Stitch Fix, Inc. (SFIX) Q3 2024 Earnings Call Transcript

Good afternoon, and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2024 Stitch Fix Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, you will be invited to participate in a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Hayden Blair. Sir, you may begin.

Good afternoon, and thank you for joining us today for the Stitch Fix second quarter fiscal 2024 earnings call. With me on the call are Matt Baer, Chief Executive Officer; and David Aufderhaar, Chief Financial Officer. We have posted complete second quarter 2024 financial results 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 results to differ. In particular, our press release issued and filed today as well as the Risk Factors sections of our annual report on Form 10-K for fiscal 2023, previously filed with the SEC, and the quarterly report on Form 10-Q for our second quarter of 2024, which we expect to be filed 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. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. In the first quarter of fiscal 2024, we began to report our U.K. business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operations. 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 our CEO, Matt Baer.

Thanks, Hayden, and good afternoon. As we've said for the past few quarters, we are committed to managing our business with financial discipline to drive profitability in the near term and growth over time. We delivered second quarter results in line with our outlook on both revenue and adjusted EBITDA. While these fell within our outlook, there is additional work to be done to improve the trajectory of our business. The original Stitch Fix vision to create an easier and more enjoyable way for people to shop for clothing and accessories is as compelling and relevant today as when the company was founded 13 years ago. Our leadership in personalization technology, combined with our passionate and skilled stylists continues to create an innovative and exciting way to shop. Our transformation efforts are grounded in fully realizing our vision and evolving the Stitch Fix experience. As we stated on last quarter's call, we are focused on three priority areas. First, we are working to strengthen the foundation of our business across all disciplines. This includes embedding retail best practices across the enterprise and ensuring we have the right organizational structure in place to enable our future success. Second, we are reimagining the client experience in order to attract and retain high lifetime value customers. Third, and simultaneously, we are developing a long-term strategy to build upon these areas and ensure we best serve our clients as their needs evolve in the future. We believe the execution of these priorities will enable the company to return to sustainable, profitable growth. In the second quarter, we made progress on several initiatives to strengthen the foundation of our business across merchandising and marketing. These actions contributed to our expanding gross margins year-over-year and will provide the opportunity for us to realize additional efficiencies in our operations. In merchandising, a robust offering of national and private brands is one of the ways we best serve our clients. So we continue to enhance our assortment of both. Extensive ongoing client feedback enables us to offer private brands that perform better and more profitably than our national brands. And we plan to further strengthen our private brand portfolio by making enhancements to our existing brands and introducing new ones. At the same time, we continue to deepen relationships with the national brands that resonate most with our clients. In marketing, we continue to evolve both program and channel strategies to optimize media mix and efficiency and to strengthen brand affinity. We know that when we reach clients for whom our offering resonates, they have a higher order value and purchase frequency as we saw with our newer client cohorts in the second quarter. While we have invested in new upper and mid-funnel tactics that help increase traffic, we continue to have an opportunity to improve our current levels of client conversion, which have not met our expectations. We are focused on improving the performance of our full funnel media. And as we move through the back half of the year, we will adjust our media mix and spend levels in an effort to improve conversion and retention of clients. Now let me shift gears to describe how we are reimagining the client experience, which we believe will help us attract and engage the right clients and drive higher lifetime value. We are taking a holistic approach to rethink how our clients engage with Stitch Fix and going forward, we are prioritizing a reimagination of the client experience to focus on long-term growth. A few initial areas guide our thinking about how to reimagine the client experience. First, we want to create a more fun and visual experience that better engages clients beginning at their sign-up and creates ongoing confidence that we will deliver for them on both fit and style. In the coming months, we plan to introduce a new onboarding experience that will be more dynamic and interactive for clients. Second, we plan to deepen engagement by developing new ways to inspire and empower clients as they discover their personal style through our service. This includes creating new social connections that help clients visualize their style and give them reasons to return to our platform. Third, we plan to offer new touch points for clients to interact and develop more personalized connections with stylists. Our stylists play a critical part in our value proposition and our clients have told us they want to get to know the stylists behind their fixes. By enabling more direct ways to connect with stylists, we believe these relationships will become deeper and more meaningful. While some of these initiatives will begin to roll out in the coming months, it will take time to accomplish our ambitious plans to significantly evolve the Stitch Fix client experience. I look forward to sharing updates as our work progresses. Finally, we have a powerful value proposition that combines a strong network of stylists, carefully curated merchandise assortment and advanced data science and technology to create an experience that only Stitch Fix can deliver. We believe that these strategic priorities tied to strengthening our foundation and reimagining the client experience will lead to sustainable, profitable growth over time. With that, I'll turn the call over to David to talk about our Q2 financial results and outlook.

Thanks, Matt. In Q2, we continued to focus on driving leverage in our P&L while also funding initiatives that position us for long-term growth. The actions we took in Q2, including negotiating cost savings throughout our business, optimizing our carrier mix, implementing efficiency measures and ensuring we have the right organizational structure in place to enable our future success. Taking a step back, since Q3 of fiscal 2022, we've undertaken detailed reviews of our business and cost structure to identify savings opportunities and the resulting actions have allowed us to expand gross margins and reduce total annualized SG&A spend by over $370 million. The work our teams have done to improve gross margin and variable cost leverage continues to produce enviable unit and order economics and our contribution profit is nearing the high end of its historical 25% to 30% range. And our work here is not done. We believe there are additional opportunities for us to operate more efficiently and drive more leverage in both our fixed and variable cost structures. Now let me get into the Q2 results. Q2 net revenue was $330 million, down 18% year-over-year and down 9% compared to last quarter Net Active clients ended the quarter down 6% compared to last quarter at approximately 2.8 million clients. Revenue per active client ended the quarter at $515, down 3% year-over-year, but up 2% quarter-over-quarter. As Matt said, we continue to see strength in our newer client cohorts with both order value and frequency up year-over-year for those clients. Additionally, our 90-day revenue per active client had its third consecutive quarter of sequential growth. Gross margin for the quarter was 43.4%, down 20 basis points quarter-over-quarter and up 250 basis points year-over-year, driven by strong product margins, improvement in inventory health, and transportation leverage. Net inventory decreased 22% quarter-over-quarter as expected due to the front-loading of our inventory at the beginning of this fiscal year. We continue to expect inventory balances to lower levels for the remainder of fiscal 2024 as we align our inventory position with demand, rationalize our assortment, and focus on our successful private brands. Advertising was 7% of revenue in the quarter down 19% quarter-over-quarter due to our typical lower seasonal spending around the holidays. Q2 adjusted EBITDA came in at $4.4 million and reflected our ongoing cost management discipline. As expected, free cash flow was negative, $26.1 million in the quarter due to the timing of receipts related to our inventory purchases in Q1. We still expect to be free cash flow positive for the full year and ended the quarter with $230 million in cash, cash equivalents, and investments and no bank debt. Turning to our outlook. We are updating our full fiscal year outlook to reflect the current trends we are seeing in our business. For Q3, we expect total net revenue to be between $300 million and $310 million. We expect Q3 adjusted EBITDA will be between negative $5 million and breakeven. In the back half of the year, we expect gross margin to increase to between 44% and 45% as a result of the ongoing efforts to drive improvement in our inventory position and efficiencies in our transportation costs. We expect Q3 advertising to be between 8% and 9% of revenue. As we've said in the past, we will continue to be methodical about our approach when we are investing in marketing and may adjust up or down based on the ROI we are seeing. For the full year, we are lowering our expectations for net revenue to reflect the current trends we are seeing in active clients. We now expect revenue to be between $1.29 billion and $1.32 billion. We expect adjusted EBITDA to be between $10 million and $20 million. For the full fiscal year, we expect gross margin to be approximately 44% and advertising to be approximately 8% of revenue. Overall, I am confident in our ability to maintain profitability today and I'm excited about the work we are doing to strengthen the foundation of our business and reimagine the client experience. We will do so by remaining focused on leverage and profitability, along with acquisition and engagement of high lifetime value customers. Now, let me turn the call back to Matt.

Thanks, David. As you heard me say earlier, I believe that we have the right strategic priorities in place to generate sustainable, profitable growth over time. We are strengthening the foundation of our business. We are reimagining the client experience to attract and retain high lifetime value customers, and we are developing a long-term strategy to build upon these areas and ensure we best serve our clients as their needs evolve in the future. While some of these initiatives will begin to come to life later this year, we know it will take time to accomplish our ambitious plans to reimagine the Stitch Fix client experience. I look forward to sharing updates as our work progresses. Thank you all for joining today's call. And now, I'll turn it over to the operator so we can take your questions.

Thank you. Our first question comes from the line of Youssef Squali with Truist Securities.

Great. Thank you very much. Hi, guys. So, I guess a two-part question. Active client count was down about 17% year-on-year. I think that's deterioration from the prior quarter's growth. What's baked into your Q3 and 2024 guide? And can you maybe just flesh out kind of the key initiatives that you have line of sight into that should help reverse or at least stabilize client count in the near to medium term? Thank you.

Hey, Youssef, it's Matt. I appreciate the question. I'll let David answer first in terms of what's baked into the guide. Any additional color that he wants to share in terms of the initiatives and then I'll add additional color to round out on those initiatives that we're focused on.

Yeah. Youssef, I think you asked a couple of questions around active client count. First, Q2 specifically, I think you called out and just a couple of call outs there. First, Q2 is typically our softest quarter for active clients. And second, as Matt mentioned in the earlier comments, client conversion was below our expectation, and we continue to have an opportunity there. And both of those factors are really what's at play there. And we had gross adds and reactivations that were down quarter-over-quarter. And so that's Q2 specifically. In the back half of the year, we don't specifically guide to active clients, but we do expect the sequential decline in active clients to continue in the back half of the year. And that said, returning to healthy client growth continues to be a priority focus for the company. We're still very encouraged by the results we're seeing in the new clients we're acquiring that have higher order value and higher frequency. And I think we mentioned in our remarks earlier that 90-day RPC is up again for the third quarter in a row. And so as Matt said earlier, we're really focused on improving the performance of our full funnel media, while also leaning into prioritizing the reimagining of our client experience. And we're really excited about that work and believe that it will attract and retain more of those high-value clients. And that's why we continue to have really a methodical approach around this. We're taking the time needed to make sure we focus on returning to healthy, sustainable long-term active client growth. Matt?

Yeah. Maybe just a quick build on that. It's absolutely right that in terms of optimization within our media spend and our media mix, in order to make sure that we're acquiring the right clients that as I've noted in previous calls that our focus is just on a really judicious spending of our marketing dollars, to make sure that the clients that we're targeting are ones that demonstrate all of the strong likelihood and characteristics of being high LTV clients for us. And over time, we'll continue to be methodical around an expansion of those client segments that we're targeting. I feel really confident in terms of the work that our marketing team is doing there. They're really focused on making sure we've got the right message in front of the right prospective clients at the right time, we're testing into new mediums and increasing spend there so that we can continue to test and learn. We're doing a good job within video right now in terms of storytelling that calls out the unique differentiators of our business model and the manners in which we can uniquely serve clients relative to other retail options that might be at their disposal. So that gives me a lot of confidence. The other piece that's just really important is what David noted in terms of the reimagination of our experience. We have just a really, really phenomenal asset where on day zero, we know more about our client than many retailers could aspire to know about their clients over the entire course of their relationship with them. We know their style preferences, we know their value orientation, and we can nail their fit as early as their very first transaction. And that's an extremely powerful differentiator and asset that we have. And as we reimagine the experience, we're going to make sure to embed that within everything that we do. As I noted in the prepared remarks, one of the first areas of focus for us is on that onboarding experience. We have an opportunity to make that more fun, more dynamic. And at the end of the day, inspire more confidence in prospective clients so that they convert with us at much higher levels. As we increase that conversion through the funnel, we'll be able to optimize our media dollars even more and hopefully, then be able to increase the number of new clients that come through the funnel. That optimized or reimagined experience is also one that helps us deepen the relationship with our existing clients as well so that we can better understand how their style preferences, value orientation, and fit changes over time, so that we can continue to keep our active and loyal clients for a longer tenure and generate even greater revenue from them. I'm already encouraged by the increase in revenue per active client that we've seen recently, and now our opportunity remains to continue to improve our conversion metrics. And as we reimagine our experience and optimize our media investment, I'm confident that we'll be able to do that over the long term.

Great. All right. Thank you both.

Thank you. Please standby for our next question. Our next question comes from the line of Simeon Siegel with BMO Capital Markets. Your line is open.

Thanks. Hey, everyone. Good afternoon. Did you say whether there's an ideal percentage of total sales that you'd like to take through private brands and maybe what's the ASP and margin differential for private versus national? And then I just wanted to confirm something. I think so at this point, 90-day RPAC, I think you said has now been up for three straight quarters. The trailing 12 months is still down. So it's just safe to say that that should give you some strong confidence that next quarter's trailing 12 months should be up, right? So just any color around that and order of magnitude if possible? Thank you.

Hey, Simeon, it's Matt. I'll speak to the questions around private brand. I'll let David speak to the questions about RPAC and any additional color that you'd like to share in terms of our private brand portfolio. In terms of the penetration between private brands and national brands, we have a strong perspective on that, that we're going to lead with a very client-focused approach. And by putting our clients first, that gives us the opportunity over the longer term to allow that mix to organically shake out based on what's in the greatest interest of our clients. And they're effectively voting with both their dollars and all of the other ways that we've built into our experience is that we have an ability to interact with them. Now, it's true that our private brand assortment does contribute a higher margin for us and currently demonstrates higher keep rates. As I spoke to in previous calls, though, we continue to do a rationalization around our national brand matrix, which is helping us continue to deepen our relationship with the national brands that resonate best with our clients. So I feel confident that the performance of our national brands will similarly improve over time. The amount of data that we have from our clients, both through the onboarding experience, as well as through our continued relationships with them, not only helps us develop some of the best private brand product on the market, but it's also information that we're able to work back with our national brands to continue to improve the performance of the buys that we make with them. So overall, I think it's about finding the balance, but letting the client effectively help us get there.

And then, Simeon, on the RPAC side, I think you called out, we definitely are encouraged by the strength we're seeing in the 90-day RPAC. But also from an overall RPAC standpoint, yes, year-over-year, it's still down slightly but quarter-over-quarter, it's up 2%. And a big part of that is what we're seeing in AOV. I think we called this out last quarter as well. But we're seeing continued strength in overall fixed AOV, which hit a multiyear high for the second quarter in a row. And so definitely something that's an encouraging sign.

And would you expect that to continue? Like should we be looking at this sequentially rather than year-over-year?

Yeah. I think AOV, there is seasonality to that. But certainly, the upside that we're seeing is encouraging and we're going to continue to focus on progressing there.

Great. Perfect. Thanks a lot guys. Best of luck for the rest of the year.

Thanks, Simeon.

Please standby for our next question. Our next question comes from the line of Tom Nikic with Wedbush. Your line is open.

Thank you for taking my question. I wanted to ask about marketing. You mentioned that in the second half it will be 8% to 9% of sales, which is higher than what we've seen recently and higher than last year. You also mentioned that depending on the ROI you're getting, you can adjust your spending. It seems like you're planning to increase your marketing budget as a percentage of sales in the second half. Is this because you believe you’re starting to see better returns on your marketing investments? I know there was a plan to shift towards more efficient marketing channels. Are you beginning to see that pay off, and is that why you want to increase spending to boost your revenue? Or is there something else driving this decision?

Hey, Tom, I'll answer your question. And David, if you want to add any additional color feel free to jump in. In terms of where we've seen our marketing, we guided to the year in terms of our marketing spend as a percentage of sales, and we're still tracking towards that for the totality of the fiscal year. There's also some seasonality built in, in terms of the amount of marketing spend that we have as a percentage of sales quarter-to-quarter. That helps us lean into both, we're strongest and also where we have the strongest ROI then based on that marketing investment. So we haven't deviated much from what we anticipated coming into the fiscal year. In terms of where we would continue to increase our spend? We look at that on a daily, weekly basis. And it's not just the totality of the spend, but it's also where we're spending it, and which client segments that we're targeting within each channel. The marketing team is pretty dialed in at the moment in order to make sure that we're quite judicious in terms of where we're making those investments and the return that we're getting from them. We also anticipate that over a longer period of time as the reimagined experience comes to life, we'll start to see higher conversion through the funnel, which would then help us without even increasing that marketing spend, get a greater return for it. But we'll continue to balance. And as we continue to see higher RPAC, it's another signal that would give us confidence in a future state in which we might increase marketing as a percentage of sales in order to drive the top line.

All right. Understood. And if I could ask a follow-up on gross margin. So again, it sounds like gross margin for the second half of the fiscal year. I think you said it should be better than the first half of the fiscal year. Can you just kind of help us understand what's driving the improvement in gross margin that you're seeing? And I guess how much more runway is there to take gross margins higher?

Yes, Tom, thank you for your question. We are very pleased with our progress on gross margins. Last quarter, our gross margins increased by 140 basis points compared to the previous year, and this quarter, they improved by 250 basis points year-over-year. We've mentioned in the past that we've been working on strengthening our foundation and implementing retail best practices, particularly in inventory buying and planning, which have positively impacted our merchandising costs. Transportation has also been a significant focus for us. We’ve adjusted our carrier mix and renegotiated with our national carriers while continuing to utilize local carriers. This has been crucial for both inbound and outbound shipments. That's why we feel confident in providing guidance for the second half of the year at 44% to 45%. Historically, we've indicated that there’s nothing structurally preventing us from reaching the higher end of that range at 45%. This remains a key area of focus for us as we aim to enhance our gross margin leverage and contributions moving forward.

Very helpful. Thank you very much and best of luck for the rest of the year.

Thank you.

Thanks, Tom.

Our next question comes from the line of Aneesha Sherman with Bernstein. Your line is open.

Hi, thank you. Matt, when I look at the business's top line growth over the last two quarters and your guidance for the next two, it seems like there is a continued deceleration in the top line, which appears to contrast with what you mentioned about the structural improvements in the business, the positive client metrics, and your increased investment in marketing that you believe is yielding results. Can you explain this discrepancy? What do you anticipate as the time lag here? Are we looking at about a year or a couple of quarters before we see the impact on the top line and a return to acceleration?

Thank you for the question, Aneesha. I want to express my strong belief in the future success of Stitch Fix. As I delve deeper into the business, my confidence in our success continues to strengthen, based on several factors I've previously discussed. First, when I look at the overall retail landscape for apparel and accessories, it's evident that customers are not happy with their current shopping options. The experience of physical retail remains quite challenging, and online shopping can be overwhelming. Our service at Stitch Fix addresses many of these customer frustrations. From Day Zero, we have a better understanding of our clients than many retailers could hope to achieve over time. This allows us to accurately gauge their style preferences, value orientations, and fit right from the very first transaction. Furthermore, our personalization algorithms, artificial intelligence, machine learning, and data science are fundamental to our model and have been since our inception. We will continue to build on these aspects going forward. Our tool systems and experiences are all shaped by this foundation, and we will keep investing in these areas as we've shown throughout our 13-year history. As mentioned, we are in a transformation phase, which takes time. We need to create a stronger business foundation that emphasizes best-in-class operations designed for scalability. This foundation will enable us to operate more efficiently and reduce costs while enhancing the client experience. We are embedding retail best practices throughout our organization as we strengthen this foundation. Additionally, we are highly focused on fostering a healthier client franchise by being prudent with our marketing spending and selectively targeting client segments to ensure we bring in clients who exhibit high lifetime value and are likely to establish long-lasting relationships with us. Importantly, as we reimagine the client experience and uphold our legacy as a disruptive retailer, the core value proposition of understanding our clients' style preferences, value orientations, and fit from Day Zero remains a quick competitive advantage for us. However, we need to evolve how this value is reflected in the overall experience. As I noted in my prepared remarks, we are currently revamping the onboarding process to keep both potential and current clients engaged and to ensure they feel confident in our services. As we enhance these experiences, we will see improved conversion rates through the customer journey, better serve both new and existing clients, and continually reimagine their end-to-end experience, including interactions between clients and stylists. This is a work in progress, and I look forward to sharing more updates with you as it develops.

That's super helpful. Can I ask a quick follow-up? Do you expect to go back to your usual seasonal cadence of having a slightly heavier weighted second half, which is kind of where you were pre-COVID where second half was contributing a little bit more than half of annual sales?

I mean it's a good question, Aneesha. I think as we go forward, I think some of those trends could return to the business. But I think to Matt's point, like I think we're focused right now on sort of some of those near-term actions that we're doing because we know that will drive us towards active client growth and sustainable revenue growth.

Got it. Thank you.

Thank you. Please standby for our next question. Our next question comes from the line of Maria Ripps from Canaccord. Your line is open.

Great. Thank you for taking my questions. First, can you maybe just talk about whether you're seeing any impact from the lower-cost competitors that are growing aggressively in the US, whether from the revenue standpoint or intensifying competition in advertising spend? And then secondly, can you maybe just give us a little bit more color around the launch of new client onboarding experience. What are some of the new features that you have in mind that maybe you can talk about? And how will it be different from the current process.

Hey, Maria. I'm glad to address both of your questions. Regarding the new lower-cost entrants in the market, I find it encouraging that the Stitch Fix business model resonates well with the clients we serve. We don't believe these new competitors are negatively impacting our business. We recognize that some of our traditional competitors are facing challenges, but from our viewpoint, the clients choosing Stitch Fix are specifically looking for personal styling assistance, help with filling their wardrobe, or finding the right work attire as they start new jobs. They also include individuals who struggle to find perfectly fitting clothing. We meet these needs significantly better than many other retailers, which gives us a competitive edge that protects us from the disruptions posed by other market players. As for the new onboarding experience, our main goal is to ensure that we gather all necessary information from prospective clients to provide them with excellent service right from the start. It's also crucial that we instill confidence in them throughout this experience, as we want them to trust that we'll understand their style preferences and meet their fit needs. Additionally, it's essential that the onboarding process is enjoyable, engaging, and dynamic. We're still in the early phases, and I’ll provide more details as we progress, but these are the guiding principles for developing this new product.

Got it. Thank you so much for the color.

Thanks, Maria.

Thank you. Please standby for our next question. Our next question comes from the line of Edward Yruma with PSC. Your line is open.

Hey, guys. Thanks very much for taking the question. Two for me, I guess first, there's obviously a large customer base that is kind of later that's fallen out, I know at the time of the IPO, there was a thought process around a 24 to 36-month kind of reactivation period as people's size or preferences change. Is any of that still holding? And kind of what efforts are you making against the lapsed customers? And then as a follow-up, I know one area of refinement has been around the close-up policy on clearing excess inventory. I guess, kind of, where are you with that? And kind of how are you disposing of some of this excess inventory? Thanks.

Hey, Ed, I appreciate the question. As I understood the first part, it's about how we continue to drive engagement with our current clients. And it's something that we talked about in prior calls, as we're continuing to improve and focus on our ability to acquire new clients judiciously, we're similarly working to ensure that we're doing a better job engaging our current clients in order to fend off dormancy proactively. And we're very mindful in terms of the retention and reactivation campaigns. I do feel that the team is extremely well dialed in and has the right amount of focus on this. We continue to have pockets of success or continue to have success around that reengagement. And we're going to continue to also invest within our CRM capabilities, so that we can better understand who our clients are, the right message is to deliver them, what the right time is to deliver that right message. And we feel like through these investments, we'll continue to keep that engagement open. And over a longer period of time, this speaks to the second part of the reimagination of the experience that's really important is we're going to start to really focus on what are those experiences that can deepen engagement with our current clients. And how can we make sure that we're giving them a reason to come back and visit us on a more frequent basis. And as we do that, we feel confident that we'll continue to be a part of their shopping journey. We'll continue to take a greater wallet share over time. And that's why that's such an important part of the investment in terms of the reengagement of the experience there. In terms of the second part of the question on clearance, I'll answer it and allow David to jump in with a little bit of additional color there. One of the things that's really important is that we continue to invest in our pricing science there. We want to make sure that we're getting smarter about our pricing intelligence that will help ensure that we've got the right markdown cadence, so that we can drive the right sell-through, so that we can ensure that we have the right keep rates. And as inventory ages, then, we'll be able to make sure that we have less and less as a percentage of our total retail that needs to go to clearance. I feel good about our level of investment there. I feel good about some of the initial results that we've seen from this increased focus in pricing science. And it's also just a phenomenal of our continued focus on retail best practices and the outsized impact that it can have on our overall business performance. And I think finally, our ability to do that speaks a lot to what David was talking about in terms of getting leverage out of the business so that we can further invest in growth initiatives over time.

And Ed, just to add on that, on the clearance side, one of the other aspects that certainly has been a benefit for us is Freestyle, where we can use Freestyle in a lot of the ways that Matt was just describing around targeted promotions and sales and using that as an avenue from a clearance perspective. And so that has certainly helped us from an inventory health standpoint.

Thanks so much.

Thanks, Ed.

Please standby for our next question. Our next question comes from the line of Kunal Madhukar from UBS. Your line is open.

Hi. Thank you for taking my questions. I guess a lot of the questions are coming in because especially about growth, coming in because there seems to be some dichotomy between what you profess and the numbers that we see. So if the user experience is so much better than what their current experience is with other retailers, why is it that the active client base is back to the January 2018, kind of, levels? And then when you're thinking about wallet share, what percentage of wallet share do you currently have from the existing clients? And a follow-up would be you talked about having a more personalized experience with like the stylists. So what does that mean in terms of stylist headcount and the amount of time that the stylist will spend with individual clients? And then the follow-up to that would be what would be the cost of having a more personalized experience? Thank you.

All right. Thank you, Kunal. I heard three questions. I'll do my best to take them in order. The first is in terms of why I continue to have such confidence in the future success of Stitch Fix versus what the numbers that you're looking at are demonstrating. And I think based on what I've continue to say is our core differentiator and our core capability is how well we know our clients and how well we know clients from that very first interaction, our opportunity going forward is how we further capitalize on that information and how we continue to build and reimagine the experience around that. So that confidence is speaking to that future growth opportunity. And as I noted earlier, we're in the midst of a transformation, and those transformations do take time. On the second question, in terms of wallet share, we're very methodical in terms of the different client segments that we're targeting. And within those client segments, we're also filling very different needs for each of those clients. And as a result, we have a very different wallet share with each of those different client bases. And the teams are very focused on making sure that we continue to develop, build and message to those clients in those different segments to meet those needs and gain as much wallet share as possible. On the third question, in terms of the future of the client stylists relationship and how we want to build out a more personalized experience and what that means for the cost basis on stylists, I think what's really important there is that we're driving more meaningful interactions between clients and stylists. One is to continue to add value and ones that create experiences that are differentiated and personalized for each client. While some clients may rely on our service to continue to keep their wardrobe replenished and refreshed over time and require minimal interaction with stylists, you might actually see less interaction with stylists. Other clients have been very vocal and have heard in many of the client focus groups that I've attended that they want to have a deeper and more meaningful interaction with their stylists and then to be looking for help getting dressed or finishing out their closet in a much more dynamic and engaged way. So in terms of what it means from an expense basis, I think it would be one where we're not anticipating on that, because we're going to be able to tailor that experience to the individual where some clients are going to want a deeper or more constant engagement with stylists. And others are going to be utilizing the power of our data science and our technology in order to keep their wardrobe refreshed, keep them on style and on trend potentially with less experience. So net-net, I think it will balance over time.

Thank you. With that, I see no further questions in the queue. Thank you for participating in today's conference. That does conclude the program. You may all disconnect. Have a great day.