Stitch Fix, Inc. (SFIX) CEO Katrina Lake on Q1 2021 Results - Earnings Call Transcript

Stitch Fix, Inc. (NASDAQ:SFIX) Q1 2021 Earnings Conference Call December 7, 2020 5:00 PM ET

Company Participants

David Pearce - Vice President of Investor Relations

Katrina Lake - Founder and Chief Executive Officer

Elizabeth Spaulding - President

Mike Smith - President and Chief Operating Officer

Conference Call Participants

Ross Sandler - Barclays

Youssef Squali - Truist

Heath Terry - Goldman Sachs

Mark Mahaney - RBC

Cory Carpenter - JP Morgan

Erinn Murphy - Piper Sandler

Edward Yruma - KeyBanc Capital Markets

Rick Patel - Needham & Co

Kunal Madhuka - Deutsche Bank

Mark Altschwager - Baird

Operator

Good day, everyone. Welcome to the Stitch Fix's First Quarter 2021 Earnings Call. Today's call is being recorded. [Operator Instructions]

At this time, I'd like to turn the conference over to Mr. David Pearce, Vice President of Investor Relations. Please go ahead, sir.

David Pearce

Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2021. Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix; Elizabeth Spaulding, President; and Mike Smith, President, COO and Interim CFO. I would also like to mention that we're joining you remotely today from our home offices. We have posted complete Q1 financial results in our shareholder letter 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 our results to differ. Also note that the forward-looking statements on this call are based on the 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 website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website and a replay of this call will be available on the website shortly.

I'd now like to turn the call over to Katrina.

Katrina Lake

Thanks, David. And thank you for joining us. After the market close today, we issued our quarterly shareholder letter with more details on our results and strategy, as well as the press release announcing the appointment of Dan Jedda as our new Chief Financial Officer. Today, I'll be sharing our first quarter results and highlighting three key themes that position us to accelerate top line and client growth in the year ahead. First, our business has great momentum and reached several multi year highs in Q1. Second, the secular shift to online shopping and the share gain opportunity we've discussed in past quarters is well underway. And we expect accelerating active client growth to play a significant role in our full year outlook.

And third, we're enhancing our Fix and direct by offering to expand our addressable market, deepen client engagement and grow wallet share over time. Before I dive into these themes, let me first discuss our Q1 results. In Q1, we generated net revenue of $490 million reflecting 10% growth year-over-year and 11% growth quarter-over-quarter, we delivered net income of $9.5 million and adjusted EBITDA of $6.9 million. During the quarter, we grew our active client count to nearly 3.8 million. This represents a year-over-year increase of 347,000 clients or 10% growth and a quarter-over-quarter increase of 240,000 our highest sequential client edition on record.

This surge of new clients who are still early in their spending journey with us resulted in an expected decrease in year-over-year net revenue per client of 4%. Even early in their journey with us, these new clients have demonstrated very strong purchase behavior in their first fixes that we believe to be a strong signal of feature satisfaction, retention and lifetime value. Q1 was a quarter that saw great momentum in client growth. And in our business more broadly, our offering continues to benefit from strong product market fit. In a time period where many traditional brick-and-mortar retailers are still experiencing double digit year-over-year revenue declines in their most recent quarter, we delivered an increase of over 240,000 net active clients quarter-over- quarter, our return to double digit year-over-year active client growth, which we expect will increase further this fiscal year.

And their very first experiences with us these recently acquired fixed customers are demonstrating both strong purchase behavior and satisfaction. We previously shared a measure that we internally refer to as a successful first Fix, which we define as the percent of clients who purchase at least one item in their first Fix and look forward to their second Fix. And each of the last two quarters nearly 80% of our first Fixes met these criteria, which is the highest level we've seen in five years. Even as we acquired a high volume of clients, we're very pleased that we're able to meet their needs and preferences. The strength of these recent cohorts are due in part to our ability to shift our inventory to meet the client and the moment, but also our longer-term efforts in improving our recommendations by leveraging our growing data set to bolster our style graphs and power algorithmic models.

We believe that establishing a favorable first Fix outcome is a strong indicator of future client engagement and retention that will serve as a tailwind in the quarters to come. We saw strong client outcomes in our newest client, and also in our broader existing client base. We're pleased to share that across our entire Fix offering with increased success rate every year on record. And in Q1, we delivered our highest level yet. We believe this strength is driven by our ability to leverage data to generate insights that allow us to relentlessly adapt our inventory assortment and continually strengthen our recommendation. In Women's for example, we've grown our athleisure assortment, as a percent of our women's inventory by over 150% compared to pre-COVID levels, helping us to serve elevated demand for these products, and meet our clients work from home needs.

In Kid's, we've used sourcing speed to our advantage. We're now sourcing a meaningful portion of some of our most in demand styles using a rapid sourcing model where product arrived to our distribution centers in as little as 10 weeks. This contributed to a strong back-to-school season in which we grew first Fix shipments by 60% year-over-year. We've also reacted to the current environment by expanding our assortment of more affordably priced products across categories, which have resonated well with women's and then clients and led to outside success rates. As we look ahead, we have growing confidence that our track record of strengthening personalization capabilities paired with our nimble supply chain will allow us to deliver better client and business results. As we look to the remainder of fiscal 2021, our strong foundation of client and business trends sets the stage for the quarters ahead.

We are pleased to reinstate annual guidance that reflects the momentum we're seeing. As Mike will discuss later, we expect to deliver net revenue growth of 12% to 14% year-over-year in Q2 and to drive further acceleration in the second half of the year, resulting in full year revenue growth of 20% to 25% year-over-year. There are several drivers underpinning this outlook. But most notable is our expectation of further acceleration of our active client growth. While the apparel industry is currently contracting, we expect to take share and drive higher new client signups as the relevance of our model of personalized discovery and convenience growth.

In Q1, we delivered first Fix growth exceeding 25% year-over-year, as the large majority of our new clients choose to receive Fixes on a recurring cadence. We expect this will drive strong engagement and repeat purchase behavior in upcoming quarters. In addition, we shared in September our plans to hire over 2,000 stylists outside of California, and we're pleased to share that due to such strong demand for our styling role. We've already met this hiring target and feel well positioned to serve higher Fix demand in the remainder of fiscal 2021. In addition to our strong outlook for Fix demand, we believe that direct buy will serve as another catalyst as we attract new clients, convert prospective clients and reactivate lapsed clients. We've continued to see direct-buy penetration grow across our men's and women's client base and we plan to introduce it to new and prospective clients later this fiscal year.

These strong trends we've seen in our business combined with ongoing market share shift to Stitch Fix, give this excitement so the quarters ahead. In Q1, the combination of record quarterly client edition, strong auto ship retention, multi year highs and successful first Fix rate and our highest success rates to date demonstrate the resonance of our offering and the power of the personalization engine that fuels our business.

With that, I'll hand it over to Elizabeth to share more on the enhancements we're making to our direct buy and Fix experiences, as well as some of the exciting marketing initiatives we're investing in to capitalize on the retail share shift that is underway.

Elizabeth Spaulding

Thanks, Katrina, and hello to all of you on the line. I'd like to begin today by sharing more about how we continue to evolve the offerings within our Stitch Fix ecosystem, which we believe, will give us more ways to win. Our goal has always been to deliver the most personalized shopping experience to every client. And what has enabled us to do this so well is the nearly 10 year advantage we have building an algorithmically driven engine for highly personalized apparel based shopping. As I'll share in a moment, we're currently in the midst of further enhancing our core Fix experience, which has generated billions of dollars in revenue since the company's inception.

In addition, we've embarked on our next form factor direct buy, which we expect will expand our addressable market, deepen client engagement, and grow wallet share over time. Let me begin by sharing more on how we're enhancing our direct-buy experience, including leveraging the usage of our proprietary Style Shuffle experience. And since its launch, Style Shuffle has proven to be a highly engaging experience. We have collected over 6 billion ratings with millions of clients having played. During Q1, we've seen on average more than 50% of our app engaged users playing daily. With such strong client engagement Style Shuffle has evolved into a key vehicle for data collection that has strengthened our algorithms and allowed us to build enhanced features that improve client outcomes.

We think these elevated levels of engagement showcased the opportunity that we have to create a powerful, speed based commerce experience that allows clients to become a partner and co creator and designing their personalized Stitch Fix storefront. As such, in November, we expanded our direct-buy capabilities with the beta launch of shop by category, which leverages our rich Style Shuffle data, as well as the valuable insights we've learned about our clients over time to create a highly personalized shopping feed for each client. Underlying these distinctive data assets with a proprietary style graph that we leverage for each individual client feed. Each category shop is built around specific themes like athleisure, sweaters for seasonal staples, which are curated using each client's real time Style Shuffle likes, along with algorithmically generated recommendations inspired by these likes.

Through this item based format, clients now have the ability to purchase specific items that they see in style shuffle. Over time, we intend to algorithmically generate a wide array of categories relevant to each individual client based on signals we gather from them across various facets of our experience. While so early and available to a limited number of clients, we have seen strong traction with shop by category to date, with approximately 80% of clients who have engaged with the offering completing at least 1000, demonstrating how fun and relevant this personalized shopping experience can be. It also complements trending for you our outfit based recommendations feed enabling higher intent purchase occasions for specific items. Shop by category is just one example of how we're leveraging our data flywheel to create a differentiated, engaging and personalized shopping experience. The offering addresses a broader range of client shopping needs, and marks an important step in our evolution of direct buy as we move closer to using it as a vehicle for client acquisition and the quarters ahead.

Specifically, we believe this new category based experience will provide a compelling gateway for the cold start experience, where we can provide relevant, personalized recommendations to clients as they enter Stitch Fix for the first time. With our Fix Form Factor we are enhancing the client experience to leverage our styling team to deliver a stronger outcome. From a survey of our prospective clients, those who have completed our style profile but not yet converted to ordering a Fix, approximately 45% responded that they would convert if they had the ability to preview what they might receive from our stylists based experience. Based on this insight, and the magnitude and potential that this prospect base represents; we recently rolled out an initiative in the UK called Fix Preview, where we show clients proposed items for their next Fix.

This new experience enables clients to engage more directly with their Fix before it ships and have more adjacency in selecting the items they receive. We began testing this feature in August, and recently introduced it to 50% of UK clients based on strong early results that demonstrate a higher client satisfaction and retention, as well as improvements in keep rate and average order value. Based on this early success, we plan to roll out this Fix Preview capability to 100% of UK clients and we have begun testing it with US clients with the intent to learn and scale in the quarters ahead. We believe this preview appeals to an even broader set of clients and allows us to drive customer confidence by efficiently showcasing our ability to pair them with a product they will love. As a result, we believe that Fix Preview along with our ongoing momentum and direct-buy will allow us not only to attract high quality clients, but also to convert our large prospect population that we estimate is in the millions.

Clients who are at the precipice but have not yet converted to Stitch Fix. As we continue to focus on accelerating our penetration of the redefined apparel retail market with our superior personalized offering, I'd like to briefly touch on some of the marketing innovation that is allowing us to capture share. Given ongoing dislocation in a brick-and-mortar retail space and our belief in the increasing relevance of our personalization model, we're investing in marketing and leveraging our predictive modeling capabilities to capitalize on the share shift underway. One of these exciting new initiatives is feed based product ads. Beginning in June, we began to roll out ads, which dynamically matched creative selections based on algorithmic recommendations of what will most resonate with each individual user. To date, we have seen meaningful improvements in these FBPA with more than double digit decreases compared to other ad formats.

And we expect to increase them in this medium given the efficiencies. To capitalize on significant store closures as well as an influx of clients migrating to online shopping. We're also launching highly targeted campaigns across specific geographies to highlight our value proposition versus peers and attract customers who spend is more likely to be up for grabs. While new, we're continuing to test these highly targeted initiatives. And we plan to share more on our progress in the quarters ahead. As you can see, we remain very excited about the opportunities that lie ahead. And our ability to capitalize on our forever changed apparel retail landscape. Our time is now to connect with new customers, understand their individual needs, and help them discover relevant, radically convenient and fun ways to shop and find what they love.

With that, I'll hand it over to Mike to provide more on our financial performance and our outlook.

Mike Smith

Thanks, Elizabeth and hello to everyone on today's call. We're pleased with our first quarter results and have continued to see strong momentum across our business that gives us confidence in our Q2 and full year outlook, which I'll share in a moment. But first, I'll provide more color on our Q1 results. In Q1, we generated net revenue of $490 million representing 10% growth year-over-year and 11% growth quarter-over-quarter. In the quarter, we grew active clients to nearly 3.8 million, an increase of 347,000 clients and 10% year-over-year and over 240,000 active clients quarter-over-quarter.

Net revenue per active client of $467, declined 3.7% year-over-year. As Katrina referenced earlier, this is driven primarily by our recent surge in new client growth. During periods of elevated growth from clients who are early in their spending journey with us, revenue per client may temporarily lower until these new cohorts of clients have more time on our platform. In addition, the trailing four quarter calculation includes the impact of our Q3 2020 COVID trough, which will be locked later this year. Q1 gross margin was 44.7% representing a 60 basis point decline from the same quarter last year, driven by higher shipping expense partially offset by lower inventory reserves and clearance rates. Advertising was 10.5% of net revenue in Q1 compared to 11.4% in Q1 of 2020 as we capitalize on efficiency gains in the quarter. Other SG&A excluding advertising was 38.2% of net revenue in Q1 compared to 33.8% in Q1 2020, driven by ongoing investments in technology talent and the associated Stock Based Compensation or SBC expense, as well as higher marketing expenses year-over-year.

Q1 adjusted EBITDA which excludes SBC was $6.9 million reflecting solid revenue growth and lower inventory reserves and clearance rates offset by higher shipping and marketing cents. Q1 net income was $9.5 million and diluted earnings per share was $0.09. Our net income this quarter included a tax benefit from the net operating loss carry back provisions of the CARES Act. And finally in Q1, we delivered free cash flow of $51.4 million reflecting our strong sales and margin performance, timing of payments and our capital light model. We ended the quarter with no debt and $29.9 million in cash, cash equivalents and highly rated securities.

Now on to our outlook; our robust demand trends along with our improved supply side position give us greater visibility and confidence to reinstate our quarterly guidance and share our first quarter outlook. While we have planned for a wide range of scenarios, one note of caution; our guidance today does reflect that our fulfillment centers will continue to remain fully operational and won't face any significant disruption from potential government related COVID mandates. First on Q2, we've seen improving growth trends across our business since the Q3 20 COVID trough. And we expect further acceleration in Q2 and throughout the back half of fiscal 2021. In Q2, we plan to deliver net revenue of $506 million to $515 million, reflecting 12% to 14% growth year-over-year, which we expect will be fueled by active client growth. In past Q2 periods, we traditionally pull back on advertising during the holiday season, given that clients tend to be focused more on intent based purchases and gifting to others. And as a result, we saw lower marketing efficiencies.

However, with our direct-buy offering, we can now play a greater role with clients intent based shopping during the holiday season. As such, we plan to lean in and anticipate that advertising as a percentage of revenue will be between 11% and 13% in the quarter. We will continue to take a disciplined approach to our marketing strategy focused on positive ROI across a diverse mix of channels, and believe that this investment will attract more active clients to our offering in Q2, and also the accreted to our additions in the back half of the year. Factoring in this investment, we expect Q2 adjusted EBITDA loss in the range of $6 million to $3 million.

Now I'll turn to our full year outlook. With the momentum we've seen and our new client signups and the expected expansion of our direct-buy experience; we see further opportunity to take share and drive growth in 2021. Specifically, we expect our year-over-year active client growth to continue to accelerate and allow us to deliver net revenue of $2.05 billion to $2.14 billion or 20% to 25% growth year-over-year. This implied growth between 29% and 40% year-over-year in the back half of this year. Given our opportunity to invest to drive growth over the course of this year, we will hold off on providing a specific adjusted EBITDA range at this time. We plan to revisit it in future quarters.

In summary, we're very pleased with the start of our year and remain confident in our Fix and direct-buy momentum paired with accelerated active client growth will position us well for the remainder of fiscal 2021. Before we turn to questions, I'll pass it back to Katrina to share more on our exciting CFO announcement.

Katrina Lake

Thanks Mike. Following a very thoughtful and extensive search, we're thrilled to be welcoming our new CFO Dan Jedda. Dan joins us from Amazon, where he spent the last 15 years. His background and experience as an ideal fit to help us to continue to scale and drive the next phase of Stitch Fix's growth. Dan officially started today, and we are excited for you to have a chance to meet with Dan in future investor meeting. And to hear from him on our second quarter earnings call in March. I would also like to thank Mike for his nearly nine years of leadership and partnership at Stitch Fix. Most recently as our interim CFO and COO he also launched and ran our men's business, had a critical role in launching the UK kid's and so many other milestones along the way. Not only has Mike achieved a lot, but he's done it in a way that has inspired, challenged and enabled our business and our people to grow. Thank you, Mike for everything you've done for Stitch Fix. We're excited that you've now joined our board and will continue to be part of our journey.

With that we're ready to open up for questions. Operator, over to you.

Question-and-Answer Session

Operator

[Operator Instructions]

We'll hear first today from Ross Sandler with Barclays.

RossSandler

Hey, congrats on the quarter, guys and Mike, congrats on your future plans. My first question is just on the advertising expense guidance. So you guys normally don't ramp up the marketing in the holiday quarter for obvious reasons that you just mentioned. But if we use that range that you provided, it looks pretty massive year-over-year like 70 percent-ish or thereabout. So what are you seeing in terms of CAC relative to that expense around, and are you going to see the, I know you report clients on a Q1 basis but it is the current quarter client growth going to reflect something closer to that, that has been growing, any color, that would be helpful. And then I can squeeze one more in. Sorry for that long question, beyond the 80% conversion on first Fix, that looks great. Can you guys parse out how much of that is coming from all the different things you're doing around personalization versus some of your customers probably have more disposable income right now, going towards retail and going to e-commerce than they are other discretionary spending categories? So is that macro got started, you're seeing in terms of personalization as well.

KatrinaLake

Yes, why don't I, and thank you very much for the questions. Ross, why don't I actually just take your question on successful first Fix on the 80% number, and then, and on the advertising side, Elizabeth Spaulding, Elizabeth and potentially Mike can weigh in as well. On the 80% successful first fix metric, I think it's probably a little bit of both honestly, I think there is no question that the macro environment right now is kind of enhancing and increasing our product market fit. I think as more and more people are looking for e- commerce solutions, and as more and more people who may never have bought jeans, as an example online are trying to figure out, like, where does the best tool out there to help me to find jeans? I think there's no question that kind of the macro environment and the kind of drive towards e-commerce is definitely a contributor.

On that being said, like we are always AV testing improvements in our algorithm. We definitely really believe especially in women's and in kid's that the speed with which we shifted the assortment to be able to meet our client, where we were, we've talked about this for the last couple of quarters, but being able to get out of the categories like workwear and the things that are less relevant, and be able to be in the categories like athleisure. And even to some extent sports like those are definitely changes that really helped our business to kind of not just survive, but really thrive during this time. And so I think it's a combination of both the macro environment as well as kind of things that we've done to be able to improve those client outcomes.

And then I'll pass it over to Elizabeth to answer your question on marketing.

ElizabethSpaulding

Yes, thanks for the question, Ross. I think a couple things to point out. One is just we've overall seen this really significant signup rate of first Fix, which we talked about in Q1. And I say for like the shoulders of Q2, not sort of the peak of what we just were in, in terms of Black Friday and Cyber Monday, which really is somewhat counter cyclical to our model, the mortgage, the ability that we're seeing the consumer shifting, so dramatically online, right now, we're anticipating to have opportunity there, and kind of the later weeks of December and into January, and January tends to be a very good month for us overall. And just the kind of efficiencies that we've seen in CPAs has been really significant. Albeit typically not during the peak holiday weeks. And so that's a big part of it is that first Fix opportunity, the other is just the opportunity to reactivate those dormant clients, as well as beginning to experiment with our prospective client base with our direct-buy offering.

And so all of those things are providing opportunity. And it is a range that we're giving on that marketing spent. And we of course, make dynamic decisions as we go; we show that 11% to 13% range. And it will depend on what we see in the weeks to come over the course of the quarter. But we're basing it on the optimism and what we've seen in terms of clients really migrating to a model over the course of the last several months.

Operator

We will hear next today from Youssef Squali with Truist Securities.

YoussefSquali

Hello, hi, sorry about that, I had you on mute for a sec. Congrats again from me as well. And Mike, best of luck. Two quick questions; first, can you maybe speak to the promotional pricing environment activities going on there? How are you guys able to hold the line, which is pretty impressive. I saw the 4% decline in ARPU but it seems like again, that may not have anything to do with promotional environment, but it will be great if you guys could comment on it. And then on the one particular category, which I highlighted last quarter, and that's the plus category can just kind of speak to the opportunities there. We've seen some pretty big announcements around store closings for some large players like [clean.blindes] and other offline players. So how big is it for you guys today and how big of a needle mover for you or the next several quarters? Thank you.

KatrinaLake

Yes, thanks for the questions; on the first thing on promotional environment, I mean, look, we can certainly see it. I think we talked about it at one point over the summer obviously, right now is the time when we see a lot of promotional activity. But the reality is because Stitch Fix is a place where people really are buying and investing in clothes that they want for the long haul. I think that what the thing that we went on is Fit on relevance. Those are things that I think a lot of other retailers are not as good at delivering, and frankly, probably aren't as relevant for some of the categories that do really well in Stitch Fix. And I think if you're thinking about a pair of jeans, or even a pair of sweat pants that are going to do a sweat pants that you wear every single day, you're not necessarily looking for the sweat pants, that's 80% off, you're looking for the one that fits you really well, that feels really good on your body.

And so I think that those that kind of the capability of being able to personalize has actually never been more relevant and the kind of crowded environment that we have today. And so I think that and the other thing that I would mention is just we did mention in the call that we have you of course, during this kind of time of economic challenge, we certainly are seeing success in some of those lower price categories. And so those lower price products, and so I think especially in our men's and women's businesses, we have reacted to the macro environment in that way and seen a lot of success there. And on the question around plus size, it's absolutely a significant opportunity. And I think the store closures that we're seeing in plus size. I mean, frankly, I think that we're seeing store closures really across the board and apparel retail and I think plus size is certainly a place where there's been a ton of acute opportunity for a while.

And that's a business that we've seen be enormously successful, and leading into COVID, certainly into COVID. Right now and we've continued to invest in making sure that we have the best products, and we have the right -- we have the best fit. And if the category that I think is definitely one that will drive a lot of growth for us in the future, and I think we will be there to be able to capitalize on the trends to come.

Operator

Moving next to Heath Terry with Goldman Sachs.

HeathTerry

Great, thank you very much, Katrina, when you look at the combination of direct buy and the trends that you're seeing in today, how would you characterize what's going on in terms of spend per customer? And particularly to the extent that you're seeing segmentation within your customer base? Is there anything notable that you would say is happening, whether it's regional, whether it's time your customers have been on the platform, new customers versus old customers, in terms of trends you're seeing within that spend, now that you have multiple options for your customers to be able to spend with you.

KatrinaLake

Yes, again I can take off and Elizabeth may have something to add. And at a high level, honestly, I mean, what we're seeing is that the two experiences are really additive. And I think some of what's really exciting about what Elizabeth shared in the category, work in direct buy is that where there are times when you are generally looking for ways to refresh your wardrobe. And there are also times when you are looking pretty specifically for things, and you still want a personalized view, but that you have kind of a category or a look or an aesthetic that you're specifically looking into. And so what we're finding is that these are actually I think there's a broader hypothesis that like direct-buy and Fix will allow us to kind of combination of those two things will allow us to address many more types of clients. And what we're also realizing, and it's opportunity, it's unlocking, I think both client opportunities, but also pretty significantly on the wallet share opportunity side where if you're looking for a down jacket to eat outside as an example, you'd actually love to buy that through Stitch Fix in a more frictionless way. And on direct-buy it's going to be a great way to do that. And I don't know, Elizabeth, if you have anything to add.

ElizabethSpaulding

Yes, I mean, I think what we're overall seeing is just we're fulfilling more occasions for the consumer and really believe that we are providing the best browser based and discovery based shopping in a world that for online has been more characterized by search. And so what we're seeing right now in the marketplace, with so much structurally shifting from offline to online we believe something like 10 points of share might shift in the next several months but usually was around one or two points a year is those purchase occasions that used to be in a store when you were looking around, we're now making those more easily available through our experience and that notion of the shopping feed, and especially what Katrina was alluding to with the categories where people can input their preferences and immediately see recommendations on categories they are looking for that is highly additive to the surprise and delight of our Fix experience for those occasions that you might have gone into the store to look for something.

And so there's a real complementarity. And it does show up very much in the penetration of the categories we're seeing. There are meaningful differences of more accessories, more footwear more men's pants than we would see in our Fix, as well as some interesting trends that we're seeing in price points that people know many of the things that they really want to get, we have seen kind of deepening of higher price points with consumers, we usually think of being a little bit more price sensitive, which we think is just a great signal that we're curating and surfacing items that are relevant to the consumer.

Operator

From RBC, we'll move next to Mark Mahaney.

MarkMahaney

Okay, thanks, Mike Smith, congrats, that's a heck of an exit. Congrats on what you've been able to succeed, wishing you all the best going forwards. A couple of questions, I really liked this idea of the Fix Preview, I would also think that that would improve success rates. So did you also see that in the UK, I can't imagine that it would do anything but elevate those when you roll them out in the US? So just maybe talk about how long you plan to test before if you get good results, you would actually roll it out into all of the US and then on these record number of customer ads that you had. Could you just peel that back a little bit? How much of that was due to gross ads, versus reduced churn or increased customer retention? All of these new this functionality, the improved -- the relevance of personalization, I would imagine the bigger impact has been on customer retention, reducing churn, but any more color on that would be really helpful. Thank you.

KatrinaLake

Thanks for the great question, Mark. Why don't I start with actually the client ad side and then we'll have Elizabeth who can generally talk a little bit more about Fix Preview. So I mean, it's probably a little bit of both, but the bigger driver is actually first Fix. And so what we what we've been seeing is that we've seen great efficiency, we see really strong product market fit, and a new client as a really the most significant driver on that 240,000. And of course, we still see really strong retention trends. So that of course, to your point that contributes as well. And but we've seen strong retention trends for a while. And so the bigger move on the dial is definitely the new client kind of goodness that we've been seeing. Of course, we still see opportunity for those to get better. And we've signaled a little bit about, especially on the new client ad side, but definitely a lot good trends we've seen on that side of the business. Elizabeth, do you want to talk about Fix Preview?

ElizabethSpaulding

Yes, thanks so much for the question, Mark. And I think you really are spot on in terms of the intuition at that being able to drive higher success rates in AOV. And we absolutely have seen that in the UK, we're weeks into beginning to roll it out in the US and really in testing mode right now to make sure it's a great experience. And obviously, we have a more established client base here and some differences that we want to understand better. But overall, the early signals are positive here as well. And so we're actively working on how can we scale this up? How can we make it a better and better experience and both for the clients that are already in our pipeline, but also making people aware that they can preview things before they buy it, which we think will have an impact on our conversion funnel as well. So we're really excited about it. And just in general, I think what gets us excited is just our clients. Happiness is absolutely going up and just being able to create the right experience. It's great.

And the other thing is the way we've been testing it is you can opt into it, we're making it available. And what's interesting is not everybody opt in a lot of people are, but some people do love surprise and delight, we want to make sure we continue with that. And for those who want to have more of that peek into what they're getting, and some engagement with the stylist ahead of time, we think this is going to be a great offering, particularly for those prospects that are the ones that I think in particular have been looking for this. So yes, it's really a positive set of signs that we see and excited to more slowly roll it out.

Operator

We will move next to Cory Carpenter with JP Morgan.

CoryCarpenter

Thank you. I had two, maybe starting on direct-buy; customers have a number of ways to interact with the product today from shop by category to shop new colors just to name a few. So I guess my question is curious which of these direct-buy initiatives had a base impact where you've seen clients engage with the most thus far and looking forward where you still see the most opportunity from a product perspective? And then as a follow up, maybe for Mike understanding you are not providing specific guidance, but curious if you still expect to see leverage year-over-year, and if not, maybe some of the puts and takes there. Thank you.

KatrinaLake

Right, thanks. I'll probably have Elizabeth talk to your first question here. And then Mike can tell you -- can talk a little bit more about your leverage question.

ElizabethSpaulding

Yes, hi, thank you, Cory, for the question. The number of ways that we're beginning to roll out the experience, maybe just to step back for a second, we launched first with shocker look, which were curated outfit feed based on showing outfits based on items you purchased in the past, which made a ton of sense for our embedded customers who had already bought items, then we watch trending for you, which is the outfit they feed that is generating recommendations just based on anything that we know about you. And that's been very successful. And that's really been the bread and butter so far of this nascent direct-buy offering the category offering, we just began in allocation of a beta in November. So it's a little too early to tell which are people using the most so far, we really see them as complimentary, because the outfit feed is very much surprise and delight and just sort of getting a sense of really browsing and seeing what you might be interested in. Whereas categories is a little bit more like, oh, great, there's sweaters, I'm going to go find a sweater and I was looking for that we're at leisure. And we'll be expanding those categories over time.

So I think each one themselves are browsing. But probably the categories are more indicative of things that are closer to search, or that you might be looking for a particular item. So we see them as reasonably complimentary. And also the outfits you are finding are really inspiring to people because they can recognize and understand how to use that item. So I'm sure we'll share more in the quarters to come as we begin to scale the full experience up and offer more features. But the intent is really to be able to address all of the different purchase occasion needs that our customers have.

MikeSmith

Hey, Cory, this is Mike; I can take the leverage question. I mean, as I said, in Q4 we, when we see these opportunities to invest and given the macro environment that we feel like there's plenty of opportunity to take share, and we're seeing really healthy returns on marketing, we're going to invest and so while we didn't provide any, like I said, any specific adjusted EBITDA guidance I would expect us to continue to invest kind of in the back half of the year when we see those opportunities. So I think more to share in future quarters to give kind of a better answer on actual leverage versus no leverage. But we're pleased with what we're seeing kind of in the marketplace and the returns on investments that we're making.

Operator

We will hear from now Erinn Murphy, Piper Sandler.

ErinnMurphy

Great, thanks. Good afternoon. I guess two questions for me as well, first, on the sales guidance. If we were just to take the midpoint, implying the back half that would be the highest dollar growth that we've seen on you guys. Are there other new initiatives baked in? Or is this just the benefit of scaling some of these opportunities like direct-buy, Fix Preview? And then my second question is just in the shareholder letter, you talk about chasing inventory, I guess I would love to have an update on what you're seeing from the vendor community, and how you're seeing the balance between vendor brands versus your own private label. Thank you.

KatrinaLake

Thanks for the question, Erinn. And I will try to take those I mean, I think on the sales guidance, I mean, the way that you should that you can really think about it is like as we acquire new clients, those clients generate some revenue in that quarter. But they also just generate kind of continued compounded revenue in the quarters to come. And so when we see a quarter, like this last one, where we added 240,000 clients, and we actually just to step back, since COVID, has kind of been building momentum, both on the revenue side, but also in the building of the client base side. So a lot -- so that kind of that momentum that we see in clients benefits us now, but actually really benefits us as we look out to the year. And so it is the new client growth that we're seeing. It's the new client growth that we've already had. It's also new client growth that we are anticipating as we are looking into the month ahead. It is the goodness that we've been seeing in the business around success rate around retention rates. So all of that is flowed in. There is some initiative working there.

I mean direct-buy certainly has been a significant contributor. And we believe that as we continue to innovate in direct-buy that can continue to contribute. Things like Fix Preview, honestly, are a little bit kind of too early to really know exactly what that's going to deliver to the business. But I think those -- there's a lot of at any given time we share in these earnings call a few exciting things that we're working on, but we're running ad test all the time. And we're always including kind of a balance of those kinds of initiatives and hypotheses into our model, but really a lot of the growth is really around just on our existing client base and what we've seen and also what we're anticipating, as we look into the quarters to come.

On your second question around chasing inventory; I mean, we've, it totally depends a little bit on business line also, I mean, in a place like kid's as an example, we've really been able to leverage our exclusive brands to be able to deliver that quick turn product to be able to grow that business, and as we've seen really great demand on that side. And I think in a place like women's, we're still very reliant on our vendor base. And on the women's side, I think what we found is that our vendors are at a point now where they are really having to choose who do I believe is going to be a partner with me for the long term. And we are really happy that we are basically always at the top of that list. And so while it's definitely been a challenging time for everybody, as demand has gone up and down and preferences have been all over the place. And in the same time, I think it's actually helping our vendor community stronger, and to be better partners with us. I think they've been really excited that we've been able to deliver growth to their businesses during this time. And they see us is really valued partners. And so as we are doing things like exploring new inventory models, and trying to figure out ways that we can be more flexible on the inventory side, we are finding that those relationships with our vendors are stronger than ever. So it's definitely a balancing business by business that change but that we feel really fortunate to be that vendor of choice, be that retailer choice for vendors.

Operator

From KeyBanc Capital Markets will hear from Edward Yruma.

EdwardYruma

Hey, guys, thanks for taking the question. Mike, best of luck going forward. I guess just two quick ones for me, I guess first obviously, some exciting data points on direct buy from a logistics perspective, I guess how much more investment necessary as you continue to scale that business? Can you deliver or do you need to kind of moderate closer and then second as a bigger picture question, hopefully, we all start to live life again, sometime in calendar 2021. Do you anticipate a big fashion shift? And I guess how do you start to position inventory or your buying around a potential resurgence in apparel demand? Thank you.

KatrinaLake

Thanks, Ed. Why don't I answer the bigger picture question, and then I'll have Mike talk a little bit about logistics. On the big picture question, I mean, it's a great I mean all of these I think this last nine months has been a real test of everybody's resilience and flexibility. And I mean I think at this point, we all acknowledge that we don't have a crystal ball. But we of course, I think the thing that has big been our biggest asset is the flexibility and the ability to be able to learn really quickly what changed and react. And so rather than trying to predict the future, I would say that our efforts are really channeled towards, how can we make sure that we are the most flexible that we can be? And how can we make sure that as behavior changes, or as we see things that are different, that we can see it first, and we can react quickly. And so kind of the reference point that we made to the kid's inventory and being able to use a rapid sourcing model. And that's kind of an example of something that we're doing there. And so I think we do expect that there will be a shift, I mean, how things will shift at what rate things will shift, like, when will things shift? I mean, these are still questions we don't have the answers to, but we want to be really prepared when those things start to change that we can really react to it. And, Mike, why don't you take the question on logistics?

MikeSmith

Yes, let me -- our service more generally. And then I'll get to a specific question, Ed, I mean, generally, I'm so proud of our team kind of on the supply side with warehouses and styling, and Katrina mentioned kind of being able to hire into the stylist needs that we had, and is sort of exceeding our expectations for how quickly we got back up to speed and styling. But warehouses the same thing, I mean, they're really, really resilient kind of during a very tough period. So specifically on direct buy, it helps to have a couple quarters, kind of in the past of having done direct buy, that we are super well positioned to handle direct buy from a logistics perspective. And it's the same inventory. It's within the same four walls. So it's no different. So we're ready.

Operator

Rick Patel with Needham & Co has our next question.

RickPatel

Thank you, good afternoon, and best wishes to Mike as well. I was hoping you can expand upon the offering of more affordable price products across women's and men's, any particular categories or brands to call out as you think about the evolving assortment and should we expect this to have a negative impact on AOV going forward. Or would you expect success from Fix Preview to offset that potential pressure?

KatrinaLake

Yes, it's a great question. And I probably will only be able to answer directionally for you just because I think some of these things, we are also curious to see how it shakes out. So I think what we're seeing is we're seeing more success. That's the kind of the lower end of our price ranges, as you would expect, I think you've heard this in other retailers calls that I think there's definitely has been some economic pressure on wallets. And so and so what we've really been doing is it is kind of a similar inventory to what we've already had. But making sure that we have the right data, making sure that we have the appropriate amounts of it. And that has resulted in higher success rates. And so, we share them, we're having the highest success rates ever in the business. And this is one contributor to that. And so when we see those really high success rates, and then we see, there's kind of pro, and there's, there's also an uptick in as well, there's a little bit of washing out effect in AOV, because as people are keeping more things in their Fix that, of course, contribute to higher AOV, even though we have we also have like, I guess it's both sides of the coin, right. And then, of course, as we think about future initiative work, and also I think there's a little bit of a hypothesis that this is temporal, and Elizabeth spoke a little bit about, like, what we're seeing in direct-buy and examples that we're seeing people who might be more price sensitive in Fix actually be excited to splurge in direct buy. And so I think we're not quite at a point that we're going to know where all these numbers land right now. But we're seeing great success rates; we're seeing the product resonate really well. And I think we have some hypothesis that there's a temporal nature, I think of just the economic pressure that we're seeing right now, and us being able to meet the client where they are. And that's, of course, a good thing. Now, that may not be a permanent trend. And then things like Fix Preview to your point on those we would believe would have some pretty meaningful impacts on things like success rates in AOV in the future. And so I think there's a lot of kind of puts and takes but like directionally, I think you're seeing which direction the arrows go. And I think the question for us is just like where does everything net out in the next six months or a year.

RickPatel

I'm hoping we can get more insight into the plan to introduce direct buy to prospective clients later this year. I'm just curious what that's going to look like from a consumer perspective. Do we still need data from their stock profile, or the goal here is to use predictive analytics to attract customers that aren't in your database right now?

KatrinaLake

I think I'll let Elizabeth jump in on this one.

ElizabethSpaulding

Yes, thanks for the question. We're very excited about this. And you kind of hit the nail on the head of one of the questions, which is what we call from an algorithmic standpoint, like how do you make a great cold start experience and make it variable friction at the same time, and so part of what I described with the category based shopping and the fun engaging way of leveraging something like Style Shuffle, we absolutely think could be a part of that new entrants, we also have very significant base of prospective clients, we actually already have their style profile, and they probably will be very interested in this offering.

So that kind of gives us the benefit of both. And then, of course, just beginning to experiment with a new sort of introduction and onboarding flow into Stitch Fix, that's probably quite a bit simpler than our typical profile for the style of product experience. So all of those things are what we're in the site of building and testing right now. But with a lot of confidence and optimism that we can create pretty solid recommendations, even with limited information, because we're not just using the information of that individual, we're using information of individuals that have a lot of similar preferences like them, of which we have with 3.8 million active clients, we have a lot of benefit of being able to understand those style preferences, leveraging our style graphs. And so we are kind of in the early days of doing a number of tests and texturing part, we're always testing things. And so we're confident that this will be part of that, like 2021, the exact timing of really scaling it up is yet to be seen, just to make sure that it's a terrific experience for new customers.

Operator

From Deutsche Bank we move to Kunal Madhuka.

KunalMadhuka

Thanks for taking the question. Just a quick follow up on the direct-buy rolling it out to non subscribers. In terms of in terms of timing, and you mentioned you're doing some testing, what have been, what is the key factor that you're looking for or you're waiting for before you actually make that final go no go kind of decision. And what maybe a reopening of the markets kind of be a decision that plays into it? And then I have a follow up.

KatrinaLake

Sure. Why don't I start and I might have missed, so your first question. The first part of your question, just so I'm clear is just what are we waiting for before we roll out that direct buy to non clients? Is that right?

KunalMadhuka

Yes.

KatrinaLake

And then the second part of that was?

KunalMadhuka

Second part of that was as we look at marketing and Mike just talked about how you will invest for growth, but you will be doing it in a disciplined manner. One is how do you intend to kind of spend on brand versus performance around this direct-buy rollout?

KatrinaLake

Got it, okay. Let me take a pass at that. And Elizabeth can certainly jump in, if I miss anything. I mean, firstly what we're really trying to optimize for is converting people into the right experience in Stitch Fix. And so we've been doing some testing around what is the best way to introduce direct buy. And like, what is the best way for us to actually figure out like this is somebody who should be on a conversion path of Fix versus this is somebody that we actually should have into direct-buy first. And so that's actually so right now, we're kind of testing to make sure we're looking at everything from an LTV perspective. And so just to be like, just put out a real, a very real example like if we go and acquire 1,000 clients who like actually really would benefit from Fix, throwing them into a direct-buy, first experience actually might be degraded to their LTV. And so there are of course, all of the cold start challenges that Elizabeth spoke to. But there's also this onboarding question around just how do we make sure that we get the right people into the right conversion paths? And how can we make sure that we're getting that right optimization? And so we want to do some more continued testing to make sure that we are really maximizing for LTV at that very first juncture and making sure that we're kind of getting people into the first step of the right experience.

And then on the second question around just how we're thinking about, we've always been very disciplined with our marketing friends, we've always been optimizing for really good ROI on that. And that won't change with direct buy. And I think what's really exciting about having direct buy to be separate is that it actually opens up all of these additional marketing channels to us that weren't actually available before. And so there are things -- there are some SEO channels, and as an example, that weren't available, like suddenly, you can actually compete and some of the items based marketing that a lot of retailers compete in. And so we view those as likely to be lower CPA channels that actually can allow us to have kind of incremental paths into Stitch Fix. And today, we haven't spent, we share it, I guess, now, like, I guess, maybe a year two years ago, when we did some brand spends. And if we look into the future, I think there's definitely opportunity for us to be exercising more of that brand muscle. I think today, we have so much opportunity just in the low hanging fruit of introducing people to Stitch Fix and to introducing people originally to the direct buy experience that I would not anticipate having a lot of brands and connected to that. But I certainly think that's a big opportunity for the business. I think especially once kind of the clouds lift little bit in the kind of tumult that is apparel retail right now, I think there's really going to be an opportunity for us to establish ourselves as the preeminent brand.

Operator

Our final question today will be from Mark Altschwager with Baird.

MarkAltschwager

Good afternoon. Thanks for taking my question, Mike, best of luck to you and your next chapter. So, Mike, starting out let me asks about gross margin. Could you maybe speak to some of the puts and takes as we think about the second quarter and back half and how we should think about potential scaled benefits on the gross margin minus the revenue growth accelerates to the levels that you're anticipating? And then Katrina separately, really remarkable progress with the new stylist hires. Could you maybe talk about your early learnings here, I know you have really a pretty significant shift in the stylist space in a relatively short period. Looking ahead, how should we be thinking about the opportunities from a productivity standpoint, as these new styles ramp in the coming quarters? Thanks.

KatrinaLake

Yes, thanks for the questions. Mark. I'll start out with your question around stylists and hiring and I'll have Mike speak to gross margin. And on the sales side, we're just like, I think stylist hiring is a place where we really, really just gotten better over the years. And this is a really unique job. This is a job where you can work from home, I guess, naturally, maybe not so unique these days. But this is a job where you can sustainably for we have been able to and will in the future be able to work from home and work from home in a pretty flexible way. And so this has always been a really attractive job. And while we were optimistic that we'd be able to have these kinds of aggressive hiring plans met quickly. We are it's just a big testament to the team that we were able to do that as quickly as we were. And I think some of it is that we've been able to improve the way that we market the role. I think there's definitely ways that we've been able to kind of leverage what we know about what makes this stylist successful today and make sure that we're bringing the right people in.

And so this is a module that we've been exercising for the last eight years or so, and one that we've just gotten better and better at. And in terms of leverage on the styling side, I mean, the way I think about it is that these stylists, like it's such an incredible asset that we have the site -- 1000s of people who are spending high quality time, thoughtfully delivering Fix for our clients. And so over time, I think that the real thesis is more how can we algorithm and do more and more things that we know that the stylist doesn't need to do. And then at the same time, how can we actually use that stylist capability in a more powerful way. And so there's a couple of tests that I would point to, we have done some live styling tests in the UK, where we have stylists, we're doing a more hands on experience with clients. And that's certainly been something that's been super exciting to see. In the UK Also, we've had some stylists who are actually helping to create content for us. And so that's another really high value add way that the files can be adding value. And so I think we're really excited about the trajectory that we've seen for hiring a stylist. And I think we're really excited as we look into the years in the future of just being able to be more creative with the way that stylists add value to our business.

MikeSmith

In a market, I mean, one of the things I'm really proud of also and this is kind of the rebound that we saw in gross margins we talked about a few days before from the Q3 COVID trough to where we are today. As I look out in future quarters, while we don't guide the gross margin, I feel like you should see consistent performance from us on gross margin, to your question about puts and takes obviously there is a little bit of headwinds in shipping, we experience less than most because we have less kind of PPE kind of holiday business. But the things that kind of help us or how to be consistent is the scale you mentioned is it's the increase in exclusive brand. And it's actually just the success of businesses like kid's in the UK as they grow and they get closer to kind of go men's and women's are. So I think we have more tail ends and headwinds, but I would expect that we have -- you'll see more pretty consistent performance from gross margin perspective throughout the fiscal year.

Operator

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

Katrina Lake

Thank you. Thank you very much. Thank you all for joining us. We look forward to seeing you virtually or maybe even in person in the coming quarters. Thank you.

Operator

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