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 comments 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 third quarter of fiscal 2021. Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix; Elizabeth Spaulding, President; and Dan Jedda, CFO. 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. 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'll 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. 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 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 third 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 Fix and Direct Buy offerings, and was reinforced by an improving apparel retail market backdrop.
As Elizabeth will discuss later, we continued 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 Fix offering and introduce Direct Buy to new clients by the end of the quarter. Let me discuss our Q3 results in more detail. In the third quarter, we generated net revenue of $536 million, reflecting 44% growth year-over-year. During the quarter, we grew our active client count to over 4.1 million, representing a year-over-year increase of 689,000 clients or 20% growth. On a quarter-over-quarter basis, we added 234,000 active clients, our second- highest client addition ever.
In Q3, we delivered a net loss of $18.8 million and adjusted EBITDA of $11.6 million. 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 capabilities. Our radically different client experience is built on getting to know every client and gathering feedback around their detailed preferences, resulting in a rich and highly differentiated data moat. Through our powerful combination of data science and creative human judgment, we've shipped over 50 million Fixes to date. 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 Direct Buy, 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 consumers' 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.
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's 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 am 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 million clients today that we serve today to the tens of millions more that we plan to serve in the future. With that, let me turn it over to Elizabeth Spaulding.
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 as 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. In Q3, we saw robust first Fix demand and reactivation rates. Our Fix 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 Fix offering in Q3, we drove strong client acquisition trends and improved client outcomes. In the first three quarters of fiscal 2021, we've already added more net active clients than any full year since 2015. In Q3, we saw strong client demand from first-time and reactivated clients that resulted in our second-highest quarter-over-quarter client additions on record.
In line with recent quarters, nearly 80% of our first-time Fix clients in the quarter purchased at least one item and shared that they look forward to their second 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. We've seen an increase in requests for vacation-related items and Fixes. Bright seasonal colors in particular are doing exceptionally well. In men's, he is beginning to venture out of leisure wear and seeking more structure with button-up shirts trending recently in our Fix request notes. These positive underlying demand and client satisfaction results reflect our differentiation 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 Fix 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's shipped and have more agency in selecting the items they receive.
Based on the positive impact Fix 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 3/4 of clients opt into Fix Preview with strong repeat engagement, which has driven higher success rates and higher average order values. With these gains and the broader expansion of Fix 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 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 Fix experience might not have. Now turning to Direct Buy. In Q3, we evolved our Direct Buy 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 with item recommendations personalized to their preferences. Clients can now engage with Direct Buy for intent-based shopping, meeting more of their everyday needs, and supplementing our more serendipitous Trending For You and Complete Your Look offerings. Following the Freestyle 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 third quarter. In addition, we've noted that our newest Fix 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 Fix clients who have been with us for 30 days or less, has purchased through Direct Buy at a higher rate than those cohorts that preceded it. Seeing clients engage earlier with Direct Buy 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 Direct Buy 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 billion 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. Hello to everyone joining us on today's call. While I've only worked with Kat for the last six months, I want to echo Elizabeth's remarks. Kat 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 third quarter, we generated net revenue of $536 million, representing 44% year-over-year growth compared to the same period last year, which was the COVID-19 trough. We grew active clients to over 4.1 million, 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 second- highest quarterly client addition ever.
The momentum in active client growth is driven by strength in Fix demand, lower dormancy rates as we lap a year ago COVID-19 softness, and reengaging past clients. Net revenue per active client of $481 increased at 3% quarter-over-quarter compared to $467 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 310 basis points from Q2 and a 520 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 are largely driven by lower merchandise cost and improved transportation costs. Q3 advertising was 9.1% 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&A excluding advertising, was 41.4% of net revenue in Q3, a sequential decrease of 120 basis points from Q2, and a 160 basis point decrease from 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 $11.6 million and reflected the flow-through of higher revenue, improved gross margins, and efficient advertising spend in the quarter. Q3 net loss was $18.8 million, and diluted loss per share was $0.18. We ended the quarter with no debt and $303 million in cash equivalents, and highly rated securities. Earlier this month, we renewed a three-year, $100 million 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 $540 million-$550 million, representing growth of 22%-24% year-over-year.
We expect to generate positive adjusted EBITDA in the range of $15 million-$20 million or 2.8%-3.6%. To wrap up, our third quarter results and outlook underscores our strong business momentum and enduring secular trends. We are 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 Fix and Freestyle offerings going forward. With that, we're now ready for your questions. Operator, I'll turn it over to you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow us to accurately treat our equipment. Again, press star one to ask the question. We'll take our first question today from Edward Yruma with KeyBanc Capital Markets.
Hi, good afternoon. 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. Sounds like a lot of tie to 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? 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 Fix. Just 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 Direct Buy gross margin question.
Yeah, 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 our highest growth categories, so I think those are here to stay. I do think we'll probably see those decelerate over time. We are seeing a growth in client Fix requests, as well as just overall trends back into workwear and work categories. We do think there's a trend towards more comfortable attire, given the hybrid work environment. 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. We're starting to see that. Within Direct Buy and the gross margin, let me hand it to Dan for that.
Hi, Edward. Thanks for the question. Yeah. What we said in the past is that we thought they were very comparable. 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 contribution profit per unit in Freestyle, just because there's less costs associated with styling and the pick. We pick five items for a Fix, 10 for kids. We like the profitability of both, Freestyle is going to continue to expand in that area. We're excited about what we see on a contribution profit per unit in the Freestyle experience.
Thank you.
Next, we'll hear from Mark Mahaney with Evercore ISI.
Okay. Let me try two questions. One, Kat, 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 bogies or the proxies that make you think you can get there? How can you go from four million to 10 of millions of customers? 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? The extent that was some of the personalization things you've done or the way you reengage with clients. How much of those reactivations were market-driven versus company-specific driven? Thank you.
Thanks for the questions, Mark. I'll start out. Honestly, Elizabeth will be, I think, just as well, if not more equipped, I think, to answer that first question. I think that, thinking about Direct Buy and thinking about what a different use case it is, and I think some of the examples that Elizabeth shared in the earnings call show light on those. Where Fixes really are, it's an amazing vehicle to be able to have more of a lean back and have the shopping done for me experience. There's a lot of market opportunity, both in the being able to help people to discover and 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.
This is a really amazing point in time when a lot of people are really shifting market share onto online channels, and where people really are looking for really differentiated experiences and ones that really speak to them. I think Stitch Fix is really well-suited for that. Elizabeth, why don't you take the rest of this?
Yeah. I think I captured it well. If you think about just the 100% share of wallet of consumers and their participation, we can just address even more by opening up Freestyle. I think it's a lighter weight entry point, but also just a greater share of participation. I think Kat answered that well. I'm 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 widely.
On reactivations, we're really excited about what we've been seeing there. There's lots of reasons to be starting to get dressed again, so I'm sure that's part of the tailwind. We're also just seeing really strong strength in our organic channels, whether people are coming directly to stitchfix.com, organic search. We've also seen strength within some of our media channels that are building awareness. When we see things like reactivations, what gets us excited is that typically means there's a lot of promoters out there of what we're doing. People, frankly, just wanting to shop again and coming back, that maybe weren't shopping as much during COVID-19 and are coming back to us. We've just seen all the channels that work well for us in marketing just continue to work hard.
Overall, just real strength in our customer demand and people voting with their feet for this to be their form of shopping.
Okay. Thank you, Elizabeth. Thank you, Katrina.
Next, we'll hear from Mark Altschwager with Baird.
Good afternoon. Thanks for taking my question. On the quarterly net add, the second time this year we've seen the over 200,000. You obviously were cycling a period of
Some easier compares with some clients not engaging in the category as much, and perhaps some pent-up demand here. Maybe to help us understand how we have won, 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?
Yeah. Thanks, Mark, for the question. Why don't I let Dan take that one and I'm happy to chime in after.
Yeah. Thanks for the question, Mark. We looked at the stimulus and to see if we could 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. As you mentioned, as well as the lower gross adds a year ago during the COVID trough. Going forward, as we go into Q4, there is the summer season that we see ahead of us. We'll continue to watch our adds closely. The tailwinds we see, we're happy with.
That's great. Maybe Dan, if I could follow up just kind of more broadly, I think in the most recent investor deck that was posted, we're still talking about the kind of 11%-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?
Yeah. Again, we're in a unique position to expand our addressable market, as we talked about. We are in growth mode. We see an incredible opportunity with us in expanding our addressable market with the launch with Direct Buy. We're excited about that. At the same time, we're focused on operational efficiencies in all the areas you would expect, including on our ops side, making sure our marketing is very efficient. 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 experience, as we build out new warehouses.
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 us.
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 two items per Fix, I believe. The question is, with the new Fix Preview product, are you seeing a noticeable increase for people that use that versus not use it in terms of that keep rate? 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? How do you feel about the sustainability of that 46% looking forward? Thanks a lot.
Thanks, Ross. Great questions. I can start on the first one with Fix Preview, and then I can hand it to Dan to add on and take the other on gross margins. I think one of the things we're very excited about with Fix Preview is that we have seen positive momentum on AOV as a result of actually kind of a combination of keep rate as well as AURs and something that we've seen in the U.K. as well as in the U.S. Overall, though, I would say keep rates are improving as well on our traditional Fixes. That's something that we saw improve quarter-over-quarter and year-on-year across all of our categories of women's, men's, kids in the U.K. I think in general, we just continue to improve across the board.
Fix Preview does have an extra boost, we think in part because clients get kind of two bites at the apple, so to speak, of giving us input on their Fix. Let me hand it back over to Dan.
Yeah, 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. That may have a small impact on gross margins. We are seeing tremendous momentum with our private label. We're happy with it. It is strong gross margins. We're going to continue to add, as I mentioned earlier, depth and selection. 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. 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 Direct Buy customers.
Just Dan, do you want to add anything further?
No, that was great. Thank you.
Thank you. We'll now hear from Cory Carpenter with JP Morgan.
Great, thanks for the questions. I had two. Maybe first, could you talk a bit about where you are with Fix cycle times and are those kind of back to the pre-COVID levels?
Wanted to talk today about the U.K., where you recently had your second anniversary. Maybe if you could just talk about the progress you've made there, and the state of the U.K. business today. Thanks.
Great. Thanks, Cory. I can start. I'll actually start with your second question on the U.K., and then I'll hand it over to Dan Jedda on the ship cycle time. We're really pleased with what we're seeing in the U.K. You're right, we just had our second anniversary, which is very exciting. We've seen triple- digit growth year-over-year and just continued momentum in that business of acquiring new women's and men's clients. As you know, we incubated the Fix Preview experience there, which has had a very positive impact on average order value. Everything we're seeing just gives us a lot of optimism, both for continuing to expand and grow in the U.K., 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.
Overall, really pleased with the momentum there. With that, let me hand it to Dan on the cycle times.
Hi, Cory. On the cycle times, we mentioned in March, during our Q2 call, that we had seen an increase in cycle times during the holiday, and then again in February, which we attributed to the weather, and we expected those cycle times to come down in March and April. 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 were excited to see that. They're still up year-over-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 from me as well. First, for Elizabeth, could you talk about how growth broke down during the quarter across men's, women's, and 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? 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 or rental, and how do you innovate around the shipping of the Fixes? Thank you so much.
Thanks, Erinn. Great questions. We're really pleased with the momentum we've seen on a broad basis across the business. I think in particular, Women's, Kids, the U.K., 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've started to see really good things on success rate and our assortment. We have a lot of confidence it's the right assortment, and we're just seeing the kinds of requests our Men's clients are having. Of course, grew year-over-year, but we expect to start to see more acceleration as we move into really people getting back into apparel and back to work. The Kids business, I think that business overall has been up triple- digits year-over-year.
We've passed a number of great milestones that we don't disclose externally. 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. We would hope that it will be even stronger this year as kids are getting back-to-school . We of course, are gearing up for that. I'll hand it over to Kat on the sustainability question.
Yeah. Great question. 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. Stitch Fix, we just recently joined the Sustainable Apparel Coalition. It's been really productive and helpful to be able to work with many other industry leaders around what are the elements in which we can be more sustainable. You mentioned shipping. Shipping certainly is a place where I think there's some room for improvement. I would also say that the study that we've done had actually shown that shipping product is actually a much more efficient way than heating and cooling really large footprint retail stores. That is actually quite an inefficient way as we think about the extent to our environment. Those stores are actually much worse for the environment than shipping back and forth.
It's not to say there's not more room there, but it's definitely just kind of an interesting finding that we found. To answer your question around rental and secondhand, we're very interested in 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 powerful, if not more powerful, in the secondhand world than the firsthand world. Directionally, I think we're probably more interested in secondhand versus rental, to be honest. There's definitely a lot of excitement and an 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 Squali. Thanks for taking the questions. On inventory, it looked like another big build this quarter. Any changes there in terms of mix, either among categories or exclusive brands versus vendor brands? Then if you could, provide any update on the progress around the new inventory models you've been experimenting with, whether it's Flex Fix or the consignment model. Thanks.
Thanks, Daniel. Let me start with the second question on the new inventory models, then I'll hand it to Dan on the first question on the build of inventory. Yeah, 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 selections 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. Part of that means we want to be able to ungate selection for our clients. 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.
We have nothing specific yet to share, but that we will be making multi-quarter investments to scale up these new models. 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, Dan Jedda, we are up 16% quarter-over-quarter to $250 million of net inventory. Again, as Elizabeth mentioned, and I mentioned earlier, as we scale Direct Buy, breadth and depth of selection become important as we want our Direct Buy customers to come back weekly and daily. We're going to continue to invest in selection. We are focused on 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. Again, Elizabeth just gave the update on the different inventory models. It's something we are aware of and focused on.
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. Kat and Elizabeth, congrats to both of you on next chapters. How are you guys thinking about expectations for revenue per client as you continue to roll out new initiatives? Just any way to, and maybe for this quarter, just thinking about where you break it out, any way to parse out revenues per client from, I guess, the new cohort of active clients versus maybe existing clients? Thanks.
Thanks, Simeon. Great question. Let me hand that one to Dan.
Yeah. The RPAC, we talked about the change year-over-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. 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. That's a big positive for us. Again, the way the RPAC is calculated on that 12-month trend just means that we need more time for these influx of new clients to spend with us. Again, we're happy with what we see on share of wallet from every cohort that we look at.
Awesome. Thank you. Then maybe for Kat or Elizabeth. As you think about the broader promotional environment, it just seems everyone is seeing better full- price sell- through. How do you think about, because that could be an umbrella. I know you're not normally in direct competition with what gets when we walk into a store, but just how do you think about that, let's just call it positive inflation we're seeing across apparel and what that does to the way you price?
I can take that one, Simeon. It's a great question. We've continued to see great demand, albeit not being a promotional player, and I think that just 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 fit them. 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 really 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.
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 the last year as consumers, in many situations, have been economically constrained. I think what we pride ourselves on just really matching the client with the right product.
Thanks a lot, guys. Great job and best luck for the year.
Thank you.
Lauren Schenk 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 third quarter. I think it was a fairly sizable tailwind, just to sort of help us quantify that and then how much it should hurt or help in the fourth quarter since I think we're lapping a significant reserve benefit last year in the fourth quarter as well. Thanks.
Thanks, Lauren. Dan, do you want to take this one?
Yeah, I'll take this one. Yes, we did mention that the increase year-over-year gross margin was primarily due to inventory health and lower merchandise costs. You're right, there was some reserves that we took in a year ago as we were in the COVID-19 and our fulfillment centers were shut down, economies were closed down. We don't give guidance on inventory 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. 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. Just a quick follow-up on the net add. Any way to quantify % of new versus existing or sort of reactivated customers during the quarter?
Dan, do you want to take that one as well?
Yeah. We don't break out the adds. I guess what 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. 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. We did see strength in both channels.
Okay. Thank you.
Maria Ripps with Canaccord has our next question.
Great. Thanks for taking the questions. Now with the Direct Buy sort of 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 consumers about this sort of emerging new offering? Secondly, just to follow up on the U.K., because you have sort of a lot of progress there. Can you maybe just talk about what are some of the sort of additional investments that are still needed to further sort of improve your scale in that market?
Thank you, Maria. Great question. On Direct Buy, we're very eager and excited to start opening that experience up at the end of this fiscal year to new customers. Over the course of fiscal 2022, we'll definitely be evolving and growing our approach to marketing. 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 services and Fix offering. We've done some early testing on new messaging, and we'll be continuing to do that over the months to come. 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 feed-based experience.
Would anticipate seeing some new marketing for us in fiscal 2022 as we begin to tell that story. On the U.K., yeah, we're very pleased with the progress. We've yet to open up Direct Buy within that market. 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. 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. It's scaling nicely. I think we feel great about the offering 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 call. 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.
Yeah. 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. 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. 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 Buy program. I was wondering if you thought you had the right tools to buy at the right level by category and to think about transitioning from summer into early fall into holiday. 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. 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. Yeah, I think we've been having kind of a dual channel approach for a while now. Of course, we're planning to expand on Direct Buy in a very meaningful way, 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 Buy of different categories that tend to have deeper penetration than what we've seen in our Fixes. Whether that's footwear or outerwear or accessories, we know the kinds of categories that we're able to actually start to penetrate in a more meaningful way with Direct Buy, which is exciting.
I think one of the big benefits of the way Katrina and the team envision this model is all the different places that we get feedback and early signals from our clients. The combination of Style Shuffle, our client feedback notes to our stylists, which of course, again, can help us understand trends before they come for Direct Buy as well, feedback that we get on 85% of items we ship. All of that has helped really inform the kind of continued buying of our assortment. I think we're feeling overall very optimistic and that we're in good shape on it. I do think the points that Dan and I 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. I'm sure we'll learn as we go.
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 selection as they come back for Direct Buy, that's very telling for us. 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. Yes, we're going to continue to invest in this area going forward. As Elizabeth mentioned, we're still building this, and we'll provide more on selection in future quarters.
If I could ask one more on private label. I think when it began, it was focused on filling in voids and focused on core and essentials. I'm wondering as you're gaining confidence in this business, and obviously the margin enhancing nature of it, if you're thinking of broadening it to include more innovation and newness and fashion?
Yeah, that's a great question, Janet. We definitely are expanding our offering there. I think one thing we're really proud of 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 are wonderful national brands. 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. We are seeing continued strength of our ability to innovate and outperform there and use our data to build great product, including categories where we also carry market brands. 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.
We will be continuing to invest there.
Thanks so much.
Our final question will come from Dana Telsey with Telsey Advisory Group.
Good afternoon, everyone. Nice to see the progress. As you think about the number of stylists and 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 ? What is the retention of stylists, adding of new stylists? How is that adding to average increase in revenues? Thank you.
Yeah, I can start on that, Dana, and Dan, feel free to chime in if you have anything to add there. Yeah, 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 our Fixes, Fix Preview, Live Styling .
They also play a very active role in training our machine learning models 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, but requires that human touch to help build and train those models as well as quality control. We feel like we have a 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. As we go from incubating that to figuring out the right way to scale it, we'll definitely take a test and learn approach of how best to scale that. I think it's a population we understand well. We love that we're able to broaden the kinds of experiences and the way they add value to the customer experience.
Thank you.
That will conclude today's question and answer session. I'll now turn the conference over to Ms. Spaulding 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.