for continuing to expand and grow in the UK, but really a lot of conviction on what this means for us to be able to take our business global and continue to bring Stitch Fix to more geographies. So overall, really pleased with the momentum there. With that, let me hand it to Dan on the cycle times. Yes. Hi, Corey. On the cycle times that we mentioned in March during Q2 call that we had seen an increase in cycle times during the holiday and then again February, which we attributed to the weather and we expected those cycle times Come down in March April, and we did in fact see cycle times come down mainly on both our client holding time and our carrier delivery times. They have come down to pre holiday levels. Again, we're excited to see that. They're still up year on year, but again, they are back to pre holiday levels. Great. Thank you. We'll now hear from Erinn Murphy with Piper Sandler. Great. Thanks. Good afternoon. Two questions for me as well. First, for Elizabeth, could you talk about how growth broke down during the Quarter across men's, women's and kids. And as kids as you lean into the back half of the year, is that a bigger opportunity with back to school being in person this year? And then a question for Katrina on just as you shift your focus deeper into sustainability, can you talk about the role that you See if at all for resale of rental and how do you innovate around the shipping of the fixes? Thank you so much. Thanks, Erin. Great questions. Yes, I mean, we're really pleased with the momentum we've seen on a broad basis across the business. I think in particular, Women's Kids BUK have really had extraordinary growth. I think our men's business is not quite yet where we want it to be. I think in part, we believe those consumers just have not been shopping as much. We Started to see really good things on success rate and our assortment. We have a lot of confidence with the right assortment and we're just seeing the kinds of requests our men's clients are having. It of course grew year on year, but we expect to start to see more acceleration as we move into really people getting back into apparel and back to work. On the kids business, yes, I think that business overall has been up triple digits year on year. We passed a number of great mile that we don't disclose externally, but we feel really confident. We actually had a very strong back to school season last year. It was actually about 60% growth year on year even though kids were largely in remote mode, kids still grow. So we would hope that it will be even stronger this year as kids are getting back So we of course are gearing up for that. I'll hand it over to Cat on the sustainability question. Yes. Great questions. And I mean, I think the high level answer is a little bit kind of to be determined. I'm not going to have a lot of specifics to share yet. At Stitch Fix, we just recently joined the Sustainable Apparel Coalition. It's been really kind of productive and helpful to be able to work with many other Leaders around what are the elements in which we can be more sustainable. You mentioned shipping. I mean shipping certainly is a place where Yes, I think there is some room for improvement. I would also say that the studies that we've done have actually shown that shipping product is actually a much more kind of Efficient way than kind of heating and cooling really large footprint retail stores that is actually quite an inefficient way as we think about the expense Our environment, those stores are actually much worse for the environment than shipping back and forth. And so it's not to say there's not more room there, but it's definitely just And then to answer your question around rental and secondhand, we're very interested in kind of How can we extend the life of the garments? We have many clothes that we've sold into people's homes. We know a lot about that. The data advantage that we have can be just as power If not more powerful in the secondhand world than the first hand world. Directionally, I think we're probably more interested in secondhand versus rental, to be honest. But there's definitely a lot of excitement and internal momentum. We have nothing to share specifically on it, but it's definitely something that's on our minds as a business. Thank you so much. Youssef Squali with Truist has our next question. Hi, this is Daniel Speed on for Youssef. Thanks for taking the questions. On inventory, it looks like another Big build this quarter, any changes there in terms of mix either among categories or And then if you could provide any update on the progress around the new inventory models You've been experimenting with whether it's, Plex or the consignment model. Thanks. Thanks, Daniel. Let me start with the second question on the new inventory models and then I'll hand it to Dan on the first question on the build of inventory. Yes. We definitely are excited about the investments we're making behind a consignment like model as well as drop ship. We see Just overall, the growth in our selection to be a big strategic priority as we expand our offering. We really consider our secret sauce to be around matching clients with the best product for them and helping transform the way they find what they love. And part of that means we want to be able to un gate selection for our And so we've made progress every quarter for the last year or so on developing the technology, Partnering with many of our great vendors in beta mode of these new offerings. And so we have nothing specific yet to share, but that we will be making Multi quarter investments to scale up these new models. So hopefully we can share more in the next couple of quarters that's more specific than that, but we definitely view it as a priority for the business. Dan, do you want to take the first question? Sure. Yes. On inventory, as you mentioned, Daniel, we are up 16% quarter on quarter to $250,000,000 of net inventory. And again, we are as Elizabeth mentioned and I mentioned earlier, as we Scale DirectBuy breadth and depth of selection become important as we want our DirectBuy customers to come back weekly and daily, and we're going to continue to invest in selection. We are focused on inventory, Making our inventory, buying our inventory in the most efficient way possible. We don't break out mix of inventory, but We're going to continue to focus both on private label and third party. And again, Elizabeth just gave the update on the different inventory models. So it's something We are aware of and focused on, but the client experience is what we're really focused on as we scale up shop, And likely, we will continue to invest in the breadth and selection for inventory. Great. Thanks. Our next question comes from Simeon Siegel with BMO Capital Markets. Thanks. Hey, everyone. Good afternoon. Great results. And Kat and Elizabeth, congrats to both of you on the next chapters. How are you guys thinking about expectations for revenue per client as you continue to roll out of new initiatives? Just any way to and then maybe for this quarter, Thinking about where you rounded out any way to parse out revenues per client from, I guess, the new cohort of ACT clients versus maybe the existing clients? Thanks. Thanks, Simeon. Great question. Let me hand that one to Dan. Yes. The ARPC, we talked about the change year on year and we addressed this last quarter and again this quarter. We have such a strong influx of new clients and it does take time with them to spend on our platform. And as you know, we define revenue per active based on a 12 month trail. What I can share is That when we look at it on a cohort basis, we like what we see because we see the newest cohorts spending more than previous cohorts. And so that's a big positive for us. Again, the way the RPAC is calculated on that 12 month trend just This means that we need more time for these influx of new clients to spend with us. So again, we're happy with what we see on Share of wallet from every cohort that we look at. Awesome. Thank you. And then maybe for Cat or Elizabeth. So as you think about the broader It just seems everyone is seeing better full price sell through. How do you think about does that give you an umbrella? I know you're not normally Indirect competition with, let's say, somebody walk into a store, but just how do you think about that, the let's just call it the positive inflation we're seeing across apparel and what that does to the way you price? Yes, I can take that one, Simeon. It's a great question. I mean, we've continued to see great demand, albeit not being a promotional player, and I think that Speaks to the strength and sort of the core model for us is meeting the need of getting the client the right product versus a highly discounted product that might not actually And so I think that's always been a big strategic advantage for Stitch Fix. And I think there's a lot of pent up demand right now to get the product you really want, which plays well to our model overall as consumers are looking for things that they maybe haven't shopped for in a long time, which I think is also demonstrated by some of these Big growth rates in categories of the assortment that probably were less addressed over the last year or so. So it probably does play well to our model. We also do a really good job, I think, of offering a combination of lower price points, mid price points and high price points, and we have seen real strength in those lower price points Over the course of last year as consumers in many situations have been economically constrained, and so I think we pride ourselves on just really matching the client with the right product. Thanks a lot guys. Great job and best of luck for the year. Thank you. Lauren Schenck with Morgan Stanley has our next question. Great. Thanks for taking my question. I just wanted to ask About the inventory reserve benefit in the Q3, I think it was a fairly sizable tailwind, just sort of help us quantify that and then how much it should hurt or help in the Q4 since I think we're lapping a significant reserve benefit last year in Q4 as well. Thanks. Thanks, Lauren. Dan, do you want to take this one? Yes, I'll take this one. Yes, we did mention that the increase year on year In gross margin was primarily due to inventory health and lower merchandise costs. And you're right, there was some reserves that we took in A year ago, as we were in the COVID trial and our fulfillment centers were shut down and economies were closed down, we don't give guidance on inventory going forward. We do feel good about the health of our inventory. Tory, going forward, we do feel good about the health of our inventory. A lot of what we're receiving, we're buying because of the demand that we see. And so without providing forward looking guidance, what we saw in Q3 from an inventory perspective is the best guidance I can give at this point, because we feel pretty good about the health of our inventory and what we're buying. Okay. Thanks. And then just a quick follow-up on the net adds. Any way to quantify percentage of new versus existing or sort of reactivated customers during the quarter? Dan, do you want to take that one as well? Yes. We don't break out the ads. I guess we'll say that they were very strong across the different spectrums, including new and reactivations. We're very happy with what we saw in Customers coming back to us and again that makes a tremendous amount of sense because they want to buy, we know them, they love of course The styling services we offer, and so we did see strength in both channels. Okay. Thank you. Maria Ripps with Canaccord has our next question. Great. Thanks for taking the questions. So now with the direct deposit or broader launch a few months away, can you maybe talk about your marketing strategy around it? And how do you need to adjust your messaging maybe to educate about this sort of emerging new offering. And then secondly, just to follow-up on the U. K, it seems like you have There's sort of a lot of progress there. Can you maybe just talk about what are some of the additional investments that are still needed to further sort of improve your scale in that market? Yes. Thank you, Maria. Great question. So, yes, on DirectBuy, we're very eager and Excited to start opening that experience up at the end of this fiscal year to new customers. And then over the course of fiscal 2022, we'll definitely be Evolving and growing our approach to marketing and yes, it's a very good point. I think we have reasonably good brand awareness and a good understanding of what Stitch Fix has meant Historically, in terms of our styling surfaces and fixed offering. So we've done some early testing on new messaging and we'll be continuing to do that over the months To comment, really being very cognizant of how do we open up the aperture of how people think about Stitch Fix and This broader notion of personalized shopping and sort of shopping and styling on demand, so to speak, with our shopping fee based experience. So, would anticipate seeing some new marketing for us in fiscal 2022 as we begin to tell that story. And then on the U. K, yes, we're very pleased with the progress. We have yet to open up direct buy within that market. So that's, of course, a Similar idea of what we've been doing in the U. S. That we need to bring to that market. We continue to grow the strength of our exclusive brands and our assortment there. So it's really just a continuation of what we've been doing as well as bringing the innovation that we're building in both markets to that geography. But it's scaling nicely. I mean, I think we feel great about the We have, but absolutely see opportunity to innovate and expand it the same way we're doing in the U. S. Great. Thanks for the color. That's very helpful. Our next question will come from Ike Boruchow with Wells Fargo. Hey, excuse me. Congrats, everyone. I guess, Dan, just another question on inventory. As you're building it up To deal with the increased breadth and depth that you need, especially for things like shop your categories, is there a way to think about inventory going forward for the company? What is needed On the balance sheet versus in years past, when direct buy wasn't as meaningful, just trying to understand how much inventory the model Should be carrying going forward given some of the shifts in strategy? Any color there would be great. Thank you. Yes, again, outside of saying the focus on breadth and depth, we're not providing any guidance And we are going to ensure that our customers have great selection in the direct buy experience. We don't again, Going forward, we're still building the way our assortment will show, and we're not giving guidance to inventory at this time. Okay. Thanks. Our next question comes from Janet Kloppenburg with JJK Research. Hi, everybody, and congratulations on a nice quarter. Not to beat a dead horse on inventory, I was wondering if you could talk a little bit about your confidence in your assortment planning and by category and seasonality as you broaden the direct And to think about transitioning from summer into early fall into holiday. And also As that selection expands, I was wondering whether we should think about any residual issues that may become more prominent because you are Offering more product to a wider audience. So I'd love to learn more about that. Thanks so much. Thanks, Janet. Great question. I can take that. And Dan, if you have any other color to add, feel free to chime in. Yes, I think We've been having kind of a this dual channel approach for a while now. Of course, we're planning to expand DirectBuy in a very meaningful But I think we have a good understanding of what we're seeing. We've kind of shared even circa a year ago some of the differences that we see in direct 5 different categories that tend to have deeper penetration than what we've seen in our fixes. So whether that's footwear or outerwear or accessories, we know the kinds Categories that we're able to actually start to penetrate in a more meaningful way with direct buy, which is exciting. We also have, I think one of the big benefits of the way Katrina and the team envision this model as all the different places that we get feedback and early signal from our clients, the combination of style shuffle, Our client feedback notes to our stylists, which of course even can help us understand trends before they come for direct buy as well, Feedback that we get on 85 percent of the items we ship, so all of that has helped really inform the kind of continued buying of our assortment. So I think we're feeling overall very optimistic and that we're in good shape on it. I do think this point that Dan and I have both raised around Going deeper with the great brands we have and starting to broaden that selection, that is a big push for us over this coming year, so I'm sure we'll learn as we go. But given how data driven we are, we're feeling, like we're in good shape in terms of being able to predict that assortment. Dan, I don't know if you have anything you want to add on there. No, I think you covered it. I think our customers continue to tell us that they want more as they come back for direct buy, and that's very telling for us. And so we want to make sure that, from a client satisfaction perspective, We have the selection and assortment to bring our clients back multiple times throughout a month or even a week for that matter. So Yes, we're going to continue to invest in this area going forward. But as Elizabeth mentioned, we're still building this and we'll provide more on selection in future quarters. And if I could ask one more on private label. I think as it when it began, it was focused on filling in voice and focused on core and essentials. And Yes, that's a great question, Janet. Yes, we definitely are expanding our offering there. I think one thing we're really is the kind of client happiness and success rates we do see with our exclusive brands. For example, in our kids business, we actually see Higher happiness and like scores with most of our exclusive brands over what our wonderful national brands. So we think it's incredibly important to have that breadth of assortment for our clients, Both market brands as well as our own exclusive brands, but we are seeing continued strength of our ability to innovate and outperform there and use our data Great product, including categories where we also carry market brands. So we definitely have more to come in the quarters where we will be launching some additional new Brands and categories that we think are of particular strength right now, so we will be continuing to invest there. Thanks so much. And our final question will come from Dana Telsey with Telsey Advisory Group. Good afternoon, everyone, and nice to see the progress. As you think about the number of stylists in engagement, given the growing customer base, How are you thinking about stylists and scaling them, especially given new features like what you're doing with live styling? Is there what is the retention of stylists, adding of new stylists? How is that adding to average increase in revenues? Thank you. Yes. I can start on that, Dana. And Dan, feel free to chime in if you have anything to add there. Yes. We have added a large number of stylists over the last year and we'll continue to invest in that differentiation for Stitch Fix. To your point on live styling, they play A role in a number of places for our clients both are fixes, fixed preview, live styling. They also play very active role in training our machine learning with our data science team for outfits, which our ability to generate algorithmic outfits in a feed is, we think, a real source of differentiation that requires That human touch to help build and train those models as well as quality control. So we feel like we have pretty good understanding of Forecasting how to grow that population and we'll figure out things like live styling, that's not probably something a client does every week. It's probably a more Episodic type of experience and as we go from incubating that to figuring out the right way to scale it, we'll definitely take a kind of Test and learn approach of how best to scale that. But I think it's a population we understand well. We love that we're able to broaden the That will conclude today's question and answer session. I will now turn the conference over to Ms. Balding for any additional closing remarks. Thank you so much for joining us today. We look forward to seeing you virtually or hopefully in person in the coming months. This concludes today's call. Thank you for your participation. You may now disconnect.