Stitch Fix achieves 4.4% revenue growth in Q4 2025, signaling strong client experience and strategic momentum for FY26 outlook.

OPERATOR - (00:01:26)

Thank you for standing by and welcome to the stitch fix fourth quarter fiscal year 2025 earnings conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded this. And now I'd like to introduce your host for today's program, Cheryl Valenzuela, Head of Investor Relations.

Cheryl Valenzuela - Head of Investor Relations - (00:01:59)

Please go ahead. Good afternoon and thank you. You for joining us today for the stitch fix fourth quarter and full fiscal year 2025 earnings call. With me on the call are Matt Baer, Chief Executive Officer and David Auerbach, Chief Financial Officer. We have posted complete fourth quarter and full fiscal year 2025 financial results and in a press release on the Quarterly Results section of our website investors.stitchfix.com a link to the webcast of today's conference call can also be found on our site. We would like to remind everyone that we will be making forward looking statements on this call which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause the results to differ. In particular, our press release issued and filed today as well as our annual report on Form 10-K for fiscal 2025 which we expect to file later this week. 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. Please Note that fiscal 2024 was a 53 week year due to an extra week in the fourth quarter. As such, the adjusted revenue growth rates we reference on this call remove the impact of that extra week to provide a comparison that we believe more accurately reflects our performance. During this call we will discuss certain non-Generally Accepted Accounting Principles (GAAP) financial measures. Reconciliations to the most directly comparable Generally Accepted Accounting Principles (GAAP) financial measures are provided in the press release on our investor relations website. These non-Generally Accepted Accounting Principles (GAAP) measures are not intended to be a substitute for our Generally Accepted Accounting Principles (GAAP) results. Finally, this call in its entirety is being webcast on our investor relations website and a replay of this call will be available on the website shortly. And now let me turn the call over to Matt.

Matt Baer - Chief Executive Officer - (00:04:03)

Thank you Cheryl and good afternoon everyone. Over the last two years, we've been relentlessly executing our transformation strategy to deliver the most client centric and personalized shopping experience. I'm incredibly proud of the significant progress we've made. We've fundamentally reshaped how we operate by strengthening the foundation of our business and embedding retail best practices. We've also made significant strides in reimagining our client experience. Our transformation is driving tangible results. We closed out fiscal 25 with a strong Q4 delivering 4.4% adjusted revenue growth. Revenue of $311.2 million exceeded our guidance and marked our second consecutive quarter of revenue growth. We once again gained market share in the US Apparel market this quarter. According to Circana data, adjusted EBITDA was $8.7 million or 2.8% of revenue which also came in ahead of guidance. Our strong top line performance was the direct result of the improvements we've made to our client experience and assortment. Fixed Average order value grew 12% year over year, our eighth consecutive quarter of AOV growth. AOV growth was driven by higher items per fix due to greater penetration of our larger fix offering. AOV growth was also driven by Fix AUR that was up 7.6% year over year as we continue to benefit from the newness and trend right styles we brought to our merchandise assortment, both our women's and men's lines of business, accelerated revenue growth in Q4, expansion into non apparel categories and a greater infusion of established brands were the primary drivers. I'm especially proud of the continued strength of our men's business that delivered double digit revenue growth in Q4 and a positive full year performance. Our core fixed channel continues to perform with Q4 revenue growth that outpaced our total growth. This is due in part to the encouraging initial results we're seeing from our new feature that allows clients to build a fix around a freestyle item. This is a strategic move that blends the best of both channels to create a more seamless experience for our clients. As a result of the changes to our client experience and our thoughtful client acquisition strategy, we are encouraged by the trends we're seeing with new client acquisition, re engagement of former clients and retention of our current clients. These shifts have led to improvements in year over year active client growth rates for five consecutive quarters. Bringing in the right clients to our service remains a key priority and this is an area where we continue to see strength. With 90 day new client LTVs at 3 year highs, our recurring fixed shipments enrollment also remains up year over year reflecting the resonance of our client experience improvements FY25 was a milestone year for Stitch Fix, where our consistent execution set us on a path to sustainable, profitable growth. In the last fiscal year, we achieved our highest contribution margin. In the last decade, we expanded our adjusted EBITDA margin by 170 basis points and we completed another year with positive free cash flow and no debt. Now firmly in the growth phase of our transformation, we'll continue in fiscal year 26 to enhance our client experience, including through investments in generative AI, and remain focused on four areas, creating more dynamic ways for our clients to engage with us, deepening our client stylist relationships, introducing increased fixed flexibility, and strengthening our assortment. In line with these priorities, we recently began to roll out a new suite of innovations. These enhancements will further our efforts to deliver industry leading personalization and convenience. First, we are leveraging generative AI to offer even greater personalization as well as new engagement opportunities. As a result of our services continuous feedback loop, we have billions of insights on our clients fit and style preferences and we are using these insights coupled with the latest in Generative AI technology to serve them in ways only we can. Our clients have shared with us that one of their biggest challenges is expressing what they want to their stylists. To address this, we recently began to roll out an AI style assistant which chats with clients while they develop their fixed request note, using Generative AI imagery as well as leading questions to help them articulate what they are looking for. Through the feedback we secure from the AI style assistant as well as our sophisticated algorithms and the expertise of our human stylists, we are now able to be that much more precise with meeting each client's individual needs. In addition to launching our AI style assistant, we are also beginning to roll out a style visualization feature called Vision that provides clients with personalized gen AI imagery of their likeness in a variety of shoppable outfit recommendations incorporating the latest styles and trends. Second, we're further deepening client stylist relationships. I often think back to the golden age of retail when sales associates knew their customers by name, remembered their preferences, and could anticipate their needs. Those personal relationships have all but disappeared from shopping today. However, at Stitch Fix, they are alive and well. Our stylists serve as trusted partners to our clients, and now we're creating opportunities for clients and stylists to collaborate like never before through a new platform called Stylus Connect. Through the beta rollout of Stylus Connect, select, clients can communicate with their stylists whenever they need assistance, whether to ask a question about fit, get tips on the latest trends or work together on their next fix. Client feedback on this feature has been incredibly positive and we are also seeing higher order values from clients who have been part of the early rollout. Third, we're giving clients even more flexibility. One of the main reasons clients come to us is for the convenience and time savings we offer. We recently launched Family Accounts which enable clients to shop for their partner or anyone else in their household, all from one account. This helps families save hundreds of hours a year. Family accounts join other ways we've embedded flexibility into the experience, including larger fixes, themed fixes, and the ability for clients to build a fix around a freestyle item. Lastly, we're further strengthening our assortment by leveraging Generative AI in our private brand design process and adding new styles and brands. By integrating Generative AI and private brand development, we are responding to trend signals more quickly and accelerating how we bring relevant styles to the market. We are uniquely positioned to do this because of the depth and quality of our data from the continuous direct and indirect feedback our clients provide. While we are enhancing our private brand development process, we're also expanding our portfolio of emerging and established brands. Since the start of FY25, we've added more than 50 new brands including Barley Favorite Daughter, Alex Mill, Roan Women, Pendleton, Madewell Men, Birkenstock, Gola, Abercrombie Kids and My Kids Favorite Goat usa, with additional brands launching in the coming months. Building off the momentum of FY25, we are operating from a position of strength and our FY26 guidance anticipates a return to full year revenue growth. We also expect active client year over year growth rates to continue to improve through the year, including a quarter over quarter increase in net adds. We will accomplish this while staying disciplined with our growth investments and as we navigate an increasingly dynamic and complex environment. Two years ago when I stepped into the CEO role, I recognized that Stitch Fix offered a powerful and differentiated alternative to traditional retail whose potential had yet to be fully realized. I am incredibly proud of the work the Stitch Fix team has done since then to further unlock that potential. At Stitch Fix, we know that the best retail experience is one that serves clients at a truly individual level, one where you know your clients so well that you don't just meet but anticipate and ultimately exceed their needs and expectations. That's the level of service we aspire to provide every day. Harnessing the power of AI, almost 15 years of proprietary data, our algorithms that get smarter with every interaction, our assortment of leading brands and the human connection of our stylists who know each of their clients personally. With this competitive edge, we're well positioned to be the retailer of choice for apparel and accessories and to continue to grow faster than the overall US Apparel market. In closing, I want to thank our team for their incredible work and our clients, partners and long term shareholders for their support and with that I'll turn it over to David for our financial results and outlook.

David Astorhar - Chief Financial Officer - (00:14:42)

Thanks Matt and good afternoon everyone. Our financial results in the fourth quarter and for the full year are a direct reflection of the strategic plan Matt outlined. We made disciplined choices to operate more efficiently and that rigor enabled us to return to revenue growth earlier than expected while driving significant leverage in our business. average order value (AOV) growth was a highlight in FY25. This was a main factor in our return to growth, but was only one of many clear signals of a healthier business. Overall. We're seeing encouraging trends in many areas, including more consistently bringing in highly engaged clients, retaining those clients for longer and selling them more items. This progress confirms that our strategic focus on the fundamentals, from improving our inventory to enhancing the client experience is the right path to drive sustainable, profitable growth. At the same time, we continue to deliver strong improvements to our cost structure. Over the last three years we have removed a total of almost $500 million in SG&A spend going from 53.1% of sales to 47.5%. Rationalizing our cost structure has become ingrained in our company culture. We achieved these operational efficiencies through a combination of large strategic initiatives and everyday expense management. We optimized our warehouse network and stylist workforce. We restructured our corporate headcount to eliminate redundancies and flatten our organizational hierarchies. We focused our marketing spend on the most effective channels for growth and we reduced the remainder of our fixed cost structure in FY26. We will continue to identify additional savings opportunities that will allow us to reinvest in growth. Now let's turn to the numbers. FY25 net revenue was $1.27 billion. On an adjusted basis, this was down 3.7% year over year, with revenue for the second half of the year growing 2.5%. We drove further leverage in our business in FY25 gross margin was 44.4%, up 10 basis points year over year and our highest annual gross margin since FY21. The increase was primarily driven by transportation leverage due to improvements in carrier mix and rate negotiations with key carriers. We also captured additional efficiencies across our operations and styling teams. This resulted in our highest full year contribution margin in the last decade. We reduced our overall SGA spend by $124 million in FY25. The decrease was primarily driven by lower compensation and benefits expense including lower stock based compensation expense and lower facilities costs. These actions allowed us to deliver adjusted EBITDA for the year of $49.1 million or 3.9% margin, up 170 basis points compared to FY24. We generated $9.3 million of free cash flow in FY25 and ended the year with $242.7 million in cash, cash equivalents and investments and no debt. Turning to our Q4 results, Q4 net revenue was $311.2 million. Revenue was up 4.4% year over year on an adjusted basis and down 4.2% quarter over quarter. As Matt mentioned, growth was largely driven by strength in average order value (AOV) due to the increased penetration of our larger fixed offerings and our focus on trend and style. Right assortment. We ended Q4 with active clients of 2.3 million, down 7.9% year over year and down 1.9% quarter over quarter. As expected, sequential active client net losses increased this quarter due to seasonality, though the year over year comp improved for the fifth consecutive quarter. Revenue per active client was up 3% year over year to $549. This was the sixth quarter in a row we have seen a year over year increase in rpac, demonstrating that the clients we are acquiring and retaining are highly engaged. Gross margin for the quarter came in at 43.6%, down 100 basis points year over year and down 60 basis points quarter over quarter. The year over year change was driven primarily by higher transportation costs due to general rate increases from carriers such as usps. Gross margin was also impacted by a mix shift towards non apparel categories. Advertising came in at 9.5% of revenue in Q4, up 50 basis points year over year but down 70 basis points quarter over quarter. As part of our broader reinvestment in revenue and active client growth, we'll remain thoughtful and disciplined in how we invest in this area. We ended Q4 with net inventory of $118.4 million, up 20.9% year over year and up 3.5% quarter over quarter. As we expanded merchandise to Support larger fixes, Q4 adjusted EBITDA was $8.7 million or 2.8% margin, down 20 basis points year over year and down 60 basis points quarter over quarter. It exceeded our guidance largely due to flow through from our stronger than expected top line performance. Turning to our outlook for Q1 and FY26 for full year FY26 we expect total revenue to be between $1.28 billion and $1.33 billion. We expect total adjusted EBITDA for the year to be between $30 million and $45 million and we expect to be free cash flow positive for the full year and for Q1 we expect total revenue to be between $333 million and $338 million. We expect Q1 adjusted EBITDA to be between $8 million and $11 million. I'd like to offer a few additional thoughts on our guidance. First, with respect to revenue, we are projecting full year revenue growth for the first time since FY21 and in a macro environment that is pointing to a more challenging environment as we enter the holiday season for active clients, we believe our methodical approach to rebuilding our client base is working. We expect to deliver a quarter over quarter increase in NET adds in Q3 FY26 we are projecting FY26 gross margin to be between 43% and 44%. This reflects higher transportation costs and ongoing strategic investments in our client experience and assortment. Our teams have done an excellent job managing the impacts of tariffs by negotiating with suppliers and diversifying our sourcing, resulting in only a small impact to gross margins attributable directly to tariffs. We expect full year advertising costs to be between 9% and 10% of revenue as we continue to be opportunistic in this area given the success we've had in acquiring healthier clients with higher LTVs. And finally, we plan to further shift more of our compensation mix from equity to cash. This will have an impact on adjusted EBITDA with a positive trade off on net income. In closing, we are encouraged by the momentum in our business while cognizant of the difficulties in the current macro environment. How we plan and execute is in our hands and that is where our focus continues to be. We're operating at scale with a strong financial foundation and a uniquely agile business model anchored by a debt free balance sheet, proprietary data science and AI and the ability to quickly adapt our marketing, merchandising and pricing levers. These give us the confidence to not only navigate the current environment, but to seize strategic opportunities and accelerate our path to long term profitable and sustainable growth. With that operator we can open the line for Q and A certainly and.

OPERATOR - (00:23:18)

Our first question for today comes from the line of Dana Telsey from Telsey Advisory group your question please.

Dana Telsey - (00:23:27)

Good afternoon everyone and nice to see the progress. Matt, as you think about the changes in the business, particularly on the top line and the additional brands that you've added lately, where are you seeing the most growth from and how are tariffs impacting the aov? And then another question after that for a follow up. Thanks.

Matt Baer - Chief Executive Officer - (00:23:49)

Hey Dana, I appreciate the question and the recognition for the continued growth. And you know, I think to answer your question in two parts, the first in terms of what we're seeing from our assortment and then the second the impact that we're seeing from tariffs, particularly any impact for aov. As we noted in the prepared remarks, both our women's and our men's business accelerated their year over year revenue growth on an adjusted basis in the fourth quarter and that was driven by expansion into non apparel categories as well as the greater infusion of established brands we've added to our assortment. If you drill down into our women's business, we saw increased demand for footwear that grew over 35%. We also saw significantly improved demand for denim, especially wide leg denim. We also saw improved demand for skirts that would include midi skirts, maxi skirts and pleated skirt styles. And we also continued to see strength in our athleisure business. If you drill down into our men's business first, just to point out again that we had double digit growth in Q4 within our men's business and a full year positive revenue comp in fiscal 25 for our men's business in the quarter and similar to our women's business, we saw very high demand for footwear and athleisure and we also saw strong performance from national brands like Travis Matthews, Adidas Marine Layer and Tommy Bahama, just to name a few. I'll speak to the tariff piece a little bit and let David add any additional context. In the fourth quarter, none of the improvement in average unit retail (AUR), the 7.6% year over year growth or the growth in AOV of 12% which was our eighth consecutive quarter of growth is attributable to tariffs. That's in large part due to the great work that our tariff task force did in order to mitigate any potential impacts in the fourth quarter of fiscal 25.

Dana Telsey - (00:25:54)

Got it. Thank you. And then, please go on.

Matt Baer - Chief Executive Officer - (00:25:59)

No, go ahead.

Dana Telsey - (00:26:01)

And then on the uptick in the sales, where do you see you're taking the share from? And given the volatile outlook for holiday, how do you think about planning for holiday? Whether it's timing, whether it is what you're seeing from your customers, how do you see that? Thank you.

Matt Baer - Chief Executive Officer - (00:26:21)

Yes, appreciate the question. Again, we're very proud of the fact that we continue to gain market share and that coincides with our growth in the fourth quarter, growing 4.4% on an adjusted basis, considerably outperformed the overall market. Something that we are very proud of. And you know, to me that indicates the fact just that our superior service is very clearly resonating with our clients. I'm very proud of the trends we're seeing in our active client growth rates, the fact that those have improved for five consecutive quarters. I'm also really proud of the fact that for the new clients that we've brought in, we see 90 day LTVs continue to be at 3 year highs with regards to who we are taking market share from. At Stitch Fix, we're very much focused on delivering the most client centric and personalized shopping experience and in doing so we're picking up share from all of the retailers that are letting consumers down. It's our superior service that is enabling us to take share from a wide variety of retailers who don't and actually cannot deliver on the personalization consumers want and expect. And that is core to our business. In terms of what we're doing for holiday, we talked about this last year we really leaned into Holiday more meaningfully than we ever had before and we plan to build on that success in our holiday this year. I believe we're better positioned this year compared to last given the changes we've made to our experience. A few of those of note is the continued flexibility we brought into our experience. That's with themed fixes, larger fixes, the ability to build a fix around a freestyle item. And one that I'm particularly excited about is the introduction of Family accounts. One of the critical components of Family accounts is that really unlocks gifting opportunities for us. We've also, as I noted before, continue to improve our assortment across private brands, emerging brands and well known brands so that we can ensure that we have the right assortment to drive promotions at healthy margins as well as ensure that we have the right assortment to serve our clients for all of the occasions that they might attend over the holiday time period. And also the new features like Vision and Stylist Connect that I mentioned, those will continue to provide clients with new ways to engage with us throughout the holiday season. We've also talked at times about the investments we've made into our promotional and CRM capabilities. Those will also help us remain competitive during this time. And ultimately it comes down to the differentiation of our business model that just continues to give us a competitive edge and we're confident that we will continue to gain market share throughout the holiday time period.

David Astorhar - Chief Financial Officer - (00:29:06)

And then Dana, just to add one additional point to Matt's point, especially around active clients and how that might be part of the underlying growth from a revenue perspective to his point, we're really encouraged by the continued improvement that we're seeing from a year over year comp standpoint. And when you play that trajectory forward for the client cohorts that we talk about, the new client ads, reengaging clients that have gone dormant and retaining our existing clients, there is that natural inflation inflection point in clients. And that's one of the reasons why I called out earlier in our remarks that we see a quarter over quarter inflection in active clients in Q3. One of the other things we're seeing, I tend to give color on the most recent quarter for Q1, we expect quarter over quarter active clients to be roughly flat quarter over quarter to down approximately 0.5%. Definitely just really encouraged with those trends. And again, this is part of that methodical approach that has worked really well for us of just focusing on deepening relationships with our clients and bringing in clients where this service really resonates with. And that's, you know, you also see that in some of the metrics where it's the eighth quarter in a row that we saw year over year growth in new client LTVs. And so just really encouraged with what we're seeing there as well. And that's one of the things we'll continue to focus on.

Dana Telsey - (00:30:24)

Thank you.

OPERATOR - (00:30:26)

Thank you. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone. Our next question comes from the line of Sol J from ubs. Your question please. So you might have your phone on mute. We're still not hearing you. Once again, ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Matt Baer, CEO for any further remarks.

Matt Baer - Chief Executive Officer - (00:31:21)

Appreciate that. To close, I'll just reiterate how proud I am of the results the team delivered this year and how confident I am in the future of Stitch Fix. The momentum that we have, it proves that we have the right strategy, it proves that we have the right team, and it proves our ability to execute at the highest level. It's my fundamental belief that you gain market share by playing offense at Stitch Fix. We continue to innovate, we continue to strive to exceed our clients expectations and we continue to face external headwinds head on. We know our clients intimately and we serve them individually. We build enduring relationships which give us a competitive advantage relative to the transactional relationship consumers have with other retailers. Our differentiated business model of expert stylists, paired with our proprietary data and algorithms as well as our leading assortment and generative AI innovations, position Stitch Fix to uniquely serve clients. In doing so, I believe that we'll continue to take share from those that struggle to deliver the level of personalization and convenience consumers so desperately want and deserve. Everything we do at Stitch Fix is in service of the client and to deliver sustainable, profitable growth. We are judicious, methodical and unrelenting in that pursuit. We remain focused and committed to accelerating growth and becoming the retailer of choice for apparel and accessories. I believe this is an exciting time to be in retail. I also believe it's an even more exciting time to be at Stitch Fix where we are writing the future of what retail will look like. We are operating from a position of strength and a solid financial foundation. I'm more confident than ever in our future. Appreciate your interest in our business and I look forward to sharing our continued progress.

OPERATOR - (00:33:23)

Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day. .