Okay, I think we'll get started. Good afternoon, everybody, and welcome to the Stitch Fix presentation. I'm Mark Altschwager, Senior Research Analyst at Baird. Stitch Fix is an innovative online retailer that leverages data science and human stylists to provide highly personalized shopping experiences. The company serves over 4 million active clients, including women, men, and kids in the U.S. and U.K. In April, Stitch Fix announced that Founder and CEO Katrina Lake will be transitioning to Executive Chairperson in August, and President Elizabeth Spaulding, who joins us this afternoon, will be taking over as CEO. Elizabeth joined Stitch Fix as president a year and a half ago. Since then, she's been leading the company's pivot into new revenue models, including Direct Buy, as well as new inventory models, which are in early stages of development.
Prior to Stitch Fix, she was the global head and founder of Bain & Company's digital practice. Elizabeth, thank you for joining the conference today.
Great. Thanks for having me, Mark. Excited to be here.
Great. Kicking us off, earlier this week, the company did report third quarter results. I was hoping we could start with just kind of quick highlights there.
Yeah. Well, we were really pleased with our quarter. We saw really strong revenue growth. Of course, we were lapping the COVID quarter of last year, but nonetheless, 44% growth we were really pleased with and just frankly feeling like our model is in the right place at the right time, and all the innovation that we're working towards is really beginning to come to life and bear fruit. We saw a tremendous net adds onto the platform, around 230,000.
After, kind of on the heels of multiple quarters of very strong net client additions, we've now added more clients in the three quarters of this fiscal year than any year on record, with the exception of fiscal 2016, and we still have one quarter left, so we feel really great about consumers moving to our platform and really just the seismic shift that we think is happening in apparel retail, where maybe 25% of the category was online pre-COVID, is now 40%. We're really benefiting from that as a truly personalized way to shop. We feel good about what we're seeing and are looking forward to continue to bring Stitch Fix to more and more customers.
Great. As I mentioned in the introduction, you are stepping into the CEO role in August. While this was announced in April, it seems like it's really been a well-planned succession over the past year and a half since you joined. Could you just talk about why now is the right time for the leadership transition?
Yeah. We've definitely gotten that question a lot. I think people kind of saw it coming, but a little bit may be surprised or wondering why April, why this moment. Katrina and I spent a lot of time building our relationship, but also, there's nothing like a crisis to sort of accelerate everything that you had intended, both the depth of our relationship and our management team, but also specifically, really the focus that I was brought in to build together with her on accelerating the innovation of Stitch Fix. I think we fortunately were not burdened with debt. We weren't burdened with retail stores. We're a totally online business.
Back in late March of last year, it became very clear that accelerating the vision for the company and really focusing on extending where we're going became really 100% my focus, leading our technology teams, kind of everything consumer facing, as well as our international business, and really charting the course for the future. I think Katrina really The two of us feel like, okay, the table has been set of this new strategy. Our senior team has really come together, and we're ready, and she's ready to play a different role. As we've said, she's not going anywhere. She'll play an executive chairperson role. She's deeply committed to sustainability and inclusion, our DEI efforts, and that's frankly, I think something that will be a secret sauce for Stitch Fix and has been historically, but even more so in the years to come.
We kind of feel like we're getting the best of both. We're sort of each other's bosses in some ways. She's going to stay an employee of the company. I think I just personally feel tremendous gratitude to have met Katrina. I feel like, yeah, it's a bit of a once in a lifetime opportunity to build a business at this stage, and one that I think we are just so distinctly unique and really purpose-built for this next wave of e-commerce.
You mentioned the broader leadership team coming together. On that point, there has been changes to CFO position as well as a new CPO hire. Can you just give us an overview of these other recent changes, is it fair to say that the new management structure is set at this point?
Yeah. We're thrilled with the team that we're building, and I think as we think about the extension from 4.1 million customers to millions of customers and really scaling as a global company, part of that is really having that team in place. We hired Dan Jedda, who joined back in December as our Chief Financial Officer, and then Sharon Chiarella joined in late March, as our Chief Product Officer. Both of them have incredible experience. It's sort of coincidental, it wasn't our intent, but they both have many, many years of experience at Amazon, and both with just tremendous experience scaling global businesses. Really what we're doing with Direct Buy and Shop is a 0 to 1 opportunity, and they both have a lot of experience in building new businesses and scaling them.
I think, we are actively searching for a Chief Technology Officer to add to the team. For the most part, we feel great now where we are with our management team and really have the team in place to be able to execute on the ambitious roadmap that we've laid out.
Switching gears a bit, pent-up demand has been a big theme in the apparel category this spring. Can you give us some insight on what Stitch Fix is seeing with your clients that sheds some light on where the consumer is right now with this wardrobe refresh, and maybe what you're seeing in frequency of Fixes, level of engagement in the Direct Buy, what they're requesting in the Fixes, would be great?
This definitely ties up again. I heard you might be searching for button-down short-sleeved shirts right now. People going out again.
That's my next Fix request. You called me out on a conference call.
It's funny because our model allows us to really trend spot what consumers are looking for with the benefit of Fix request notes, which would be one way to make that request if you have a Fix coming. What we launched recently was our categories experience within the Shop offering, where you can see your own personal store. Everything is relevant. Mark, if you open up your personal store within our Shop experience, everything fits you. It reflects your personal style. Hopefully, you'll start more and more to see brands that you love, categories that you're looking for, things that are more trending topics relative to staple-based categories. Through that, we are definitely seeing an appetite for going out again, an appetite for going back to work. Our vacation requests have been up 300% between May and April.
People are really gearing up for differently dressing that really is absolutely been pent up. Active and athleisure has been by far our highest growth area of the business in terms of assortment over the last year. We kind of believe that's here to stay in terms of becoming really a staple category with hybrid work and people wanting to be more comfortable. We are seeing demand for more structured looks again. Things like the going-out clothes we mentioned on the call, 60% growth in our women's business and rompers and jumpsuits, which I think are great for spring and summer. We are seeing kind of this shift, and also back to work, requests from our men's clients for more structured product again. It all just, I think, signals that there is absolutely pent-up demand.
We've also seen record numbers in terms of the Direct Buy usage we have, in part because of the new feature we launched with categories, where the original incarnation of Direct Buy was completely sort of inspiration-based. We showed you a trending set of outfits. Categories, we can more deeply accommodate specific use cases, which we believe will help us grow share of wallet. I think in general, there is an uptick right now. Consumers are shopping again for the category.
As you mentioned, there has been a lot of things that app experience over the past year, which actually now tails into my next question, which is that there's been meaningful evolution in the model over the past year. Direct Buy is a big piece of that. Features like Fix Preview and Live Styling are now helping you appeal to more customers. Could you speak more generally about how the model is changing and how you're expanding your addressable market?
Yeah. I think one thing that's really unique about Stitch Fix and how we started is this DNA that is so geared towards personalization. We've sold $7 billion worth of clothing sight unseen. What a radical idea Katrina had to say, "We're going to send you five items, and we're going to get it right a lot of the time, because we're going to use the power of data science, human judgment, and continuous improvement in getting to know our clients and getting better over time." Our keep rates on our Fix model have gotten better every quarter on record. That said, how do we really address every consumer's need? The idea of styling services is a good idea, but it may not appeal or be necessary for every purchase occasion.
What we're really focused on right now to those examples of product innovation is how do we really become a platform that's known for personalized shopping for everybody? What a wonderful experience to have a store that everything makes sense for you. You're not going through racks of clothing in a department store where nothing, like 99% of it is irrelevant, or searching and filtering within an e-commerce experience where you have to do all the heavy lifting to kind of break it down to find what you might like and then at the end of the day, have to order three different sizes because you're not sure what will fit. We really solve all of those problems.
Our product innovation is very focused on how do we bring this personalization to the forefront and personalized shopping, which we really think opens up our total addressable market. There's purchase occasions and use cases that the original Fix model was not as able to accommodate. The specific, your button-down shirt request, if you wanted that this weekend, that would be harder to get if you just thought of that today in our Fix model. Of course, we have that product. We want to get that to you. How can we make that available? In some ways, we kind of think of ourselves as going, if we were to make the Netflix analogy, we're kind of going from our DVD era into our streaming era.
Like, wouldn't you love to just walk into this own personalized streaming app that's already what's available, and we think it's just going to become better and better, paired with the power of the deep relationships and inspiration and advice our styling community can bring, which is a really unique part of the original vision of Stitch Fix was to bring that human touch at scale.
As you look at some of your core clients that really are engaged with that core Fix experience, what are you seeing with Direct Buy? Is it additive to those purchases? Is it replacing some of the Fixes that they otherwise would have ordered? What are you seeing there?
Yeah. We really like what we've been seeing. We originally did the most purest sense of that as kind of an A/B test of hold out, which we no longer can truly do, but we did that before we took Direct Buy to launch, and of course, it was a much narrower experience at the time, and we loved what we saw at that point. It was highly incremental. We see all of those signs continuing. Our clients that engage in both are spending more with us. They're spending more sooner with us. Like we've noticed that each new cohort of Fix clients are engaging faster with Direct Buy, and it's expanding their spend with us, and that's really exciting to see.
We also know from an incrementality standpoint, to my point earlier, there are certain purchase occasions and product categories that are better suited for a personalized shopping experience relative to our Fix model. Fix Preview is kind of opening up some of those harder-to-serve categories without having some consumer agency and involvement. Things like footwear, things like outerwear, dresses, items that are probably more episodic, and we need to know you're really in the market for those, are really well served through Direct Buy and the shopping experience. We have been seeing higher category penetration. We also notice consumers splurging in Shop. If introduced with something I absolutely love, we really try to pride ourselves on understanding a consumer's price preferences. We've had a lot of affordable offerings during this COVID time period, which we think has led to very high success and keep rates.
If you really love something, you love that brand, you love that look, you might lean in and surprise us with spending a lot more than your typical average top or bottom that we might see. That's another sign of the incrementality.
That's great. As of April, the company was serving 4.1 million active clients. That was up 20% year-on-year. What do you see as the right pace of growth for the platform?
Yeah, that's a great question. We haven't guided yet for next fiscal year or what that growth will look like. Our historic kind of growth algorithm, and this was really preceded by my joining the company, had been kind of this notion of 20%-25% growth. There's so much white space in our category in terms of us being able to address the market. It's a near a half a trillion dollar market between the U.S. and the U.K., and very soon, half of that is going to be online. We think we went from 25% online pre-COVID to 40%. That kind of seismic shift is a real change in consumer behavior. As we think about growth, we do think we're in a period of accelerated innovation and a bit of a land rush.
We want consumers in this era of going from maybe e-commerce 1.0 that was about search and filter, 2.0, we think we can define it for retail and apparel retail in particular, that's going to be about browse and discover. By opening up our shop experience, we would anticipate that's lower friction, more clients being able to engage with Stitch Fix sooner. No specific kind of growth kind of guidance yet, but I think we're very ambitious in being able to capture this moment in time that we've been purpose-built for.
Just following up there, could you touch on the approach to reactivations?
Yeah. I think there's reactivations. There's also converting a large base of consumers, which we consider our prospects, who've given us actually all of their information. They went all the way through the style profile. They've shared with us what they love, but they haven't yet converted, and both of those are rich populations, in the millions when you put them together, for us to go after. With reactivation specifically, those would be defined as clients that used Stitch Fix. Maybe they used it for a year, maybe they used it for multiple years, and then no longer were using our service. We've seen really strong strength in terms of our net adds recently as both brand new to Stitch Fix, but also reactivation of those dormant clients.
Part of what we think is going well there is both people shopping again, to the macro question earlier, but also we've added more possibilities to our platform between Direct Buy as well as Fix Preview, and we've been able to start reactivating people. It's still the minority, but over time, I would anticipate it could become a lot bigger, that are being reactivated with our shopping experience, not just with Fixes.
I want to switch gears to marketing. Advertising expense has been running at about 10% of sales. What is the optimal level for the business, and how has the approach to marketing been evolving as you're adding these new ways for clients to shop?
Yeah, I think we are very disciplined in how we spend on marketing. We have a pretty sophisticated growth marketing team paired with a data science team that is just dedicated to marketing, and so as we think about all the levers that we pull there, whether it's digital advertising, whether it's our referral program, even the TV and OTT that we do, it is incredibly data-driven and performant. I think the things that you'll see changing in the next year plus, one is we have a whole new offering that we're going to be introducing to consumers, and so building brand awareness of that is something that we'll be embarking on in FY 2022.
We're really thinking about what are the breakthrough messages that educate consumers on this very different way to shop and just a different set of experiences from what they might have known in the past from Stitch Fix. There's also marketing activations that we can do that we couldn't do with the Fix experience. For example, we previously didn't expose a product catalog. Things like search engine optimization, product listing ads on Google, certain ad units now become available to us as well as actually free traffic sources like search engine optimization. We're really excited about beginning to turn those things on over the course of next year. Of course, there's infrastructure to build and things that we need to do to make that happen, but it's absolutely on our roadmap as we enter fiscal 2022.
Looking at some of the more recent trends, net adds have been very strong, even while advertising has been kept in check. It looks as if the customer acquisition costs have been pretty attractive. Maybe just talk a little bit about what you're seeing there.
Yeah. I think over the course of the last, basically since maybe May, post the initial onset of COVID, we've been just seeing really great strength and new additions to our platform as we believe consumer behavior has been changing. Part of that has been just, I think the strength of the resonance, like there's been no more resonant time period than COVID of the comfort of trying on clothes in your own closet versus somewhere else, and I think we've really shifted that behavior, and that drives more promoters of Stitch Fix, which is word of mouth, more organic traffic, more just searching for Stitch Fix on Google and coming directly to us. I think that has definitely been a benefit. I also think that we continue to see strength in just our overall retention.
Even during this turbulent time period, we've just seen a lot of durability to our model. Of course, this quarter, we also just benefited from what we talked about as continuing strength in these dormant reactivations, but also, we were lapping a quarter where fewer people signed up with Stitch Fix Q3 of fiscal 2020, just because we really turned off marketing at the beginning of COVID as we dealt with disruptions in the supply chain. Overall, I think we just feel very optimistic that consumers are shifting to our model.
This is just a better way to shop for apparel, and I think having a catalytic event where we all are on Zoom, we're all shopping online more, and people realizing, like, "Wow, this is a massively better way to experience apparel," has really been an excellent catalyst for people who maybe previously hadn't fully considered Stitch Fix to now convert to Stitch Fix.
Along those lines, your revenue per active client is roughly $500 per year. Can you talk about the key drivers to growth there and where you think you are from a share of wallet perspective?
We have very strong revenue per active client. That's something we've historically had a lot of success in expanding over time. Part of what drives that is the continuous improvement in getting our Fixes right, getting keep rate well. The introduction of Fix Preview, as we shared, I guess, on the prior call, we talked specifically about what we saw in the U.K. of a 10% improvement in average order value with the full rollout of that into the U.K. We're seeing similar strength in the U.S. Those kind of continuous enhancements of getting our core model better and better is a great opportunity.
Then, of course, as we get clients into Direct Buy and the incrementality there is a great opportunity to be able to reach more purchase occasions, more of the consumer share of wallet, and as we add more brand selection, more product categories, those are all areas of opportunity. There are a lot of apparel categories we're very under-penetrated in, whether it's intimates, footwear, outerwear, dresses. There are just places where we participate today, but in a very limited basis that we see upside in. I do think, as we open up the idea of shopping with Stitch Fix from the get-go, we may have more active clients that behave in a different way. I think a lot of people ask the question of revenue per active client.
It was up quarter-over-quarter, but down very slightly year-over-year. Part of that was just the influx of new clients. If we have new clients earlier in their life cycle with us, I think we'll probably look at what's the best way to introduce that metric over time because it's a trailing 12-month revenue metric today.
Got it. Personalization has been the overarching theme here. Can you talk about your use of data science for personalization and really how that's improved over time? You've invested a lot in the data science and engineering teams, really over the past couple of years. What inning are you in with those investments, and how do you think about scaling them?
Yeah. I think that nature of our model has been from the very beginning and very deeply in our DNA, whether it's how we match and personalize to the client in terms of client matching, which is, of course, the consumer-facing differentiation we have. It also applies, though, to the way we work with our vendor community, the way we manage inventory within our network, all of which contribute to a great customer experience. I think some of the kind of very unique differentiators in our personalization is the data flywheels that we build that are sort of self-perpetuating. Style Shuffle is a great example of that, where we now have over 7 billion ratings. We're adding 1 billion ratings on a pretty regular basis.
If you think about that, it's something that's only in the last couple of years that we've had available, where consumers, for those who aren't familiar with it, they're basically thumbs up and thumbs down on different apparel items. You can take as many quizzes as you want, but typically it's kind of 10 items, and it's kind of extraordinary how much people actually engage with that widget in our app and in mobile web. That's a very powerful tool in understanding consumers on a style graph, kind of like if you're on a social graph. We have a style graph that underlies our understanding of style and really extracting the features that matter to a particular consumer and consumers like them. That's kind of a sticky, fun thing to play, it's just constantly generating new information. It also allows us to be really smart.
Like, the second we get a new product in our product catalog, we bring that into Style Shuffle so we can immediately see which client is going to love that product and what set of clients should we be bringing that to. We also get tremendously accurate feedback on our items. North of 85% of every item that gets shipped to a client, we get very detailed feedback on, which strengthens our understanding of fit, preferences. We have very strong statistical models built by our data science team on topics like fit, and that's contributed to things like the return rates we see in our Direct Buy experience are materially better than the rest of apparel e-commerce because of the understanding we've built with data science around fit and preference.
As the platform evolves, are there new revenue streams that you could pursue?
Yeah. I think simply by expanding the aperture of our TAM with the consumer-facing model, that's obviously widening the revenue reach for the business. There are other ways that we've been thinking about, like our vendor community. We want to provide more value-added services to those vendors. We know that there are tools we've built for ourselves internally, like for the exclusive brands we've built, to better design product and be more accurate in consumers loving that product, but also how much of it we should produce. Value-added services as we embark on some of these new inventory models. We can really be a great forecasting partner for our vendors, but also value-added services like how to think about pricing, how to think about designing new products.
That's probably where we're focused on most today, but I think that the nature of the data assets and the kinds of software tools that we've built that are based on data science within our category are really unique. Over time, you can imagine other ways being available to us to monetize those as well.
Earlier in the call, you talked about the big land grab opportunity that's out there. I guess, in that context, how do you think about the balance between growth and profitability over the next several years?
Yeah. What we love about our model is just the strength of our contribution economics. The unit economics of both our Fix and our Direct Buy offering are very attractive, and so that's an amazing starting point, of course. That said, getting to much higher profitability right now relative to growth, I think we're very focused on growth because we know the path to leverage and further leverage. The biggest path to leverage is us being able to serve a lot more clients and taking advantage of that faster and really being the leader in this new chapter of browse and discover for apparel. As we embark on widening the feature set, widening this great experience with Shop, layering on the styling services that can deepen the trust and relationship with our clients, I think we are in a period of really doubling down on growth.
Of course, always looking for efficiencies, more efficiencies in how we work with our vendors, more efficiencies and getting more out of each unit economic win of our keep breaks of our products. We will be doing things that drive leverage in the business, but absolutely investing in our product and engineering talent, investing in our distribution network, and investing in these new inventory models to really set us up for scale.
Great. That's my next question on inventory. Really, it has been a constraint to growth historically, given the company's focus on remaining free cash flow positive. What are the new inventory models that you're exploring that could potentially lessen that constraint?
Yeah, it's a great question, and one that I got a lot of healthy debate early on in my tenure because our historic model, we've been really efficient with how we've bought inventory, much more efficient than if you look at the rest of our category. We have bought everything on wholesale receipt, whether it's our own exclusive brands or market brands and our market brand partners, which is typical. That is how the category has operated. That said, it is a constraint on growth, depending on how much working capital you believe you want to invest, how much risk you want to take.
Really our vision is to be able to undo that constraint by a combination of consignment-like models with our vendors where we can provide these win-win-win services, win for the vendor, win for the customer in terms of broader selection, win for Stitch Fix in terms of expanding the reach of our platform. In that consignment-like model, it's essentially like a vendor-managed inventory where we would have the vendor's product and more of it in our distribution centers. As it sells through, we would take control of that inventory, which is different than buying on receipt. You're buying ahead, you take the inventory risk, you sell through what you can, and hopefully you're very effective at it, so that you're not taking the risk of eating that inventory or having to clear it at the end of the day.
We've been historically very, very good at that in the wholesale model. Probably there are areas that we've taken less risk in because of the nature of doing totally wholesale and also less selection, which we know more selection makes customers happier. That's one of the models, is this consignment-like model. We're in beta mode. We've been building the infrastructure for it, the vendor partnerships for it over the last year, and we're very excited to continue to build on that and expand it over time. Then, of course, drop ship is another area of opportunity that we've been testing, and we're excited about that as well. There's inventory that, as well as you might predict demand, there might be a black swan event where something's super popular and having drop ship available to take advantage of that could be quite important.
There are certain vendor partners we might add over time that have really strong distribution capabilities where that might make the most sense. All of that, as we extend shopping, this will be a really powerful vehicle to be able to build that flywheel of selection to make it the best customer experience.
I guess bringing a couple of these things together. Do Direct Buy and these new inventory strategies go hand in hand and can one be successful without the other? I guess asked another way, can Direct Buy scale to billions in revenue without having vendor-managed inventory or marketplace type model in effect?
I think we could expand Direct Buy probably without it, but we could be a lot more efficient and productive in how we do it with these models. I think not everything's going to hit at the same time. We'll be rolling out and beginning to open up Direct Buy in the next few months and extending that, and those models will begin to come online as Direct Buy scales. We're really excited because we do think it creates a great flywheel of expanding selection in an efficient way and bringing a great customer experience. We're really excited because we do think the two go hand in hand. I think we'll probably be investing in inventory in the short term to make sure we have the right selection for Direct Buy.
Great. I think we're right at our time. We're going to have to leave it there. Elizabeth, thank you so much for the time and for joining the conference.
Great. Thank you, Mark.