Good day, everyone, and welcome to the Stitch Fix Q3 2022 earnings call. Today's conference is being recorded. Now at this time, I'd like to turn the conference over to Alexandra Viski-Hanka. Please go ahead, ma'am.
Good afternoon, and thank you for joining us on the call today to discuss the results of our Q3 of fiscal 2022. Joining me on today's call are Elizabeth Spaulding, CEO of Stitch Fix, and Dan Jedda, CFO. We have posted complete Q3 2022 financial results in a press release on the IR section of our website, investors.stitchfix.com. A link to the webcast of today's conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance.
Please review our filings with the SEC for a discussion of the factors that could cause the results to differ, in particular, our press release issued and filed today, as well as the Risk Factors section of our quarterly report on Form 10-Q for our Q2 previously filed with the SEC and the quarterly report on Form 10-Q for our Q3 , which we expect to be filed today. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures are provided in the press release on our 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 Elizabeth.
Thanks, Alexandra, and thank you all for joining us for Stitch Fix's Q3 2022 earnings call. Before we dive into our financial results, I'd like to take a moment to remind everyone where we are in the broader Stitch Fix journey to put into context the actions we're taking to improve performance. As you know, we are in a period of transformation from a Fix-only business to a Fix plus Freestyle ecosystem. This enables us to serve our clients' on-demand styling needs as well as to begin to acquire new clients through personalized shopping. That's opening up a much larger opportunity with a TAM that is 2 to 3 times greater than the Fix-only business. We are building upon our core strategic assets of rich data science, plus the personal touch of human stylists.
This is a necessary and significant undertaking that requires us to adjust our original systems, marketing tools, and selection to ultimately deliver enhanced customer experiences. While Freestyle has already demonstrated strong unit economics and meaningful client value, expanding Freestyle into a client acquisition vehicle is an iterative process. As we discussed previously, establishing a Fix plus Freestyle ecosystem will take time and will not be linear. We are moving forward deliberately and thoughtfully with a sense of urgency, addressing the areas that are within our control. In Q2, we saw that our new onboarding flow created friction for customers eager for a Fix, therefore impacting conversion. In parallel, similar to many in our industry, we continue to navigate the ongoing effects of Apple privacy changes, which is impacting traffic to our site. Both of these have made new client acquisitions challenging.
We are working through both of these with tremendous focus. Today, I will provide more detail on steps we have taken to mitigate these challenges and what is to come. Additionally, as we promised in our last call, our team has taken a deep look at our business and our cost structure. We have done a detailed review of how we deliver our experience, and we've begun to take action to become more efficient and deliver profitable growth over time. Both Dan and I will spend time on this momentarily. Now, on to our Q3 financial and operating results. While we are confident in the strategy we have in place, we are not satisfied with our Q3 performance. We can and must do better, and we're focused on execution as a team. Topline results, as well as active client counts, were largely within our expectations.
We generated net revenue of $493 million, reflecting an 8% decline year-over-year and an adjusted EBITDA loss of $36 million. Active clients declined 5% year-over-year and 3% on a sequential basis, ending Q3 at 3.9 million. We have made several improvements to the new client engine, which I will speak to in a bit. Revenue per active client or RPAC reached $553, our sixth consecutive quarter of RPAC growth, and our 90-day RPAC also remains strong. This RPAC expansion is the result of the incrementality of Fix plus Freestyle usage by our clients, as well as the ongoing benefit of keep rates with Fix Preview.
Freestyle revenue grew 13% year-over-year, with outsized growth in categories like special occasion and social wear. In fact, Freestyle revenue from Dresses grew more than 75% year-over-year, which is over 5 times the rate of growth of Dresses in Fixes. Freestyle continues to drive incrementality in client spend once inside our ecosystem, and we are increasingly encouraged by the activity of our emerging Freestyle-first customer base. To date, approximately 20% of Freestyle-first customers come back and purchase again within 30 days. To improve our clients' experiences, we recently updated our core recommendation algorithm to a novel client time series model architecture, which unifies data from client interactions across both Fix and Freestyle. Historically, our algorithms focused on understanding a client's set of specific attributes. In contrast, this model focuses on understanding the clients through their interactions with Stitch Fix over time.
A test of this new model demonstrated significant improvements to client outcomes with a nearly 6% lift in Freestyle revenue and a 4% lift in Freestyle reorders over a 30-day period compared to our previous algorithm. It is now rolled out across the Freestyle experience. Now, on to our progress on conversion and marketing. Given that conversion of new visitors was not where we wanted it to be in the Q2 , we took action to refine the onboarding experience and our landing page. This has resulted in approximately 40% improvement in new client conversion in the Q3 as compared to the Q2 . First, we began directing all stitchfix.com traffic to a simplified Fix-first onboarding path. Now, clients entering through stitchfix.com are directed to schedule a Fix upon completing a style profile. After scheduling, their Freestyle Shop is unlocked.
Second, our landing page experience better clarifies our offering and highlights our key differentiators. We now feature more community-based stylist content, and we enable visitors to interact with Style Shuffle before creating an account. While this is indeed positive progress, we are still not yet at our desired conversion levels. In addition, overall new client traffic to our website was down in Q3. As I noted at the outset of the call, both factors, conversion and traffic, ultimately played a role in the 3% decline in our total active client counts quarter-over-quarter. We are deeply focused on driving traffic into our ecosystem and reigniting new customer conversion. As part of these efforts, we are further diversifying our marketing portfolio with the support of our new chief marketing officer.
We are moving more into digital channels such as TikTok and YouTube, as well as leaning into the use of influencer partnerships. To that end, we recently launched an integrated men's campaign with Keegan-Michael Key called Stitch Fix It. During this campaign, we not only saw an increase of over 60% in men's traffic than over the prior weeks, but also strong efficiencies in our direct response ads CPAs. Additionally, as we said we would do last quarter, we have successfully rolled out personalized search. With this feature, client search results are based on relevance and only show in-stock items that match individual style preferences, fit, and size. We believe this will drive continued engagement once inside our ecosystem for our clients, as this has been their most highly requested new feature.
Now, I wanna shift to what I mentioned at the top of the call regarding decisions we are making to adapt how we operate to position ourselves for profitable growth. In light of our recent business momentum and an uncertain macroeconomic environment, we have taken a renewed look at our business and what is required to build our future. Today, we are sharing changes that we estimate will result in fiscal 2023 annual expense savings of $40 million-$60 million. These savings will predominantly come from the difficult decision to reduce our workforce. This includes a reduction of approximately 15% of salaried positions and represents approximately 4% of our roles in total. Dan will spend time going into detail on our broader cost structure and expected savings. We also expect to see meaningful operational improvements from this restructuring.
We are centralizing a number of key capabilities and streamlining decision-making to drive efficiencies in how we operate and deliver experiences. We are also ensuring that we are allocating resources to our most critical priorities. Going forward, we will continue to innovate our client experience and broaden our offering. In parallel, we will continue to identify opportunities to drive efficiencies in how we operate and deliver our experiences while investing strategically in both technology and product. I would like to thank those team members with whom we are parting ways for their many contributions to Stitch Fix and to our clients. Our priority is to support them through this transition in every way that we can. In summary, we strongly believe in and remain focused on our mission. We are transforming the way people find what they love by combining data science and the personal touch of human stylists.
While we have work to do to expand our Fix plus Freestyle ecosystem and reignite our new client engine, we have made progress in key areas in the Q3 . We remain focused on executing our Fix plus Freestyle strategy with excellence. We are thoughtfully and deliberately making the necessary decisions to drive our business forward, and we commit to providing you updates as we make progress on our efforts. I will now hand it over to Dan.
Thanks, Elizabeth, and hello to everyone joining us. I'll first spend some time on the drivers of our Q3 results and the actions we are taking to position ourselves for profitable growth. Then I'll walk through our Q4 financial outlook. In Q3, we generated net revenue of $493 million, representing an 8% decline year-over-year. This reflects the compounding effects of lower net active clients year-to-date, which ended Q3 at 3.9 million. Active clients declined 200,000 or 5% year-over-year, and 112,000 or 3% quarter-over-quarter. While largely expected, this decrease is primarily related to ongoing conversion challenges, which we are working through, as well as lower traffic, which many are experiencing across our market segment. While we continue to diversify our marketing portfolio, it will take time for new channels to drive meaningful traffic and new clients.
Q3 gross margin was 42.6%, 340 basis points lower than Q3 of last year, driven by increased transportation costs and tightening product margins. Transportation costs increased due to increased shipping rates, including fuel surcharges and higher split shipments in Freestyle. Product margins were impacted by higher product costs as a result of rising inflation and increased penetration of national brands in our brand mix. We expect to continue to see elevated product and transportation costs in Q4, and therefore expect similar gross margins in Q4 compared to Q3. Q3 advertising was in line with expectations at $51.5 million or 10.4% of net revenue, reflecting increased spend in the influencer channel. Other SG&A excluding advertising was $235 million or 47.8% of net revenue, an increase of 640 basis points year-over-year.
The increase is primarily due to higher fixed labor costs, including stock-based compensation. Q3 adjusted EBITDA was negative $36 million, reflecting lower net revenue, lower gross margins, and higher fixed labor costs versus last year. Net inventory ended the quarter at $213 million, a decline of approximately 1% year-over-year. Throughout Q3, we experienced delayed receipts of 3-4 weeks on a subset of inventory due to the ongoing nature of shipping delays and port congestion within the global supply chain. We do not believe our revenue was impacted in the quarter, with the exception of a few categories in our men's business, where we saw higher than normal sell-through rates. Similar to our spring/summer buys, our buying team is working proactively on our fall/winter buys to get ahead of any delays that may occur due to the global supply chain challenges.
Finally, during the quarter, we repurchased $19 million worth of company stock, or $30 million year-to-date. We ended Q3 with no debt and $283 million in cash equivalents, and highly rated securities. We have the financial flexibility to execute our strategy as we move towards profitability. Turning to our cost structure, as Elizabeth discussed, we undertook a detailed review of our business and the cost structure needed to support it in order to ensure we are positioned for profitable growth in the future. As a result of this review, we've identified approximately $40 million-$60 million of expected annual savings in fiscal 2023, driven by a reduction in our workforce. These expected savings are calculated off our annualized Q3 expense base and are inclusive of investments in areas such as product and technology.
The impacted positions, which include approximately 50% of our salaried positions and 4% of roles in total, span all our general and administrative functions and levels, as well as styling leaders. As a result of this action, we expect to incur restructuring and other one-time charges of approximately $15 million to $ 20 million to be recognized in Q4. We're also looking at other fixed and variable operating costs, including rationalization of our real estate footprint. Now on to our outlook. In Q4, we expect net revenue in the range of $485 million-$495 million, representing a year-over-year decline of 15%-13%. As a reminder, last year, we saw a greater increase in net revenue from Q3 to Q4 than we did pre-COVID, due in part to macroeconomic factors.
Excluding restructuring and one-time charges of $15-$20 million, we expect Q4 adjusted EBITDA in the range of -$30 million to -$25 million, or EBITDA margins of -6% to -5% of net revenue. This guidance assumes that net active clients will be slightly down quarter-over-quarter. In terms of the current macroeconomic environment, we continue to navigate the ongoing uncertainties that many in our industry are experiencing, including supply chain constraints, global inflationary pressures, and potential shifts in customer demand. We are optimistic about our path to capturing the opportunities ahead. Though these transformational moments take time, we are confident in the company we are building and our ability to overcome our current challenges. We're committed to optimizing and managing our cost structure within our business as we focus on returning to profitable growth. 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 that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll take our first question from Jian Li with Evercore ISI.
Great. Thank you for the question. I just wanted to, Dan, if you could just unpack a little bit your last comment about the shifting in customer demand. If you can kind of, I guess, unpack a little bit, is it shift in categories and verticals? Are you seeing any kind of recessionary pressure or wallet shift, kind of a pullback into this away from discretionary? Just wanted to see kind of if you guys have seen any impact, kind of that's a recessionary impact on the consumer demand. The other thing is, appreciate a color on the net adds for the next quarter. Overall, how should we think about the recovery path? The landing page experience, like should we see that kind of normalizing over the next couple quarters? If you can give us a timeline on when the trough is? Thank you.
Thanks for the question. Appreciate it. I think your first question was asking about recessionary effects and if we're seeing a shift so far in consumer demand. You know, as we look at our consumer behavior, we can unpack different price point preference consumers, different demographics, and really over Q3, we did not see a meaningful impact within our customer cohorts. You know, as we mentioned in terms of RPAC, we saw continued strength there. When we dissect that by user group and user segment, we continue to see year-on-year growth across our different demographic and user groups.
I think what Dan Jedda was referring it to was just an anticipation that we are continuing to see inflationary pressure for the broader U.S. consumer and U.K. consumers that we serve, and that we know that typically heading into what, you know, many are predicting as a recessionary period, that we may see an impact. To date, we've seen real strength in our consumers, but we're just, you know, letting folks know that like many others, we're thinking about that. The second question I think you were asking was more on net client normalizing. You know, what we saw was, as we mentioned we were doing in Q2, real strength in improving our conversion funnel that was up 40% quarter-over-quarter. We see actually more opportunity for upside there.
The challenge that I think we continue to face, like many others, has been more the traffic to our site. We have made progress diversifying our marketing channels, and we have more work in front of us, and we know it'll take time. You know, one of the, I'd say, top priorities for us right now is just reigniting that net active client growth flywheel, and we'll continue to make progress, updates on that each quarter.
Great. Thank you.
Okay, we'll take our next question from Youssef Squali with Truist Securities.
Hi, can you hear me?
Yep. Hey, Youssef.
Excellent. Hey, Elizabeth. Hi, guys. Thank you for taking the questions. I have two. One, just going back to the conversion issue. I think you talked about the improvement that you've seen sequentially, the 40%. Maybe you can frame that relative to kind of where you are relative to where you need to be. I guess as kind of a related topic in terms of your willingness to kind of lean into marketing. We've seen recently that you've started leaning in, and I think you even spoke to it a little bit. How far are you from getting to a point where you wanna actually lean in a lot more aggressively to try to reignite the growth that you kind of have spoken to? One last question for Dan, if I may. Are the cost savings from the latest round of layoffs enough to get you back to profitability in 2023, at least on an EBITDA basis? Thank you, guys.
Thanks, Youssef. I can take the first couple questions and then hand it over to Dan. Yeah, you know, as I mentioned, we did make real progress on the conversion funnel. When I talked about conversion, that was through our core domain at stitchfix.com, and we are pleased with the progress that we've made there. We think there is more upside if we just look longitudinally over the last couple of years. We think that we still can get some upside. You know, I think we've made the majority shift, but there's still some left there that we could see continued improvement on. What we know is part of our future is Freestyle becoming a first-time customer acquisition vehicle and diversifying our marketing channels, and we are still very early in that journey.
I did mention on the call the fact that we now have this cohort of Freestyle first customers. We're encouraged by what we're seeing in terms of their repeat purchase behavior. We continue to be very encouraged by our ecosystem customers using Fix and Freestyle. We really have not ignited marketing spend, to your question, on leaning in to Freestyle becoming a customer acquisition vehicle, and that's really through high-intent shopping. We know that half of all apparel shopping begins with a pretty high-intent purchase. When people search for something through Google or other sources, they see an influencer ad with a particular product, that is all net new marketing for us. As we see improved conversion rates on folks landing on our product detail pages, we will eventually be ungating our category pages.
That's when we really intend to start to layer in more marketing spend and lean in. More to come on that. We're incredibly focused on improving the customer experience to do that. Then we are learning with some of these channels we've historically been less focused on, like influencers and integrated marketing. We're encouraged by the early results we're seeing, like that men's campaign I mentioned. You know, more work to do to make sure the experience is where we want it to be before we more deeply invest. On the path to profitability, I'll hand that to Dan.
Yeah. Thanks, Elizabeth, and hi, Youssef. You know, as we move through our transformation of Fix and Freestyle, we are positioning ourselves for profitable growth in the future. As Elizabeth alluded to, this will come from net active client growth with the client experience that we're investing in, and also the optimization of our cost structure, which we talked to on the call. We'll give you updated guidance along the way, and I don't have a specific timeline in mind yet, especially given all the macroeconomic factors. That said, we believe Q4 is our trough on profitability, and we believe that you know, fiscal 2023, at some point, we can return to profitability. I don't have specific timing in mind, but we'll give more guidance along the way.
Okay. That's great. Thank you both. Thank you. We'll now take our next question from Trevor Young with Barclays.
Great. Thanks. On the inventory side, up 16% Q-on-Q, it seems like there's still some of the residual inventory delays at 3-4 weeks versus 4-5 weeks last quarter, and perhaps that's maybe a little more narrow in scope. How are you balancing kind of that existing inventory build versus some of the commentary you mentioned about preparing for the winter inventory versus, you know, some of the consumer softness that, you know, maybe you're seeing? More broadly, I guess, how comfortable are you with current inventory levels, product assortment, and the outlook for promotional environment as we head into the back half of the year?
Thanks, Trevor. I will let Dan largely take that question. One thing I'll just comment on at the beginning, then he can talk about the levels we're at. You know, for Q3, you know, similar to the prior quarter, we did see some delays, but we felt like we were in a good position with our women's business. With our men's business, we did see longer delays that once that product came in, we saw good performance with. We're just really making sure we have the right product at the right time for our customers. In many situations, we have increased how we're buying ahead to be prepared to have the right goods at the right time. On that kind of levels and outlook, I'll let Dan take that.
Again, we were slightly down year-on-year as we go into our at the end of our spring and into our, of course, summer selling season. So much of the sequential increase that you did see was for seasonal merchandise that we were happy to see as we get ready for the summer sales. We feel very good about the inventory position we're in on a year-on-year basis. We feel like we don't have this excessive inventory that many in our industry are experiencing. We feel like we are managing the global supply chain well. We did order and are ordering our fall/winter buying now, early, to get ready for that in anticipation of. We feel really good about the health of our inventory, the assortment, that we can give within Fix and Freestyle going forward. Not much to say beyond that. Again, it's a position that we wanna be in with the right assortment currently.
Great. Thank you both.
Sorry. I guess I didn't answer the second part. You know, we have experienced limited time offers and clearance events in the past. You mentioned about sales on that. You know, we will likely continue some of that with Freestyle in the future. We'll update you more on that as we go forward.
Thank you. We'll now take our next question from Cory Carpenter with JP Morgan.
Hey. Thanks for the question. Just on the restructuring, just curious, you know, why now you thought was the right time for that? Should we expect any impact to growth from the restructuring? Separately, maybe Elizabeth, could you talk a bit about Fix Preview? I think you mentioned earlier that you're seeing improvements to take rate, but if you could just talk about an update on the type of adoption and the results that's driving, that'd be great. Thank you.
Yeah. Thanks, Cory. On the why now, you know, we know that we're in a tough macroeconomic time period. We also wanna make sure that our cost structure and our operating model is positioned to build our future. We saw areas of opportunity in some places where we could centralize and simplify some of our functions. We also wanted to be cognizant of setting ourselves up for profitable growth as we head into fiscal 2023 and beyond. You know, the timing was right. It was the responsible thing to do for the business, and really being focused on setting ourselves up for fiscal 2023 and beyond. In terms of it impacting growth, I mean, we were very, very focused, as we mentioned on the call, in making sure we're continuing our investments in the areas that most impact our customer experience.
Those areas being technology, our product functions, you know, continued investments in the areas that most differentiate that client experience and helps us to continue to build out this Fix plus Freestyle ecosystem, and the diversification of our marketing channels. We were very cognizant of making sure we can continue to make those investments, as Dan and I both alluded to. On Fix Preview, I think maybe what you're referring to is I just mentioned that our RPAC continues to demonstrate the positive impact we've seen from the ecosystem adoption of Freestyle, as well as the full rollout of Fix Preview. Really no new news there.
You know, as we mentioned, multiple quarters ago as we had done the work to build that product experience and then rolled it out, that is an experience relative to our legacy Fix offering, does provide higher keep rate and higher average order values, and we have continued to see that play out over time. We will be lapping that, you know, in the future now that we are entering a time period where it was fully rolled out, but we're happy with the results from that, and we continue to see. We will make ongoing improvements to Fix Preview.
You know, one of the learnings we've had is if a client gets a preview and they don't accept anything from the preview, that can be, you know, not surprisingly, a moment where the client says, "Huh, are you gonna have what I want?" We've been testing new features to make sure that we can immediately, address that type of a preview to make sure that it's a positive client experience. We're encouraged that we can now start to make the next wave of improvements to that product feature, but overall, it's been a win both for the U.S. and the U.K. markets.
Thank you. We'll take our next question from Kunal Madhukar with UBS.
Hi. Thank you. Thank you for taking the question. Quick one on the personalized search that you just launched. I would have thought with all the data that you have, the personalized search option would have been, you know, probably the first thing to launch. Why did it take this long to launch a personalized search?
Hey, Kunal. Thanks for the question. You know, the original Freestyle experience began as really an add-on to our Fix business, where we knew that clients would love to purchase items that would go with items that they had gotten in their Fix. Filling out an outfit, filling out things that they could complete their looks with. We know still that 40% of our sales in a much more fulsome Freestyle experience, although one that we're still building out, still come from outfits. That is a key differentiator for our experience. As we embarked on building out more Freestyle over the last year, we added things like product categories, more new brands. You know, we now have a home feed where you can shop looks in your community using computer vision.
Really our first port of call had been being able to just serve up personalized recommendations through outfit feeds and categories. You know, I think there's just many features that we still have yet to offer, and personalized search was one that was highly demanded. We wanted to make sure that as we launched it, we both tested it, but also that we are serving up items that are ones that will fit our clients. They will reflect things that are immediately in stock that will fulfill their price preferences. Now we'll start to layer on things to that personalized search feature like outfits, given how compelling it is. I think it's just one of many things in our product roadmap that we will be rolling out over time.
Thanks. If I could follow up with maybe another couple, if I could. One would be on the inventory side. So you kind of talked about, you know, the slightly higher, you know, inventory on a Q-over-Q basis. But then when we look at like across, you know, different retailers, physical retailers, almost all of them have like very high inventory. So as you look at like, you know, maybe a higher promotional environment going into fiscal Q4 , would the RPAC levels be, you know, be similar? How do you think about like RPAC levels for the Q4 ? You know, a follow-up on the restructuring that just happened. With the restructuring, how does it impact or will it impact your personal styling process for the fixes? Thank you.
Thanks. I think your, t he first part of your question was on our inventory, and I think it was a little bit more around the broader environment of whether or not we're in this promotional time period. I mean, as you know, Stitch Fix typically is not a highly promotional retailer. You know, we focus on getting clients goods that are the perfect, fit and style for them, and really this notion of getting a client the one pair of jeans they love versus showing them tons of jeans that are on sale. Like, our goal is to get you the item that you love. In general, you know, we're focused on delivering that kind of personalized experience to our clients.
We did test in Q3 a limited time offer where we did test some of our goods, a very small number of goods, on a promotional discount, and we were encouraged by what we saw in terms of the halo effect on our broader consumption within Freestyle. We know that there are goods that we wanna be able to clear out of our inventory. It is something we anticipate doing in the future, but we don't anticipate that impacting our RPAC. If we do anticipate that, we would share it. In general, we feel like what we're doing is really creating more purchase occasions, more product categories our clients can love through the expansion of Freestyle together with Fix.
Typically, we're solving three big problems for our clients: discovery of items they wouldn't have found on their own, tremendous fit, and then the relationships with our styling community and the relationship through styling outfits. Our focus is making sure that's done at a value, but not, you know, winning on promotional pricing. On the restructuring question, I think you were asking about our styling community. We did have an impact to the leadership layer, but we did not reduce our styling team, so there's no change in how we're delivering our styling experience right now.
Got it. Thank you so much.
Thank you.
Thank you. We'll take our next question from Simeon Siegel with BMO Capital Markets.
Hi, this is Garrett Klingshirn on for Simeon today. Couple quick questions, if you don't mind, and thanks for taking our question. First of all, on the cost savings. Given most of those were labor-related, are those going to be mainly, are we gonna see the immediate impact of that in Q1, Q2 of next year? Is that or is that gonna kind of ramp over time? Then secondly, I kinda curious, I believe it was mentioned 90-day RPAC growth was up again. Did you give a number on that? I think you did last quarter.
Thanks for the questions. I'll take the second one, and then Dan can talk more about when the cost savings will materialize. We did not share a 90-day RPAC number on this call. We did share just the continued strength we're seeing in RPAC overall, and just the continued incrementality of both Fix and Freestyle. On the cost savings, why don't I hand that one over to Dan?
Yeah. On the labor side, we will see an immediate impact that we might have some smaller one-time charges in Q1, but the ongoing impact that will be immediate. Part of the $40 million-$60 million was over and above the labor savings, just other cost-saving initiatives, like I said, rationalizing our real estate footprint, specifically in our fulfillment network. That will happen over time as we sublease, you know, excess capacity that we have. There's demand out there for warehouse space, et cetera. We will see an immediate impact from Q4 into Q1 on fixed OPEX savings specific to labor.
Gotcha. Appreciate it. Real quick, if you don't mind a follow-up. I believe you talked about kind of the success with RPAC growth that's driven a little bit from, you know, Preview and Freestyle helping in there. I'm just curious if you could give a breakdown within RPAC of what the kind of the breakdown with price versus units and mix, what that would look like what's in there? What kind of drove the broader increase, if you wanted to break it down in those components, if possible?
We don't actually break that out, but I will say, as we've shared in the past with Fix Preview, that that's had a positive benefit largely on keep rate, meaning the number of items that our clients maintain. You know, in part, if you think about what that customer experience is about, is the client's getting really two chances to weigh in on what they get in their Fix, both when it shows up, but beforehand, giving feedback of 10 items that we send in a preview. Not surprisingly, that results in a higher keep rate. That's the biggest driver of Fix Preview. The combination of now, you know, 30% of our clients, we've shared in the past within our women's business, for example, using both experiences, those are incremental. You know, it's different product categories that they tend to be purchasing in Freestyle. We see outsized performance in things like second layers and footwear and dresses. It's really the incrementality of more units for the most part. You know, there may be small pricing benefits, but for the most part, it's that we're selling more goods to our clients through a broader experience.
Great. Thank you so much.
Thank you. We'll take our next question from Lauren Schenk with Morgan Stanley.
Great. Thanks. I wanted to ask about the customer onboarding process and your comments about directing all customers to the Fix business, and then once they schedule, Freestyle is unlocked. I guess, is the idea that a customer could be a Freestyle-only customer, has that changed? If so, is that sort of a permanent decision or are you still sort of iterating? Thanks.
Thanks, Lauren, for the question. It is still possible to be a Freestyle-first customer. One of the things that I think we've learned over the past several months is if you're a really high-intent shopper, a lot of that traffic is coming through a search of looking for a particular item. They might be coming from some of the new work that we're doing in other new marketing channels where we're talking about a particular item. If those clients land on a product detail page, and over the coming quarters, they will also be able to land on a product category page and explore our catalog, those clients can become Freestyle-first clients immediately. It's still a small population, and to the question that Youssef asked earlier on, when are we gonna start to really lean into that marketing?
As that experience continues to improve, we think that will become a bigger source of our customer base, a bigger source of our ad spend. That high-intent shopping, we really view as a vehicle for Freestyle becoming a customer acquisition vehicle. On the core stitchfix.com, you know, until our brand awareness for Freestyle and the fact that you can shop with Stitch Fix gets higher, we are gonna focus that as a Fix-first channel and then immediately into Freestyle. We anticipate that over time, that would change, but we feel like that's the best way to serve our client demand right now through stitchfix.com.
Okay. Thank you.
Thank you. We'll take our next question from Ike Boruchow with Wells Fargo.
Hey, guys. This is Jesse Sobelson on for Ike. I was just wondering if you could remind investors of your inventory acquisition strategy. Is it all based on acquiring full price goods? As you look forward and work with your partners to acquire inventory for the fall and winter, what are you hearing from them when it comes to inventory availability and what they're planning for the remainder of the year? Thanks.
Yeah, I can start, and then Dan, feel free to add on. I mean, the way that we work with our vendor. So if you think about our goods, maybe just to step back for a second, we have our own exclusive brands. We have goods that are Stitch Fix only that we work with third-party suppliers, but they're producing only for us. We have a number of more established brands that we work with, whether those are up and coming D2C brands or, you know, big established national brands. The majority of our sales actually come from the first two in terms of exclusive brands and Stitch Fix only. We have a lot of discretion within those in terms of working with our suppliers to get those goods produced.
In general, as everyone knows, the supply chain has slowed down, and so we're typically just buying ahead in a longer timeframe. Although some of our goods, such as our exclusive brands, we still have a lot of flexibility on. I'd say the one thing that has changed in particular is just having more foresight to what we're buying into, and then really leveraging as much adaptability as possible within things like our exclusive brands and Stitch Fix only because we have very, very high control there. That is probably one of the biggest shifts we've made. One of the big benefits of our business is how much client data and signal we get, so we can make adjustments pretty rapidly, especially given the nature of how many of our goods we're actually in control of directly.
I don't know if, Dan, anything else to add?
I'll just add, in terms of availability, we're not seeing a direct impact of anything related to COVID lockdowns in China. There's some indirect impact in just, you know, delayed shipments that have been ongoing. With respect to where we source from, you know, everything is up and running. There's been no real impact on that side, just indirect, which we are managing through ordering early and just managing the global supply chain.
Cool. Thank you very much. Thank you. We'll take our next question from Ashley Helgans with Jefferies.
Hi, it's Blake on for Ashley. Thanks for taking our question. I first wanted to ask about the restructuring savings of $40 million-$60 million. Just wondering if you could kind of maybe rank the biggest increases in costs you've seen versus last quarter, that seem like they're gonna maybe offset that next year. I know you mentioned inflation, supply chains, and things like that. If you could just maybe talk a little bit more about those categories.
Yeah, I can let Dan take that. I guess one clarifying point though I would make is, the cost improvements that we made through the restructuring are really on our fixed cost basis, and some of the things that you just mentioned would show up more in our gross margin. In essence though, I think there's work that we're doing on both fronts. Dan, I'll let you maybe add on to that.
Yeah. Maybe if you could clarify specifically. I wasn't quite following the $40-$60 million, which, as we said, earlier, is a reduction off our SG&A. The way to think about that is our SG&A, excluding advertising and SBC, it is a reduction from that base. But let me have you ask the question again, just so I make sure I answer it.
Yeah, sure. I guess you mentioned some pressure on the gross margin. I guess you've mentioned earlier that you hope to get break-even EBITDA next year, which is a little bit less than consensus was modeling. Just trying to think of the main offsets to these incremental cost saves.
Yeah. I think the way I would look at that is, you know, the comment we made is sometime in fiscal 2023, we are planning to be profitable. The timing of that is uncertain just given all the macroeconomic factors that we're going through. On, I've talked about the cost saving side. On the gross margin side, I think we talked about Q4 being similar to Q3, and I think we've said before, we would expect ongoing inflationary pressures from a product cost standpoint, as well as higher fuel charges, mainly due to pricing and fuel surcharges, and I also mentioned higher split shipments in Freestyle. We would expect those to continue on closer to the current run rates, and that will have some impact in fiscal 2023. Again, we'll provide more guidance on fiscal 2023 when we report Q4.
Okay. That's super helpful. On that note, did you, I might have missed it, but did you say what marketing was supposed to be in Q4? I know you've talked about 10% of sales recently, but did you give that guidance?
We didn't, but it is. We expect it to be in that 9%-10% range that we normally see of revenue.
Got it. One last question, I know this might be hard to answer, but you mentioned, you know, just from a high level over time, as Freestyle changes, as maybe the bigger customer acquisition source, how do we think about the timing of that?
Yeah, I can touch on that. I mean, we don't have any specific timing to share right now. I mean, we are just very focused on continuous new feature rollout and continuous improvement of that customer experience. The examples, you know, we shared today were around things like personalized search or the algorithm that has really improved the customer experience of our recommendations. We're just in a continuous drumbeat of expanding those features. I think one of the big things that we're working on right now is ungating a category-based shopping experience, and that will, I would imagine, take the next few quarters. We will give updates along the way. As that experience gets better and better, we will begin to spend more into marketing to direct traffic to that channel.
We know that's a big part of how shopping occasions begin, and we know we can do that in a highly differentiated way, given the nature of the way we can present outfits and item recommendations that really saves consumers time and helps with their discovery. No exact timing to share yet, but we know that that presents a lot of opportunity for us in the future. Albeit small, the population of Freestyle first customers we have today, we're encouraged by what we're seeing. We're also encouraged by, you know, helping those Freestyle first customers also experience the broader Fix offering as well. More to come, but that and just the overall new active client flywheel is by far the biggest focus for us as a team.
That's super helpful color. Thanks again.
Thank you.
Thank you. We'll take our next question from Tom Nikic with Wedbush Securities.
Hey, good afternoon. Thanks for taking my question. When you look at the apparel industry broadly, you know, this year and, you know, the general commentary has been that, you know, there's been this big kind of closet refresh this year and, you know, people are restocking on, you know, wear to work and, you know, wear to weddings and wear to social events, type of categories. You know, it seems like an inopportune time, you know, for your business to have these, you know, onboarding issues and things like that. Like, is there any concern that you've kind of, you know, sort of missed, you know, a bit of a golden opportunity to, you know, bring in, you know, a new cohort of clients when they're, you know, really looking to refresh their closets? Or do you think that you'll be able to, you know, pick up these customers, down the road?
Yeah, I mean, I think we're always gonna see consumers seeking out newer, better ways to shop. You know, one of the things we saw during the pandemic was just a systemic shift of more consumers shopping online. Now, stores took back a little bit of that in the last few quarters, but by and large, consumer behavior has shifted. There's always gonna be shifts in preferences for different types of apparel. You know, in this moment, there's a big shift to dresses and vacation wear. You know, we saw a 25% increase in vacation re-requests in this quarter. That was on top of actually 300% last year. We actually saw a lot of that going out again, coming out of COVID last year in addition to this year. Those changes we think are always gonna be occurring.
What's so unique about our model is we can adapt to what consumers are looking for, their preferences. We've been able to adapt and have the right product in terms of these dressier occasions. We're seeing strength in our own brands that we've launched. You know, even in light of athleisure and, you know, some of that category slowing down a little bit, we've actually seen increased performance in our own exclusive brand of We Wander that we launched. I think what's unique about our model is I think just fundamentally a lot of consumer behavior will continue to shift. You know, we're really just focused on being a better way for people to find what they love, and that is a pretty age-old problem that we don't see going away regardless of an economic cycle.
Got it. Thanks a lot, Elizabeth. Best of luck the rest of Q4 and into fiscal 2023.
Okay. Thank you.
Thank you. We'll take our next question from Mark Altschwager with Baird.
Good afternoon. Thanks for taking my question. Just starting out kind of a higher level question, but you know, revenue per client continues to look, you know, pretty healthy. I think you called out higher keep rates with Fix Preview. Then some of the issues that are weighing on the traffic and conversion, you do seem somewhat company specific. I guess you know, we're all watching the same macro headlines and data obviously. I'm trying to get a better sense of what you might be seeing in terms of your customer behavior that has you concerned on the macro or concerned of maybe a bigger slowdown.
Yeah. Thanks for the question, Mark. We are encouraged by what we've continued to see on RPAC and client spending inside our ecosystem, you know, both the adoption of new categories, the continued health overall of keep rate, as well as buying into new product categories with Freestyle. On a year-on-year basis, I think our cohorts, you know, we just continue to really like what we're seeing. I think to your point, for us, it's really about getting this new active client flywheel going. You know, part of that for us has been macro. You know, I think the impact of Apple Privacy has been one that we've continued to navigate through and just really start to evolve how we're driving traffic to Stitch Fix.
In terms of the broader macro backdrop, I mean, we do anticipate that consumers are gonna be, you know, seeking more value, and we just need to make sure we have the right product at the right time. We play across a very wide portfolio of price points. We know we can provide a lot of value with many of our exclusive brands, so we're just making sure we're serving the right product at the right time. Just every, you know, serving one client at a time every day.
Thank you. Just a follow-up for Dan then on the SG&A. You know, as we think about what next year might look like, could you just give us a little bit more color on what the mix between fixed and variable expenses looks like in that other SG&A, after we incorporate the $40 million-$60 million in restructuring savings?
Yeah. I think, without giving too specific, because we don't break out fixed and variable, you know, we do see that $40 million-$60 million, a good chunk of it is fixed, but will also be in variable productivity. We are seeing that. We are, you know, that is part of the $40 million-$60 million. I do think, though, the bulk of it will come on the fixed side simply because of the actions that we're taking today, as well as, you know, rationalizing the real estate footprint. That's all part of our fixed cost structure. The bulk of it will be in that area. A lot of the variable, in addition to the efficiencies, will come along the lines with respect to revenue, which we'll guide more when we have our Q4 earnings call.
Great. Thanks for the detail.
Thank you. At this time, there are no additional questions in the queue. That does conclude today's conference. We do thank you all for your participation, and you may now disconnect.