Oh, hi, Mike. All right. Thank you for being here. For those of you that have wandered in and decided to eat lunch here, you're in for a real treat, so bless your luck. I have here Matt Baer, CEO of Stitch Fix, and I'm just going to read some quick disclosures here. As a reminder, this discussion may include forward-looking statements. These statements are subject to risks and uncertainties and reflect the company's current expectations. Descriptions of those risks and other factors that could cause actual results to differ materially from these statements are discussed in Stitch Fix's filings with the SEC, including its most recent Form 10-Q. Statements made today are effective only today and will not be updated to reflect subsequent events or circumstances that may arise. Great. How are you?
Excellent.
Thanks for being here. So, as I guess theoretically alluded to in that intro, I'm just, you know, a lot of people know the name, have followed it at various points in their career. I don't think people have been paying attention to it for the last two or so years that you've been there. Can you just provide kind of an update as to sort of when you came in, why you decided to join, and then some of the primary initiatives early on? We can kind of go to more recent initiatives.
Yeah, yeah, absolutely. Thanks, Dylan. So, Matt Baer, the CEO of Stitch Fix, I joined roughly two and a half years ago. I grew up in retail. I'm a fourth-generation retail operator. And what's driven my professional pursuit, my career, has always been how can we leverage technology and innovation to create better client experiences? How can we fix the areas where retailers are letting consumers down? And that's always been the mission, the vision of what is Stitch Fix. When Stitch Fix was born 15 years ago, the idea was to create the most client-centric and personalized shopping experience, and that remains true today. Where our opportunity was is how can we build a business that is sustainable and is profitable and delivers against that aspiration into the future? So we launched a formal transformation.
There were three strategies or three stages of that transformation: first, to rationalize the business, then to build the business back, and ultimately a growth phase of the transformation where we return to revenue growth. As part of the rationalization phase, we closed fulfillment centers, we exited the U.K., we instituted retail best practices across the board, which really helped ensure that we were buying the right product, we had the right sell-through, get the right inventory turns, and we wanted to make sure that we were as efficient as possible through our operations and our supply chain. As a result of those efforts, we reduced our fixed costs by 24%, we improved our gross margins by 200 basis points, and we improved our contribution margins by over 500 basis points. Maybe more exciting is the work we did in the next phase of the transformation.
When we started to build the business back, we wanted to create a more modern Stitch Fix, a more dynamic Stitch Fix, and we wanted to lean in to make sure that we were the most client-centric retailer possible. So we reimagined the client experience across four different groups. The first is to create a more dynamic way where clients can engage with us, everywhere from onboarding through every instance in their client journey. The second was how do we create more flexibility within our business model so we can meet our clients where they are and serve them for all of their apparel and accessories needs? The third is how do we deepen the client-stylist relationship? And the fourth is that we really had a lot of work to do to strengthen our assortment such that we could have the absolute best assortment in all of retail.
That work has led us to three consecutive quarters of revenue growth. In the last quarter, we grew over 7%. That's in an apparel, accessories, and footwear market that only grew 1% over that same period of time. So we're delivering outsized revenue growth relative to the market. We also have nine consecutive quarters of average order value growth, up nearly 10% in the last quarter. And finally, we have six consecutive quarters of improving trends with our active client count, with considerable strength in the last quarter, with both new clients up 4%, re-engaged clients up 8%, and clients that left the service down 17% year- over- year, the lowest number of clients that left the service in over five years, so we have tremendous momentum in our business.
We're really just getting started in terms of how we're leading into generative AI innovations and continuing to fuel the momentum that we have in our business overall.
I want to talk about the AI. Can you just maybe outline, though, why it's important for this business to have implemented retail best practices? I mean, what were you coming from as far as sort of what you put into place?
Absolutely. Look, at the end of the day, we're a retailer. We're buying physical product, we're putting it in our fulfillment centers, we're shipping it to our clients, and then they're going to wear it and be really proud of that assortment. It's going to make them feel more confident, it's going to bring joy to them when they get that assortment. And for any retailer, it seems common sense, but if you're not winning with having the absolute best assortment, it's going to make everything just that much more challenging. We also had the opportunity to bring some more common best practices in from markdown strategies, promotional capabilities, and really just across the board how we were thinking about bringing that client experience to life with a retailer's mentality. And that's part of what's really played an outsized role in all the improvements that we've seen.
And so then, as you think about your back-to-growth mode, active customer growth comes in two or so quarters. The new customer that's out there. Is this a re-engagement story? Who are you leaning into with a sort of a more targeted marketing approach?
Yeah, so if I start at the highest level and I think about who our TAM is over time, we have tremendous opportunity for our business. Only 10% of U.S. consumers enjoy shopping for apparel and accessories in person. Not much better online. Only 15% of people in this country like to shop for apparel and accessories online. That creates a tremendous opportunity for us to go out and capture 80%, 90% of the market where retailers are letting down their customers and their prospective customers. The manner in which we get there starts from where we are today, where we're serving clients exceptionally well, and as we continue to improve the experience and expand our assortment, we can methodically increase that TAM and go after new client segments.
I think one of the things we did as part of the transformation is we launched a new brand platform called Retail Therapy, and we built that platform to be very flexible such that we could explain why the Stitch Fix service differentiates from other retailers and how it can uniquely serve specific client segments. So I'll give you an example. A lot of people in this country are now on GLP-1 medications. And when you go on a GLP-1 medication, your body goes through a transformation and your apparel and accessories needs change pretty considerably and pretty quickly. I believe, with a very high level of confidence, we are the best retailer out there to serve clients in the midst of a body transformation.
Our opportunity then is we go out to market and we target prospective new clients who we know or have a high level of confidence are on a GLP-1 medication. We explain in our media and marketing content why we're the right service for them. We then bring that traffic into a dedicated and personalized landing page explaining why the Stitch Fix service will suit them best and serve their needs as their body transforms. And then we also give that information back to the stylist so that they can serve that client best in every interaction. And we've got tons of different use cases very specific to that or very similar to that. We're bringing clients in with a very specific use case in mind and then meeting them where they are from an experiential standpoint.
And that speaks to the data and the deep data pools that you developed over time. Can you kind of walk through what data, what behavioral data, what spending data you have and how that informs the business and particularly the marketing and go-to-market?
Yeah, yeah, absolutely. So I think, again, one of the things that attracted me to Stitch Fix initially was Stitch Fix was born out of this understanding that data science, algorithms, LLMs, the ability to lean in and turn those into a competitive advantage is going to give you a very unique ability to serve clients in a differentiated way and in a personalized way to increase lifetime value and increase engagement over time. The way that we're parsing and studying that data today is to think about the different client segments or client cohorts where we're seeing outsized success, understanding the unique characteristics within them, and then bringing in similar clients into our experience. One of the things that we're really proud of is that this work continues to yield financial results for us too.
We have nine consecutive quarters of our three-month LTV increasing with new clients that we've acquired, which really is a proof point that we're acquiring the right clients, we're acquiring high-quality clients, and they're staying longer and they're spending more.
Part of my thought here too is that all of a sudden there's a whole new set of tools available to the market, right, to be able to be that much more precise and efficient with your spend. Is that kind of what you're saying?
I think so, but the differentiation here, and for many reasons why we're uniquely positioned at Stitch Fix, it's the quality of the data that's your input that's going to determine the quality of your output, and nobody has that quality of the data from an input perspective. It's the same reason why a lot of our client-facing generative AI experiences are so far superior to anyone else in the market, whether that's a startup, new entrant, or a well-resourced large institution. It's because we have that data both at a market level, but critically at the individual level, so every time that someone joins Stitch Fix and they onboard, we gain so many different data points about who they are specifically so that we can tailor and personalize that experience to them, and no one else can touch us there.
And then, so the new client that's coming in, you've put a very sort of firm flag in the ground. You put a flag in the ground on revenue growth, you hit it, you put a flag, or you were early, flag in the ground on when you're going to see active client growth. There seems to be a certain amount of control that you have in the business through that sort of availability of data. Is that fair?
It's fair. I think it's also, I know it's part of what you're saying too. It's a testament to the fact that we have the right team, we have the right strategy, we continue to execute at an exceptionally high level, and we get that added benefit of our business model, which creates a recurrence. And it gives us the confidence that we understand what our client base will look like in the future, what the revenue opportunity is in the future. And we've had several consecutive quarters where we've come out and actually delivered revenue ahead of our guidance. And that's because we continue to lean in with more new innovation, and that innovation that we end up bringing to market ends up continuing to outperform even our confident expectations.
So yeah, we have a lot of confidence in terms of how we can see into the future, but we're going to continue to push ourselves to even outperform where we see that business likely trending towards today.
How do you bridle sort of the spend as far as from a customer acquisition standpoint? Because everything you're saying is very attractive. You would think you would just go to your marketing department and give them every dollar that you could, right? How do you weigh quality versus sort of pace?
Yeah, so I think it's about being very methodical. I've been part of other organizations where we've chased either revenue growth or active client growth almost as a vanity metric. If you do that, it's not sustainable. It will collapse. The work that we're doing is to be very methodical to ensure that as we bring in new client cohorts, those clients are continuing to spend at or above the levels of the prior cohorts that we brought in, and then we can tailor our investment thesis going forward. We're looking at that on at least like a 90-day lag in order to see how those clients have onboarded, how they've taken to our service, how their spend levels have evolved relative to prior cohorts, and we're going to continue to be both, I think, appropriately patient or methodical in that growth.
As I think you noted, we have already guided that in our third quarter, we'll return to active client growth on a quarter-over-quarter basis. As we shared in our earnings call last month, our men's business has already returned to active client growth. We know we can do it. And what we're going to continue to do is lean in and be methodical in terms of how we really continue to push the envelope there. And then we get all those added benefits when I talk about the increases in lifetime value, the nine consecutive quarters of average order value growth. So you can just really see into the future that once that flywheel gets spinning with active client growth, the revenue opportunity is just that much larger.
And so that's the stickiness in the engagement. There's a piece of it that's just the acquiring and being sort of targeted in that. Can you kind of speak to what drives the longer-term engagement, your confidence level that sort of the LTV has increased, even looking at beyond sort of the 90-day window?
Yeah, so there's a lot of things that are leading to that. At a high level, I'd tell you it's the confluence of all of the things that we've done to reimagine the client experience. But I'll anchor on a few. The flexibility that we've created within our business model is really paying dividends for us. If you look at the current Stitch Fix experience versus what it looked like just a few years ago, it's now unrecognizable. Stitch Fix used to be five items in a box on a recurring cadence with one markdown lever, and that was it. Today, we have Fixes of all different sizes, of all different cadences. You can initiate a fix based on a theme. Maybe you are starting a new job or you need date night outfits or you're going on a cruise or a vacation.
You can also engage through our Freestyle channel and initiate a Fix from there. We've also recently unlocked family accounts. 92% of our women's clients shop on behalf of a spouse or partner. Historically, Stitch Fix was only an experience between one client and one stylist. Now that we've unlocked this, we see even more opportunity and are seeing even more growth with our active clients. There's some crazy external stats out there. 70% of the items of clothing in a men's closet was purchased by someone else. Our men's business got back to revenue growth and active client growth before we even unlocked family accounts. So we see even more headroom there.
And then a lot of the investments that we've made are in our CRM and our martech capabilities so that we can understand each client uniquely, when to engage them, when to pull them into the experience, when to pull them into the experience and offer them a Fix, or when to pull them into the experience and offer them an opportunity to shop within Freestyle. Or even now, we have a lot of opportunities to just inspire our clients on a daily basis. And how do we continue to engage them and give them a reason to open our app on a daily basis, visit us on a daily basis?
I mean, it seems you're adding depth to a generally good idea on paper. You're not going to say it, but I will. I mean, the prior business was effectively, here's the undynamic model. We're going to go to the same theoretical customer with the same basic product over and over again and see if it works, and it didn't, then it didn't.
I think there is definitely a lot of things that always worked in the model. And where our opportunity was, though, was to really continue to add value throughout the client journey and to continue to give them reasons, to your point, to continue to come back to us. Something that maybe is not quite as sexy, but for those in retail who understand this very clearly, our core business historically had been about 80% just in tops and bottoms. And what we've done over the last two years as part of reimagining and strengthening our assortment is to very meaningfully move into all other apparel categories as well as to move into accessories. With our current client base, we have a $1 billion fair share opportunity just in active wear, accessories, and footwear. And so far, we're finding a lot of success with that.
In the last quarter, we have our women's accessories business up over 40%, our women's sneakers business up over 60%, our jewelry business up over 25%. So we're seeing that growth in these categories. It's helping us dress our clients head to toe and again, gives them even more reasons to come back to us and makes the entirety of their wallet share available. I think it's important to note too, so much of that is born out of client insights. I do a monthly in-person focus group with our clients, and in one of the early ones, it was some of our most loyal clients, and the overwhelming feedback that I received in that room was, "I love Stitch Fix. It adds so much value to my life, so much convenience to my life.
I need to be able to use it more, and it needs to serve more of my needs." And that's why we're increasing the frequency, increasing the categories that we offer. And now we've driven up our revenue per active client for seven consecutive quarters.
When you're also a stylist, you get insight there as well.
I'm also a stylist. It helps me get very close, very personal to all of the needs of our clients, which really helps hammer that home as well. And every client has a unique need, and it's really interesting to see the unique ways that we're meeting their needs. I have a client in Alabama. She's a single mom. When I started styling her, she had three kids. She now has a fourth kid. She has no interest and no time to walk the mall, to shop, to figure out what to buy for herself or her children. She comes to Stitch Fix and relies on me in order to take that burden off of her, a true convenience or solution seeker. I also have another client. She lives in Letcher, South Dakota, population 159. I refer to those as fashion deserts.
There is nowhere else where she can go to access the assortment or the level of service that we provide. Stitch Fix is the only retailer that can do that. With more and more stores closing, more and more malls shuttering, those fashion deserts are ever expanding, and we have that unique opportunity to move in and capture that market share. I also have a client. She's 60. She goes to work every day in San Francisco, and she has no idea how to walk into that office and be appropriately on style or in trend. She relies on me for that. And I think we've done a really good job making sure that she feels confident every single day when she goes to work.
That's fantastic. On the new category extensions, I mean, are you fully kind of built out at this point? And it's just about sort of adding more. Are there more extensions you can do?
We're adding new categories all the time, and we have both a lot of opportunity for new category expansion, but more importantly, it's around continuing to deepen the penetration of those new categories that we've entered. That billion-dollar number is real, and we're working to chase that every single day.
What about private label? You already have a relatively healthy penetration, 40-ish, right?
About roughly 40%-50% with revenue and units.
Right. Is that something? What's the right level there? And I think you have a unique use case because it kind of supplements a Fix, right? So what's the strategy with private label?
Yeah. So if I go back to the transformation that we have, the first phase when we rationalized our business, we took a hard look at our private label. And we did that from a very objective standpoint. And any items within our private brand assortment that we weren't proud of, we removed them. And through that process, we actually even removed several brands that weren't delivering the level of quality, the level of value, or standing for something unique and differentiated. Then we started to build back our private label brands. I'm really proud of the work we've done there. I think now they stand for quality. They stand for value. They stand for a very specific use case. We also launched new private brands, like in our men's business, The Commons, an elevated everyday brand. It's the shirt and sweater that I'm wearing today.
It's now a top five brand for us in our men's business. And it becomes a reason for our clients to continue to come back to us. It deepens that relationship with our clients. It builds loyalty to the brand, and it becomes something that they're accustomed to, understanding our different private label brands and how we can meet their needs with each of them. And of course, the kicker is we get about 500 basis points higher margin with our private brands.
Yeah, and is 50% the right level or do you think?
We're going to continue to be very client-led in different categories. The data will tell you different things, both external data as well as internal benchmarking data. We have private brand in our footwear, for example, but also when it comes to more athletic or performance footwear, the data that we have is pretty clear that national brands make a difference from purchasing intent. But when it comes to the cashmere sweater that you're going to wear to work, we have a lot of right to win that business, and we have to find out the right balance for each category and for each client.
I was going to ask you about the importance of the stylist, but I don't think I could have done a better job than you just describing your own experience being a stylist.
Yeah.
But you do get the question, why even have this, right? Does AI take the place of a human being longer term? Can you just kind of the uniqueness and the...
Yeah. Yeah. The role of our human stylist is absolutely critical. Our clients and our stylists, they build deep and enduring relationships. Often a stylist is the first person to find out if a client is expecting or if their child got engaged or they've got a wedding coming up. And they come to build these relationships and count on their stylist for many different things. And they build those relationships that endears loyalty to the brand. The stylists also add a tremendous amount of value, added value on top of all of the leading innovation and AI capabilities that we have in-house. Longer term, where that opportunity drives is that the experience needs to be just as personalized to the individual client as our recommendations ultimately are. For some clients that favor more of a wardrobe day-to-day, they might need less involvement from their human stylist.
For other clients, they want to talk to their stylist every single morning as they're getting dressed and ready for work and how to pick out the right outfit.
They can.
They can. We recently launched a new platform called Stylist Connect where clients and stylists can have near real-time conversations. They can share inspiration back and forth. If a client sees something that they like, they can take a photograph, send it to their stylist. The stylist can then send back an item or build an outfit around it or even show the client in a generative AI image wearing that outfit, at which point they can then purchase on their behalf through Freestyle, add it to their next Fix. I think what you'll continue to see over time is an even more dynamic relationship whereby the client-stylist relationship, the client-stylist interactions become even more tailored, even more personalized to that individual.
Because it's about predictability, right? I mean, part of the real solve as far as the stickiness. Because what used to happen if you all get on a subscription-type model, they would get potentially burned out. They would go away. It's about solving for that to some extent, right?
It absolutely is. We meet our clients where they are now. We make sure that we're tailoring that experience, whether it's the number of items, the cadence, or even if it's a Fix versus a Freestyle transaction. And being able to move into more categories also helps us continue to build out and strengthen that relationship such that we have that perpetual relationship with clients now. There's no reason why they would burn out or churn in that regard.
Can we dispense for the last minute here, open-ended, looking out to this next year? You've given a certain amount of guidance, but what's the right way to think about growth here, structural growth? You've mentioned the TAM that you can kind of build into. What happens from here?
Yeah. So I mean, look, I've been at Stitch Fix for about two and a half years now. As I mentioned, I'm a fourth-generation retail operator. I've had the unique opportunity to work at both the world's largest retailer, the country's largest department store, worked at and founded retail startups. I've never been more confident that this is the future in terms of how consumers are going to engage with a retailer, how they're going to procure all of their apparel and accessories needs. I have the utmost confidence that we're going to continue to lean into this momentum that we have, play offense, continue to innovate for our clients, and continue to capture even more market share going forward. In the last quarter, we guided to another consecutive quarter of accelerated revenue growth.
We'll continue to grow the top line, continue to steal market share. As we talked about, we're going to get back to active client growth. We've guided to that in our third quarter. And then ultimately, we're going to continue to put leverage in our business to drop even more to the bottom line and deliver some pretty healthy EBITDA and net income numbers over a longer period.
Excellent. Thank you.
Yeah.
Thank you, everyone, for being here.
Thank you.