SFIX (2019 - Q4)

Good day, everyone, and welcome to the Stitch Fix Fourth Quarter 2019 Earnings Conference. Today's call is being recorded. At this time for opening remarks, I'd like to turn things over to David Pearce. Please go ahead, sir. David Pe

Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year for 2019. Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix; Mike Smith, President and COO; and Paul Yee, our CFO. We have posted complete Q4 and full year financial results in our shareholder letter on the IR section of our Web site, 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 our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR Web site. These non-GAAP measures are not intended to be a substitute for our GAAP result. Finally, this call in its entirety is being webcast on our IR Web site and a replay of this call will be available on the Web site shortly. I'd now like to turn the call over to Katrina.

Thanks, David, and thank you for joining us. After the market closed today, we issued our quarterly shareholder letter with more details on our results and our strategy, which I encourage you to read. I'm excited to share our fourth quarter and full fiscal year results, which demonstrate strong top line growth in both periods while we continued to make strategic investments to drive long-term growth and profitability. In Q4 '19, we generated net revenue of 432 million at the high end of our guidance range reflecting 36% year-over-year growth. As a reminder, fiscal year 2019 was a 53-week year with Q4 '19 consisting of 14 weeks. Removing the impact of the extra week in Q4, we grew revenue by 26% in the quarter. We also delivered 7.2 million in net income and 6.4 million in adjusted EBITDA in line with our guidance. During the quarter, we grew our active client count to 3.2 million, an increase of 494,000 clients and 18% year-over-year. In addition, we grew net revenue per active client by 9% year-over-year, our fifth consecutive quarter of growth and a reflection of our strengthening ability to help clients find what they love. 2019 was a very busy year for us and we’re proud of all that we accomplished in our second year as a public company. We grew net revenue 29% year-over-year to 1.58 billion, generated positive adjusted EBITDA for our fifth consecutive year and delivered 37 million in net income. We captured more of our large addressable client base by adding nearly 0.5 million active clients in 2019, and we’re serving those clients even better evidenced by our growth in revenue per active client in every quarter in fiscal 2019. We further extended our addressable market by launching in the UK, our first international market and recently celebrated our one-year anniversary of kids. We’re excited about the longer-term opportunity for both of these markets which add to the already significant opportunity we have continuing growing our women’s and men’s categories. Even while we invested in our kids and UK categories, the health and scale of our women’s and men’s categories allowed us to offset these investments and drive leverage across our business. We grew our gross margins year-over-year and turned our inventory at a rate of more than 6x annually, a function of our continued scale, strengthening capabilities and the growing impact of data science such as our inventory optimization algorithm and Style Shuffle platform. We also continued to invest in, strengthen and diversify our marketing capabilities. Our marketing strategy focuses on return on investment and quick payback. This means we may not always be managing to the lowest customer acquisition cost without regard to quality of clients and it also means that we are not spending to a hypothetical lifetime value but instead optimizing for payback within a few quarters. We wanted to illustrate this strategy with data in a one-time disclosure in our Q4 shareholder letter. This disclosure shows that over four recent quarterly cohorts, each has generated payback on marketing spend of over 2x to 4x in their first three to six full quarters. Having both near-term paybacks and returns that grow as clients continue to engage with us over many years is a strategy that helps us deliver long-term growth as well as profitability. To share one last highlight on the marketing front, 2019 also marks our first investment in longer length marketing channels with the launch of our first integrated brand campaign. We’re excited about the prospect of using brand marketing as another channel to frame our value proposition and drive greater awareness and affinity with both new and existing clients over time. I’d now like to take a moment to look forward and discuss the significant opportunity we see to extend the reach of our personalization capabilities to capitalize on the extensive market share we have available to us in 2020 and beyond. For many years we have characterized the business that we are in as that of personalization. We believe strongly that winners in apparel retail will be those who most effectively help clients find what they love. This company was founded with the premise that personalization is the best way to help clients navigate the crowded world of apparel retail. This was our belief in 2011 and we have even deeper conviction today that personalization is the future. We’ve been in this business of personalization for almost a decade and we believe that our investments in these capabilities is precisely what sets us up to be successful for many decades to come. Almost all of the nearly 5 billion of apparel and accessories we’ve sold in the last five years has been through recommendation, not chosen by the end customer. Our business model has required us to build an incredibly strong set of recommendation capability, made possible by the wealth of data we’ve collected across these transactions. We now have a personalization engine that gives us the ability to deeply understand clients and products and generate powerful recommendation on what products will be successful and with whom. To date, this personalization engine has generated great value to us and it has powered our primarily five items Fix format. While this one form factor has served us and our clients extremely well, we believe the market opportunity for personalized experiences in apparel is massive and that our platform can be extended much more broadly than this one form factor, and we’re excited to start talking about it and demonstrating it in 2020. With that, I’d like to discuss one example of an initiative that demonstrates how we plan to extend our personalization platform. Recently, we began testing an offering called Shop Your Looks. This offering is part of our new direct-buy functionality which enables clients to choose and purchase items outside of a Fix directly from our Web site. However, unlike most eCommerce offerings which choose to show every available product to every visitor, what’s unique about Shop Your Looks is that it’s hyper-curated and personalized to every client. The feature is based on items that clients have already purchased from us but also presents a personalized subset of algorithmically generated items delivered to clients in the form of shoppable styling recommendation for pieces already in their closet. At any given time, we might have tens of thousands of items available in our inventory assortment that we could be showing clients but we are still confident in our personalization capability that we choose to only show clients an average of 30 to 40 shoppable items at one time on this stage. We are excited and optimistic that even an imperfect not yet optimized beta test offered to a portion of our women’s clients that through this hyper personalized shoppable experience we’ve seen success. In fact, in just a brief eight weeks beta test, over one-third of clients that purchased through Shop Your Looks engaged with us multiple times and approximately 60% of clients who buy through the offering purchased two items or more. While Shop Your Looks is still early and there remains a lot for us to learn and enhances the product, the offering leverages the personalization engine we’ve built over the last eight years and demonstrates this tremendous potential as we explore maximizing our capabilities in new and incremental ways. Leveraging these capabilities in a direct-buy format is an exciting step for us and one that has the potential to drive further engagement between fixes, increase our ability to serve clients well and get deeper share of wallet. Innovation such as this one also provides potential benefit with respect to new clients, enabling more ways for clients to experience the benefit of personalization can provide new entry points into our business and allow us to customize the way in which people want to buy and engage with us to address many more types of clients and need states. It’s this confidence in our personalization platform that feeds our investment strategy in 2020. Last year, we invested in new categories to extend our market opportunity and in 2020 we’ll be investing in our digital product creating more possibility and making the incredible capabilities that we have more expansive and better positioned to capitalize on the enormous opportunity in the markets we are in. We have deep conviction in the capabilities we’ve developed and excitement for what we can do in the near and long term. This gives us confidence in 2020 to guide at the high end of our long-term growth target as Paul will share in a few moments. Now, I’ll turn it over to Mike who will discuss how our strength in data science capability at improved inventory assortment have allowed us to enhance our personalization.

Thanks, Katrina, and hello to everyone joining us on today’s call. Over the course of 2019, we’ve talked about how we continue to invest in our data science advantage and in our inventory assortment to deliver greater personalization to our clients. I’d like to take a few minutes to discuss both of these areas and highlight how these investments are supporting stronger client and business outcomes. Let me take a minute to step back and remind people the advantages of scale that we’ve achieved in this business and how it relates to this platform. To-date, we have shipped over 200 million items and saw that over 85% of shipments in 2019 result in direct client feedback. We believe that these client feedback loops and the resulting rich data we receive are instrumental in strengthening our recommendations and capability. Over time we have begun leveraging our data science strength to more broadly inform our strategic decisions. One recent example of this is Style Shuffle which has become a valuable platform that is now fueling multiple areas of our business. As a reminder, we launched Style Shuffle in 2018 and as of today we’ve collected over 3 billion ratings with over 80% of our active clients providing detail feedback. To date, we’ve used the ratings to learn about our clients’ style preferences and to inform better inventory matching. Over time, we see multiple other end uses of the platform that include informing our merchandize buys, testing new styles and further personalizing our marketing campaign. Most recently, we integrated Style Shuffle data into our styling application to improve our recommendations. Style is one of the most challenging areas of retail to unlock and we believe that this data enables us to address this pain point. We’ve now translated Style Shuffle learnings into visual galleries to provide stylists with greater visibility into each client’s style preferences. Since integrating these insights for our women’s clients, we’ve increased the number of items purchased per Fix, average order value and client satisfaction. The deep insights from Style Shuffle reinforce our powerful data advantage and show the platform’s growing impact across our businesses. Nearly one-third of our data scientists use Style Shuffle insights to power other initiatives across the business. This investment continues to clearly show a competitive advantage, and as Paul will share is why we plan to continue investing and building our data science and technology teams in 2020. In 2019, as we further improved our inventory management capabilities to match product and clients, we reinvested the resulting working capital gains and inventory breadth to support our growing and diverse client base. This investment enables us to acquire a launch and learn strategy to new categories such as kids in the UK, expand our addressable market and capture greater wallet share. For example, in women’s we increased the number of brands we shipped by nearly 50% and grew the number of styles we offer by nearly 70% over the last two years which allowed us to further penetrate our addressable market and serve more clients. We also grew our assortment of items with distinct end uses such as workwear, special occasion and casual wear by over 5x since 2017 enabling us to better serve our clients’ diverse needs and drive greater wallet share. In men’s we also expanded our assortment of brands, styles and end uses. In activewear specifically, we doubled the number of products and brands over the last year to more closely align with our clients’ style and fit preferences. Even while making these investments, we continue to quickly turn our inventory at a rate of more than 6x annual rate. Over time, we plan to use data science to inform even more of our inventory decisions enabling us to enhance our assortment, better serve clients and capture greater wallet share. In today’s shareholder letter, we discuss how our enhanced data science capabilities and strengthened inventory assortment has allowed us to deliver stronger personalization for our clients. Specifically, we shared that in both 2018 and 2019 cohorts we grew our average success rates for items across clients first, second and third Fixes. For clients in our 2018 cohort we’ve increased success rates between their first and second Fix by 8% and between their first and third Fix by 14%. We saw increasing success rates across Fixes in our 2019 cohort as well. In addition to demonstrating our success within a cohort, we also highlight our strengthened personalization capabilities across cohorts. For example, the success rate of items sent in the first Fix of our 2019 cohort was 17% higher than in the first Fix of our 2018 cohort. We believe this shows that our data science insights paired with our strengthened inventory assortment offers significant competitive advantage that we expect will grow over time. With that, I will now turn the call over to Paul who will discuss our financial performance and outlook.

Thanks, Mike. Our results demonstrate our ability to invest in the long term, while balancing growth and profitability. We delivered revenue growth in both Q4 and full year 2019 above our stated long-term range of 20% to 25%. At the same time, we made strategic investments in talent, inventory and marketing that fuels healthy client growth in gains in net revenue per client. We also laid down plans for future growth with the first ever integrated brand campaign and our expansion into the UK. Katrina highlighted new ways we’re using our personalization capabilities to engage with clients and Mike shared how we continue to harness the power of data and feedback loops to serve them better. As we look to FY '20, we remain firmly committed to self-funding initiatives that widen these competitive nodes and our FY '20 revenue guidance reflects our confidence. Q4 net revenue was $432 million representing 35.8% growth year-over-year. FY '19 net revenue was $1.58 billion, 28.6% above last year. Moving the impact of the extra week, the revenue growth rate for both Q4 and the full year was approximately 26%. Gains in both periods were at the high end of our guidance and were driven by both women’s and men’s as we continue to ramp kids in the UK. Active clients grew to 3.2 million or 18% year-over-year. Active clients represent anyone who checked out a Fix or was shipping item using our new direct-buy service in the preceding 52 weeks measured as of the last date of that period. Net revenue per active client grew 9% year-over-year or 7%, excluding the impact of the extra week, representing our fifth consecutive quarter of growth even as men's and kids became a higher mix of our business. Q4 gross margin was above our expectations at 44.1%. This represented a 30 basis point decline from last year, driven by an increase in inventory reserve as we invested in inventory year-over-year. Full year gross margin was 44.6% representing a 90 basis point improvement versus last year. This expansion was driven by lower clearance as we managed our inventory effectively and implemented initiatives to reduce shrink. Q4 advertising was 9.0% of net revenue versus 9.1% in Q4 '18. This leverage reflected our choice to spend less in July and deploy marketing dollars more effectively at other times of the year. For the full year, advertising was 9.6% of net revenue compared to 8.3% in FY '18, driven by our brand investments concentrated in Q3. Other SG&A, excluding advertising, was 34.6% of net revenue in Q4 and 33.4% for the full year. This line increased year-over-year as we’ve built our UK team and invested in payroll and stock-based compensation to attract and retain top talent. Together, our over 200 engineers and 125 data scientists introduced new product features, strengthened our Style Shuffle platform and expanded the ecosystem of algorithms that guide our daily operation. Notably, these SG&A investments were partially funded by higher efficiencies in our warehouse and styling teams. Today, variable labor costs represent less than half of our other SG&A, excluding advertising, reflecting a very strong unit economics. We expect to continue leveraging variable costs through efficiency initiatives and expansion of our direct-buy capabilities over time. Q4 adjusted EBITDA was $6.4 million or 1.5% of net revenue and FY '19 adjusted EBITDA was $39.6 million or 2.5% of net revenue, in line with our guidance ranges. Q4 net income was $7.2 million and diluted EPS was $0.07. For FY '19, net income was $36.9 million and diluted EPS was $0.36. Lastly, we’re proud of our ability to grow our business in a capital efficient way. In 2019, we self-funded meaningful investments across technology, marketing and new markets and did so while maintaining profitability and generating $47.8 million in free cash flow. We ended the year with $368 million in cash, cash equivalents and highly rated securities and no debt. Our healthy balance sheet continues to enable us to self-fund our growth and maintain flexibility. Before I provide 2020 guidance, I’d like to step back and share how we’re approaching decisions around growth and investments and their impact on our financial outlook. First on growth. We are more confident than ever in our platform of personalization and our ability to extend our capabilities to enhance the size of our addressable market and improve our ability to serve clients. In addition, our early reads across our direct-buy platform only fuel our convictions. This confidence is reflected in the full year growth outlook I’ll share in a moment. We also believe that by investing more aggressively in these capabilities will strengthen our service and extend our leadership in personalization. As a result, we plan to invest more heavily in technology talent in 2020 to accelerate our momentum. With that, I’ll start with our full year fiscal 2020 and then share how our Q1 outlook fits within this year. For full year fiscal 2020, we expect net revenue in the range of $1.90 billion to $1.93 billion, representing growth of 20.5% to 22.5% year-over-year. Importantly, adjusting out the impact of the 53rd week in FY '19, our guidance range reflects growth of 23% to 25%, the high end of our long-term growth target. In line with my earlier commentary on a ramping FY '20 talent investments, we expect EBITDA in the range of $10 million to $30 million. Besides investments across our operations, this guidance includes stock-based compensation or SBC of $75 million as we plan to invest aggressively in our data science engineering teams to advance our personalization capabilities, including direct buy. Given these talent investments as we look ahead, we recognize the need to balance the ongoing importance of SBC while driving leverage in our business. At the same time we note that comparable companies exclude SBC from adjusted EBITDA. As a result in FY '20, we’ll provide EBITDA both including and excluding SBC and believe that by providing this visibility we can more clearly demonstrate the leverage we drive across our business. In FY '20, this will result in adjusted EBITDA excluding SBC in the range of $85 million to $105 million. By comparison, this range is higher than last year’s adjusted EBITDA excluding SBC of $75 million. Finally, note this guidance includes impacts in the recently announced List 4 tariffs. While today these tariffs have been immaterial to our business, we’re working closely with brand partners to mitigate potential future impacts while also continuing to diversify our supply chain. For Q1 '20, we expect net revenue in the range of $438 million to $442 million representing growth of 20% to 21% year-over-year. We plan Q1 softer than our full year growth for two reasons. First, we’ve had greater success this year with summer products like T-shirts and sleeveless tops. While these items carry a lower average unit retail and average order values, we’re happy to see the seasonal products successful deep into the summer season. Second, as I noted earlier, we spent less on marketing in late Q4 which meant we had fewer clients to contribute to revenue at the start of Q1. Our guidance reflects continued momentum in our revenue per client growth which was 9% in Q4 and consistent client count growth which was 18% year-over-year in Q4. We expect Q1 EBITDA in the range of negative $7 billion to negative $4 million. This includes SBC costs of $13 million as well as planned investments in marketing and the UK, resulting in adjusted EBITDA excluding SBC in the range of $6 million to $9 million. Looking ahead to Q2, we expect EBITDA to return to positive levels. In summary, we are proud of the strong growth and profitability we delivered in 2019 and our confident the strategic investments we’re making in 2020 will fuel our personalization capabilities and allow us to capture greater market share over time. With that, we’re ready to open it up for questions. Operator, over to you.

Thank you. [Operator Instructions]. We’ll hear first today from Edward Yruma with KeyBanc Markets.

Hi. Good afternoon. Thanks for taking the questions, guys. I guess, first, it seems like you’ve unlocked an exciting growth opportunity in kind of more self selection through extras and maybe now Shop Your Looks. How does that change the longer-term economic model given that it seems like a more automated process? And then I guess as a follow up on tariffs, I know Paul you mentioned that you’re working to mitigate, but what’s the impact that you baked in the guidance? Thank you.

Thanks, Ed. I’ll take your question probably to start on your models and then Paul can speak a little bit about the financials and the tariffs. Yes, we’re really excited about kind of being able – for years we’ve talked about what we’re building is a set of capabilities and this ecosystem of personalization and it’s just really exciting for us to be able to demonstrate how we’re going to take that outside of the box format. So I think we shared pretty early results here. We’re about eight weeks into the beta test that we have and so while we can’t speak specifically to like how much of our business will this be or what will that kind of – what proportionally will it be in the future, I think Paul has some perspective on the financial side and he can speak to tariffs as well.

Hi, Ed. Right now as you’re aware, we have a very positive economics. So as you think about direct buy as a future channel of growth, we see opportunities to be additive on that front. So over time we’ll give you more color on that. But as we scale the business, we see opportunities to improve our margins overall in the business with direct buy. Specifically with tariffs I noted in my remarks that we have integrated the impact of tariffs, including the List 4a and 4b tariffs in our guidance. We deemed the net impact of these tariffs to be immaterial. We’ve been working very closely with our brand and manufacturing partners to mitigate the impact. And so overall for the year we deemed the number to be fairly immaterial and we’ll give you updates on the way as we see how this progresses.

Great. Thanks so much, guys.

We’ll hear next from Doug Anmuth with JPMorgan.

Thanks for taking the questions. First, just hoping you could talk a little bit more about why you spent less on marketing in late 4Q, what the trend is going forward and why you think the growth will accelerate through 2020? And then also just on stock-based comp for this coming year in the 75 million, has something changed in the business or is it just reflective competitive nature of the industry? Thanks.

Great. Thanks, Doug. I’ll start a little bit on marketing and then I’ll have Paul wrap it up. Firstly, we’re really happy to share disclosures on the marketing side. And so just philosophically stepping back, we talked a little bit on the call and our disclosure show that on our philosophy in marketing is not to acquire clients just for the sake of acquiring clients. We’re looking to acquire thoughtfully clients that are going to be successful through our business and that generate quick payback and we’re not kind of spending to this hypothetical LTV. And so the disclosures hopefully can help to share a little bit of kind of what the strategy is around there. And so as we’re thinking about planning out our year as we are looking to kind of – as we finished out this last year and we’re looking to be on the high end of our growth range again in the next year, we’re really thoughtful about where we’re placing those marketing dollars so that we can make sure that we’re generating the best return on those dollars and at the same time achieving our growth goals at a high level.

Hi, Doug. This is Paul. In regards to your question around SBC, now that we’ve been a public company for two years, we look back, we’re very proud of the capabilities we’ve built, the competitive notes we’ve built in personalization, and what underpins that as talent. And as we looked and planned out 2020, we knew that we had an opportunity to continue to widen that node not only to continue to hire and retain great data engineering and data science engineering talent but also hire world class leaders and that’s translating to our SBC guidance of $75 million for the year. We think this visibility is helpful for investors to understand that we do feel confident in growing this business over the long term. That being said, a lot of other companies as we benchmark do exclude SBC from EBITDA and we felt by sharing that number people can do their own analysis. It is a non-cash expense. But internal we have looked at as an investment and one that will pay off over time.

And just a follow up. Any more clarity just on the acceleration through the course of the year, just what drives the confidence there? Thanks.

Absolutely. So our guidance for the full year is 23% to 25% on an adjusted 52-week basis. One area is direct buy. It’s very much in early stages today but the reads we have so far give us confidence that will play out over the course of the year. We have a whole variety of other initiatives. Style Shuffle is a platform that’s continuing to allow us to get to know clients better and get them the right product, so those initiatives are reflected in our full year guidance. And then finally, while kids in the UK are still small, they are growing and they will continue to grow throughout the year. So all of these initiatives come together to reflect our full year guidance of 23% to 25% on an adjusted basis which is on the high end of our range on a long-term basis.

Okay. Thank you.

From Barclays, we’ll move to Ross Sandler.

Hi, team. I have three questions. So first one, the gross margin was down a little bit and you mentioned inventory. I assume this is mix into the new categories. Can you talk a little bit about the trends that you’re seeing with gross margin in women’s versus kind of the newer categories? Is that mostly just the mix or any color there would be helpful? And then, Katrina, going back to the marketing comment, so you mentioned in your prepared remarks that you can actually target higher quality clients and pay a higher CAC because you know the frequency or the retention might be better. So is this a new capability or is this something that you’ve done fairly recently to get those payback period improvement, any color there? Lastly and sorry for the three questions, Amazon recently rolled out a personal shopper product for wardrobe, so any initial thoughts on that or are you seeing any impact from that offering? Thanks.

So I’ll probably have Paul start and then I can take your questions on competition and on marketing.

Hi, Ross. It’s Paul. In regards to your question on our gross margin, it was 30 basis points lower year-over-year and that was in line with our expectations. There was a slight mix impact due to the UK but more notably this reflects our choice midyear last year to invest in more inventory. We knew we had an opportunity to meet customer demand in the second half and continue to broaden our inventory speaking to what Mike talked about, to be able to serve a broader and more diverse client base. And when you have higher inventory, you do have a reserve impact. So year-over-year we did have a higher inventory reserve cost that was reflected in our gross margins. We’ll see this sort of annualized in the first half of 2020 and again it’s reflective of our confidence and our ability to buy the right inventory and get the right clients. And so overall the health of our gross margins by virtue of our inventory management and operating efficiencies would shrink and also expanding in excess of brands, those trends continue and we just have some investments underneath it that these initiatives are allowing us to invest accordingly.

Hi, Ross. So your question on marketing, so firstly I think the capability of – I guess like there’s a two-part question here. Like one is really just like our philosophy and our philosophy is not new. And so we’ve been thinking about our customer acquisition cost and payback in a short period of time for a long time, and that’s why we’ve been profitable for five years now. This has been a strategy that we have employed since the early days of how we can make sure that we’re building a healthy business with healthy margins along the way. I think what you’re seeing that’s newer is in the last and probably 2019 or so, we really honed our capabilities on using algorithms in the marketing world of being able to target clients that we can actively know that we can spend more for but that we know we’re going to get payback for. And I would say that was newer in the last year or so compared to prior years. And so that helps us to get confidence to spend more in certain times versus others because we can feel like we’re going to see that really good payback. And so that’s a good new capability that we’re really proud of. On the competition – just to step back, we’re in a huge – we have $400 billion of market opportunity here and 80% of that market opportunity is still in stores. And so I would say that our – from our competition is really the migration of those dollars that are stuck in kind of retail stores and migrating those dollars online. And so I think head-to-head competition wise like we’re not necessarily looking at lookalike models of who the competitive set is. And I think we see our differentiation as being really strong and that why personalization is entirely what we’re focused on even in Shop Your Looks which we talked about which has more of a direct buying component, in that case we are doing almost the opposite of showing you everything. We are taking tens of thousands of things and actually only showing you at any given time 30 or 40 shoppable items. And so it’s a very counter approach to what a lot of other eCommerce does and that’s really compelling and that’s really driven by our feedback model. And Mike reinforced this statistic that we had that 85% of our interactions are on generating this really powerful first person, high signal feedback data and that’s really what helps us to be able to deliver that capability to be able to understand if people are going to love. And then lastly, we’re differentiated in our rules with vendors and brands and brands love working with us. And we’re a channel that really helps them to preserve their brand integrity that helps them to be introduced to clients in a really authentic way and I think that’s another huge point of differentiation in our model.

Anything else, Mr. Sandler?

No. That’s super helpful. Thanks, team.

Next, we’ll hear from Mark Mahaney with RBC Capital Markets.

Okay. Can I ask two questions, please? First, your year-end Stitch Fix for kids, could you talk about some of the learnings you’ve had from that? And then secondly on this direct-buy functionality, I think this is fast gaining [ph]. I think it could be highly material and I wonder if you already know to what extent it increases spend per customer. I get the data point about how you had these – this very short-term cohort had two items or more clients who did buy that way, what I can’t tell is, is that cannibalistic from what they would have bought from their Fix and if not, that’s highly accretive. If you assume in a six to eight-week period that your average customer would maybe purchase two items a month or three items a month, you’re talking about 25% to 50% increase in spend potentially. So just talk about whether it’s too early to know or what your guess is as to how much of that’s going to be incremental spend with you or how much of that could actually be reduction in what they purchase from Fixes? Thanks.

Thanks, Mark. Thanks for your questions and for your enthusiasm. I’ll have Mike start and then I’ll talk a little bit about direct buy.

Yes, we continue to be really excited about kids, product market acceptance with all of our clients, boys and girls with a wide range of ages continues to be very strong. We continue to learn that we can develop great product on the existed brand side and have a phenomenal market brand business. Our team is really strong and I think the combination of existed brands and market brands and the product acceptance and the strength of the team gives me a lot of confidence that sort of when I was GM of men’s we had this very good glide path expectations of gross margin and where we would land and I’m seeing the same thing in kids. Kids has now kind of expanded into two warehouses versus just in one. Men’s is now in four and it’s fun to kind of see these businesses start as seedlings as Kat has talked about in the past and then ultimately grow to more maturity. So as we get further along in kids, we’ll be able to share more as we learn and grow just like we did in men’s, but excited about where kids is today.

And then on direct buy, we share your enthusiasm and excitement. That being said, eight weeks in and so I don’t think we are in a place right now to know exactly how this is going to interact with our ways of buying. But we definitely think that in aggregate it’s very incremental and it’s going to be very incremental in that. This is allowing people another way to buy and another way to find things where they are looking for something more specific where they can confidence that we recommend that it’s going to fit and that it’s going to fit their style. And the other thing is eventually and this isn’t today, but eventually we see that this is actually going to be a way that we can actually bring people into the Stitch Fix ecosystem in a more productive way and a more likely way. And so while dollar for dollar, we’ll have to figure out how much of it is going to be overlap and spend and there will be a small portion of that that will be cannibalistic. It is broadly really incremental to our company and our service because it’s really allowing people another touch point to engage with Stitch Fix that in some cases is going to allow them to increase their share of wallet with us and in some cases actually might allow for a better entry point or a more productive entry point into the Stitch Fix ecosystem. So we’re excited.

Katrina, when will Shop Your Looks be available for men?

That’s a great question. Right now it’s actually only available to I think 20% of women, so it’s still a pretty narrow beta and we’ll definitely share more as we roll it out.

Okay. Thanks, Katrina. Thanks, Mike.

You’re welcome.

We’ll hear next from Scott Devitt with Stifel.

Thanks. I have two. The first one is just a clarification on the first reason for the 1Q guide relating to the summer products and just want to make sure that I understand it. I think what you’re saying is that your comping lower price summer products relative to fall sales last year because the weather was warmer in the first two months of the quarter, so just want to make sure that that is actually what you’re saying? And then secondly on China and supply and you mitigating the impact, could you talk about how much supply does come from China and how you’re mitigating it or are suppliers sourcing from other moving manufacturing out into other locations or are they digesting the tariffs and not passing prices onto you or are you tweaking price to the consumer? Which of those levers are you pulling or suppliers pulling to kind of mitigate the impact? Thank you.

Hi, Scott. This is Paul. Thanks for your questions. First, in regards to Q1, we noted that we were selling more summer product this year-over-year. It’s still hot in August which is the first month of Q1 and we were really pleased that we were able to serve this client’s needs. A lot of retailers out there bogged down all their goods in July. By comparison we knew that we had demand to meet and we were able to satisfy clients. So year-over-year there was an impact AOV [ph] early part in the quarter and those metrics have normalized now that we’re squarely in the fall season. Specifically to tariffs, our mix of China like a lot of apparel retailers is large. It’s a big source of manufacturing for the apparel industry. The good news is we have three key parts of our toolkit that allows to mitigate that costs and that’s why the financial impact in our full year guidance is not material. First and foremost we have very strong partnerships with our brands as well as our manufacturing partners, so as a result we can partner together on finding ways upstream to reduce cost and mitigate the tariffs. Two, we talked about this before. With our data science capabilities, we do have an ability to look at pricing options should we have to surgically pass on cost to clients, we can do so in ways that are not very impactful. And then finally more long term working with both our brands as well as – brand partners is to reduce our mix in terms of country of origin from China. That work is already underway. That is longer term in mind and we want to balance sort of the marketplace and make sure we have diversification on that front. So all-in, we feel very confident in our tools and we’ll again update you as we see how this progresses.

We’ll move on to Piper Jaffray’s Erinn Murphy.

Great. Thanks. Good afternoon. Two questions as well for me. I guess first just following up on the inventory of 39% versus your low-20s guidance for sales in the first quarter, can you just kind of walk through what that disconnect is? And I guess, Paul, as it relates to that, are you expecting pressure on the gross margin in Q1 as a result? And then secondly, Katrina for you more on the UK, can you share what you’re learning, kind of how the brand mix is evolving there, how long it takes in average for a customer to get their Fix and then just any kind of expectations of what’s implied in 2020’s guidance for the scaling of that business? Thanks.

Great. Thanks, Erinn. I’ll have Paul start that and actually I’ll probably have Mike who’s a little closer to the UK business talk a little more on the UK.

Sounds good. Hi, Erinn. This is Paul. We ended the year with 39% higher inventory and that was in line with our expectations, our plans. We noted earlier Q2 of last year we made the conscious decision to invest in inventory. We turned 6x a year and so we knew we had opportunity to reinvest some of our working capital gains in the ability to personalize. And Mike talked about some changes we’ve been able to make year-over-year in terms of broadening our number of brands, our SKUs in women’s as well as across the business and that gives us really great confidence to be able to serve a very broad set of clients. And so that’s been an investment that continues in the first half of this year. So from a gross margin standpoint, less on clearance but more on inventory reserve which is a function of how much inventory we have in the books, we do see that reflected in our gross margins in the first half and that reflected in the guidance I’ve given for Q1. But stepping back, we are really good at managing inventory and we’re really excited that we’ll be able to use that capability to serve even more clients better going forward.

Hi, Erinn. On the UK, it’s still early and we launched in May. But there’s a couple of sort of nuggets that I’d say. One is, our men’s product is really reaching clients in a favorable way, like our clients love the men’s product. And I’d say the second thing is brands – we’re able to work with all the brands we want to work with. And so it’s really fun to have a wide range of brands both in men’s and women’s as well as work with all the brands we want to work with. So learnings for us is like how do you do quick and collect and how do you have different transportation options? And so we’re working through those kind of as we launch. And as a reminder, we talked about on the call, we spend a decent amount of time in this launch and learn phase between sort of new businesses and it allows us to better the customer experience, figure out what capabilities like Style Shuffle, kind of when to include them into these newer business lines and that’s kind of where we are on the stage of the UK.

Got it. Thank you, guys.

And from SunTrust, we’ll move onto Youssef Squali.

Thank you very much. I have two questions. Can you speak to growth in the women’s category I guess relative to what you’ve seen in the last couple of quarters? What I’m trying to figure out is, are we seeing any signs of maturation in this category since it’s your oldest? And then second, you rolled out a new onboarding flow. I’m trying to figure out what kind of impact is it having on conversions and market inefficiency? I think one of your employees was quoted or had a blog in which she talked about seeing maybe a 15% lift in style profile completion rate. Just trying to see if that potentially could be a good indicator in conversions as well. Thanks.

Hi, Youssef. This is Paul. I’ll take the first question and then we’ll get to the next one. So overall, women’s continues to be a very healthy part of our business. Our client growth in Q4 was across men’s, women’s and kids. UK was very early. And then as I noted, 9% growth in revenue per client would only be possible because of women’s. The newer categories whilst they are very exciting opportunities have a lower revenue per client. So women’s continues to be very healthy. In fact, we’re investing in inventory to broaden our ability to serve many women’s clients. It gives us great confidence going forward in 2020.

Youssef, hi, this is Mike. I’ll take the onboarding flow question. We are testing a lot of different things on conversion all the time and we have a very robust kind of A/B [ph] test as we talk about, to Paul’s point about the investment strategy in data science and engineering. We’re going to continue to do that because of how much opportunity I think we have to optimize the experience. But some of these tests work and some of them don’t and it’s an important part of our profile to always be testing things that we think are going to improve the client experience. So no kind of specific conversation about that specific conversion test, but we do that all the time.

Okay. Thank you.

You’re welcome.

We’ll hear next from Ike Boruchow with Wells Fargo.

Hi. Good afternoon, everyone. Apologies, three questions from me. So first, you say you spent less on marketing in 4Q. Just curious, is that a dynamic that should reverse in 1Q? Just kind of curious, maybe Paul what’s baked in from marketing spend in the first quarter in that guidance. The Q1 revenue, just curious the revenue dynamics, if I kind of plug in similar type of rev per customer that gives me basically no net adds. I’m kind of curious of your comment rev per customer versus net adds? And then apologies, the last question, bigger picture. I think this year’s implied around 1% full year EBITDA margin which includes the SBC and now we have the shift in – the direct-to-buy strategy. I’m just curious how does this all inform your thinking on the longer-term EBITDA margin guide of 11% to 13% just longer term when you think about the business? Is any of that changing when you think about 5, 10 years down the road? Thanks so much.

Hi, Ike. This is Paul. So your first question was around our marketing spend. So where we’re in July, the depth of summer, we just didn’t see the efficiencies there. So we made the choice not to invest in that period and just rather spend it when there are efficiencies. We’re very focused on ROI and will be spending some of that in Q1. But we did leverage our marketing spend as I noted 9.0% this year versus 9.1% last year. In Q1, now that we’re in the fall where we do see efficiencies, we have real confidence in spending both paid and brand in the quarter and these investments are reflected in my EBITDA guidance for Q1. Specifically to the sort of drivers of Q1, we see growth in both revenue per client, seeing that momentum continue, that was 9% in Q4 but also consistent growth in client count. So there will be – mathematically when you do that net adds quarter-over-quarter and that’s a reflection of our continued focus on ROI, positive performance marketing initiatives. And then finally in terms of your EBITDA question for long term, we are very confident on our long-term margins of 11% to 13%, also growing 20%, 25% for many years to come. We’re also comping our investments this year. But again, two years in we’ve been able to set the stage and delivered on our commitments and this year we see near-term opportunities investing in amazing talent that’s continued to build the pipeline of initiatives. Shop Your Looks is just one of many initiatives we have ahead of us to continue to engage with clients and to get to know them really well. So from that standpoint that’s the fuel that’s going to allow us to grow 20%, 25% for many years to come and that’s the path of scale that will get us to the long-term margins. But right now we see the opportunities and again we have great confidence given our past two years of performance.

Got it. Thanks, Paul.

We’ll now hear from Rick Patel with Needham.

Good afternoon. Thanks for taking my question and two for me as well. So very nice continuation of growth in sales per active client. Can you provide some additional color on what the drivers of this were in the fourth quarter and your confidence in the sustainability of this trend as you look out to fiscal '20? It sounds like direct buying will be a pretty big driver but curious what else is embedded in guidance. And the second question is really around investment spending going forward. So if you put SBC aside, you planned incremental investments for the UK in the back half of fiscal '19 as we look out to fiscal '20. I’m assuming this will continue to be a pressure point until you anniversary it, but what else may be in the pipeline for investment spend that we should be keeping in mind?

Hi, Rick. Thanks for your questions. This is Paul. So first of all, yes, we’re really excited with the fact that we’ve grown revenue per client five quarters in a row and that is a function of a whole variety of initiatives. Specific to Q4, we talked about Style Shuffle as being transformative in our ability to understand clients’ style. So we’ve embedded that information into our algorithms to guide our stylists and that’s helped us drive wallet share. Another thing we talked about earlier is that our client base is quite diverse and early on we’ve had opportunities for clients who are very early in our journey with us to serve them better. Mike talked about the fact that over the first three fixes, we’ve gotten better increasing our success rates over those three fixes and that’s helping us drive overall improvements to revenue per client. And then final driver is the fact that we’ve invested in inventory and broaden the assortment and that again continues to allow us to serve clients well. All of these initiatives continue to play out in 2020 and then direct buy is layered on top of that. In terms of the investments we’re making in 2020 and beyond SBC, as you noted we really ramped up cost in terms of people and infrastructure in the UK in the second half. That was $12 million in the second half last year. Those will be annualizing in the first half and that’s reflected in my guidance for Q1 and the full year. Secondly, marketing; we ended last year with marketing as a percent of revenue at 9.6%. That’s the low end of our stated long-term range of 9% to 11%. You’ve seen the quick paybacks we have in our shareholder letter. We’re starting to build on our brand capabilities. So we see for the full year opportunity inch that up further to the midpoint of the range and continue to drive long-term returns on our marketing spend. So all of these investments taken together give us great confidence that we can grow at 20% to 25% for the long term and that’s also reflected in the four-year guidance for 2020.

That’s very helpful. Thanks very much.

And at this time, I’d like to turn things back to Katrina for closing remarks.

Great. Thank you all for joining us. We look forward to seeing many of you on the road and we’ll connect next quarter.

That does conclude today’s conference. Again, thank you all for joining us.