Stitch Fix Inc (SFIX) Q1 2023 Earnings Call Transcript

Stitch Fix Inc (NASDAQ:SFIX) Q1 2023 Earnings Call dated Dec. 06, 2022.

Corporate Participants:

Hayden Blair — Investor Relations and Treasury

Elizabeth Spaulding — Chief Executive Officer

Dan Jedda — Chief Financial Officer

Analysts:

Youssef Squali — Truist — Analyst

Simeon Siegel — BMO Capital Markets — Analyst

Mark Altschwager — Robert W. Baird — Analyst

Edward Yruma — Piper Sandler — Analyst

David Bellinger — MKM Partners — Analyst

Jesse Wilson — Wells Fargo — Analyst

Tom Nikic — Wedbush Securities — Analyst

Kunal Madhukar — UBS — Analyst

Trevor Young — Barclays — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Mark Mahaney — Evercore ISI — Analyst

Aneesha Sherman — Bernstein — Analyst

Lamont Williams — Stifel — Analyst

Presentation:

Operator

Hello, and thank you for standing by. Welcome to the Stitch Fix First Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce Hayden Blair.

Hayden Blair — Investor Relations and Treasury

Good afternoon, and thank you for joining us today to discuss the results for Stitch Fix’s first quarter of fiscal year 2023. Joining me on the call today are Elizabeth Spaulding, CEO of Stitch Fix; and Dan Jedda, CFO. We have posted complete first quarter 2023 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 the results to differ. In particular, our press release issued and filed today as well as the Risk Factors section of our Annual Report on Form 10-K for our fiscal year 2022 previously filed with the SEC and the quarterly report on Form 10-Q for our first quarter of fiscal year 2023 which we expect to be filed tomorrow. 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. 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.

With that, I will turn the call over to Elizabeth.

Elizabeth Spaulding — Chief Executive Officer

Thanks, Hayden. As we stated on last quarter’s call following a transformative year with the rollout of Freestyle, we began fiscal year 2023 with a clear focus on growing our client base and achieving profitability. As the macroeconomic environment continues to be uncertain, we are now further balancing the need to optimize our cost structure against achieving the long-term growth objectives of the business. We are confident in this approach and are determined to use this moment as a catalyst to create a leaner, more nimble and profitable Stitch Fix while continuing to enhance the experience for our clients.

In fiscal Q1, the retail industry experienced a meaningful pull forward of the holiday promotional environment which continues to be more pronounced than expected due to weak consumer sentiment and excess inventories. We believe this resulted in lower client spending and also had a large impact on our net active clients which declined 11% year-over-year. Overall, Q1 net revenue declined 22% year-over-year to $455.6 million which was at the low end of the range provided on the Q4 call. Despite this, we continue to deliver on operational efficiencies and cost controls which enabled us to beat our provided outlook on adjusted EBITDA a negative $7.4 million for the first quarter. Dan will provide more details on the quarter in his section.

Today, I will discuss our plans for the balance of 2023 in a few key areas. First, our focus on profitability and how we plan to further simplify our cost structure to create a more efficient operating model. Second, how we continue to strengthen our client experience with an emphasis on our biggest differentiators of discovery, fit and human relationship. And lastly, how we are evolving our marketing strategy to increase our focus on engaging and reactivating the audiences that already know us.

First, on our focus on profitability and a leaner operating model. On the last call, we said that we recognize returning to positive adjusted EBITDA and free cash flow was of the utmost importance. This remains our central focus and the continued uncertain macro environment underscores the value of a leaner profitable business model that will allow us to adapt quickly in the future. As such, we are increasing our FY ’23 cost reduction targets that we announced two quarters ago to $135 million from the $40 million to $60 million previously discussed. While much of the new reductions will come from advertising, which I will discuss more later on, we are also targeting more fixed and variable productivity in a number of areas. We recognize we need to operate the business more efficiently and focus on the areas most critical to move us forward in the current environment. We believe we can execute these initiatives while simultaneously enhancing our client experience and without compromising the long-term growth potential our highly differentiated business model presents. To reinforce our biggest focus is on achieving profitability. That said, we do want to give you an understanding of what we are working on in the background that is foundational to further enhancing our client experience.

Our clients choose Stitch Fix to find items they would not have otherwise found for themselves for the tremendous convenience our styling service provides and for the personalization we deliver in client style and fit. We are the leaders in providing personalized styling support to our fixed model which together with freestyles on-demand styling features like Shop Your Looks and Trending For You drive higher conversion and lower return rates relative to traditional e-commerce retail. Knowing this, there are two specific areas of opportunity we are focused on enhancing to grow and retain our net active client base, making it easier to enter our ecosystem and ensuring our clients still consistently heard and served in a personalized way to keep them coming back again and again.

In terms of entering our ecosystem, we made progress in the first quarter testing a new outreach strategy to a large number of signed-up prospects who’ve not yet purchased from us, which increased conversion by 30% over last quarter. We are also working on faster signup processes and more personalized search-based landing pages to continue to make it easier for clients to get started with Stitch Fix.

In terms of feeling heard and served in a personalized way to keep clients coming back again and again, we see clear opportunities to improve client retention at critical moments with Fix Preview and Fix Checkout. For example, we know that when clients keep at least one item and are looking forward to their next Fix, they are likely to have multiple future fixes, the inverse is also true. If a client buy zero items in their first Fix, they’re 3 times as likely to cancel their auto-ship than clients who bought one item. Given the criticality of these moments, we are testing multiple new ways for richer interaction and listening both before clients receive their Fix as well as when they share feedback if we haven’t hit the mark. One test underway includes stylist experts contacting first time’s clients who purchased zero items to get to know our clients better and to proactively suggest replacement items from Freestyle for the client so that we can get it right.

We expect this higher level of personal touch and communication will be meaningful in improving client happiness and ultimately improve retention. And lastly, we are evolving our marketing strategy to increase our focus on engaging and reactivating the audiences that already know us, while continuing to lean into new acquisition channels. This is a critical step towards increasing profitability as we will reduce marketing spend in the back half of the year. As a business, we have relied on digital performance-based channels and lower funnel spending on client prospects. While these channels did install proved to be successful, they are now less efficient than they once were. In addition, we have a pool of over 10 million consumers that have already interacted with us but if not recently or ever made a purchase that we can more directly target to bring back into our ecosystem. Recent testing showed the cost per acquisition for re-engagement of this pool is significantly less than prospective clients who have never interacted with us. Our experience has continued to evolve and we want to reach those clients who already know us and help them rediscover their love for Stitch Fix.

In addition, we’re continuing to expand our under-penetrated marketing channels such as affiliates, influencers, and SEO/SEM, which will take time to develop into meaningful contributors but will be important over time for new customer acquisition.

In summary, we remain confident in our unique and differentiated business model and the long-term opportunity ahead of us. And we are adapting to meet the moment in these uncertain times by focusing on these things within our control, we will continue to set ourselves up to achieve adjusted EBITDA and free cash flow positivity in the near term while maximizing our long-term potential.

With that, I will turn the call over to Dan.

Dan Jedda — Chief Financial Officer

Thank you, Elizabeth, and hello to everyone on the call. Q1 net revenue declined 22% year-over-year to $455.6 million which came in at the low end of our guidance due to lower net active clients and a pull forward of holiday-related promotions across the industry. The deep discounting the industry has experienced well in advance of the normal holiday season particularly impacted October Freestyle revenue.

Adjusted EBITDA for the quarter came in at negative $7.4 million, which was above our outlook, largely due to effective cost controls, as we continue to drive towards our goal of positive adjusted EBITDA and free cash flow. Net active clients in the quarter declined 11% year-over-year to $3.7 million. This was an improvement from the sequential loss from Q3 to Q4 of last year. Net active clients were lower than what we expected at the onset of the quarter. While we are seeing an increase in new active customers, we continue to see a high number of customers delaying spending, partially due to the macro environment. Revenue per active client was approximately flat year-over-year at $525. However, our analysis does show that clients are spending less across a broad set of cohorts and we expect this to continue given the economic backdrop and the deep discounting we are seeing in the retail industry.

Q1 gross margin came in as expected at 42.1%, down 490 basis points year-over-year, driven primarily by higher product costs, higher clearance, and unfavorable transportation costs year-over-year. Sequentially, gross margin was up 210 basis points from Q4 to mostly to improve the inventory reserves. We continue to believe gross margin will be approximately 42% throughout the rest of FY ’23. Advertising was 9% of revenue in the quarter. For the remainder of the year, we expect advertising as a percent of revenue to be lower than our historic rate due to the marketing shift Elizabeth discussed. We will be laser-focused on spending advertising dollars where we see near-term positive ROI and we’ll continue to build out new marketing channels. For the remainder of this year, we expect advertising to be approximately 5% to 6% of revenue. So we’ll continue to evaluate our advertising spend to ensure we are managing to the right return on investment.

Net inventory grew 20% year-over-year due to higher receive volume. We did expect this higher inventory given our long lead times from order placement to receipt of inventory. We aggressively adjusted our buying in Q4 of last year and we expect inventory to come down sequentially in Q2 and continue to decline in the second half of the year. Free cash flow for the quarter was negative $16 million and we ended the quarter with $209 million in cash, cash equivalents, and highly-rated securities.

Now on to our outlook. The challenging economic environment increases uncertainty around the trajectory of net actives and therefore revenue as we look forward. We know that high rates of inflation are impacting consumer purchases and high levels of inventory are impacting pricing with deeper discounting across the retail industry. Additionally, we are reducing our advertising spend amidst a very promotional holiday season. In these times, we are less certain how the revenue story plays out for the rest of the year. And so our goal continues to be managing our overall costs while continuing to focus on improving our client experience with the goal of becoming adjusted EBITDA and free cash flow positive in the near term. In light of this backdrop, we anticipate revenues to be between $410 million and $420 million for Q2 as we continue to see pressure on net active clients and expect the holiday promotional environment to continue throughout the end of the quarter.

We expect adjusted EBITDA for the quarter to be between negative $5 million and positive $5 million, primarily reflecting our ongoing cost structure efforts, and a reduced level of advertising spend. Given our current visibility around our marketing and retention efforts and balancing the uncertainty in this challenging backdrop, we are lowering our full-year FY ’23 revenue guide to be between $1.6 billion and $1.7 billion. This assumes no material change in the current competitive landscape and macro environment from where we are — where we see it today. Despite this, we are raising our outlook on adjusted EBITDA for the year to be between negative $10 million and positive $10 million reflecting our reduced advertising levels and ongoing cost management initiatives.

Before we turn it over to Q&A, I want to remind everyone that even at current levels, our units and order economics, continue to be strong with contribution profit excluding advertising in the range of 25% to 30%. We know there is further opportunity to improve both fixed and variable costs and therefore we see an opportunity to increase our contribution margin in addition to improving fixed leverage. In the meantime, we will continue to focus on things we can control, deepening our differentiation, improving our client experience, and rightsizing our overall cost structure, all with the focus on near-term positive adjusted EBITDA and free cash flow. Doing this [Phonetic] it is expected to be in a strong position producing healthy and profitable leverage as the economy improves and for a return to growth.

With that, I’ll turn the call over to the operator for Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Youssef Squali with Truist.

Youssef Squali — Truist — Analyst

Great. Thank you very much. Hi, guys. So just a couple of questions for me. One, on the last earnings call, you guys talked a little bit about some of the new product enhancements personalization features efforts that you guys were doing to drive engagement and improve the user experience. You also had a brand campaign that was launched, if I remember correctly, in mid-September. Can you just speak to the performance — to one, the efforts you’re making where are you there? Second, how the campaign relative to your own expectations? And then, broadly speaking, how are you kind of positioned for the rest of the year from kind of an inventory standpoint, where would you like inventory to be at the end of the year? Thank you.

Elizabeth Spaulding — Chief Executive Officer

Hey, thanks, Youssef. I can take the first part of that and then I’ll let Dan speak to our inventory position. On the customer experience, I think I alluded to some of this on the call that we’re pleased with the progress that we’re making on clients entering our user experience. That was an area that we’ve been focused on over the last several quarters and were significantly off our lows in new client conversion, which gives us confidence that we’re doing the right things to create an even more seamless entry into new to Stitch Fix customers and that’s starting to pay dividends.

We did things like improved our dynamic landing pages depending on where clients were coming from, including some improvements to the style quiz and we’ve begun to experiment with what we really featuring and talking about in terms of how it works in the Stitch Fix experience and sort of the unique differentiators of our styling experience. And we’re leaning into further improvements on that as we entered Q2 with things like delaying our email capture, one-time login, just areas that we’re very aware of that create friction so pleased with the progress that we’re making and continuing to focus on doing more there, more broadly within the user experience I also had mentioned. These kind of critical moments of truth within fixed preview, as well as within the checkout experience and so we’ve made a number of improvements on how we’re surfacing inventory to our clients. I mentioned Fix Preview. That one, we’re a little bit — that as we launched and rolled that out over time, increased our overall AOV and retention as we rolled that out a year or two ago. We now see kind of the next wave of improvements of client listening and learning and we’re eager to dive in there. We like what we’re seeing in these very early tests but we’ve yet to scale them and more to come over the coming quarters and then kind of related to the — those landing pages and how we’re educating consumers. That’s a good bridge in to your question on the brand campaign.

That was the first time we had done a campaign that was consistent across the UK and the US and really focused on and always on messaging around how it works and really educating consumers on the unique differentiators. And so the consumer qualitative feedback that we’ve received from that is strong. We like what we’re hearing in terms of consumer appreciation of the value proposition. We also saw some improvements in organic traffic conversion that we think could be attributed to the relevance of that campaign. It’s something that we imagine kind of being layered within how are influencers are talking about Stitch Fix, how we talk at within TV and OTT. So it’s something that we anticipate we will build on in the future and is part of really conveying our unique value proposition.

I will let Dan touch on the inventory position question.

Dan Jedda — Chief Financial Officer

On inventory, as we mentioned in the prior call, we did expect us to increase inventory than we did expect this quarter. The $220 million to be the peak and we are seeing that decrease throughout November and even through the first week of December, so the trajectory is right where we expected. We will be lower in Q2, we’re going to continue to be lower in Q3 and Q4 sequentially because we have rightsized our buying for the second half of the year. So that inventory will go down and I suspect it will be negative on a year-on-year basis in the back half of the year.

Youssef Squali — Truist — Analyst

That’s helpful. Thank you.

Operator

Thank you. And our next question comes from the line of Simeon Siegel with BMO Capital Markets.

Simeon Siegel — BMO Capital Markets — Analyst

Thanks, everyone, and hope you’re doing well and a nice Thanksgiving. I was hoping you could give any color on gross versus net adds, maybe in active clients this quarter? And then if I heard it correctly, and apologies if I didn’t, I was hoping you could elaborate a little bit on the comment about consumers having choice to where to shop impacting the net adds. I guess that sounds a little bit more difficult for traditional retail. So I guess you guys had been maybe insulated, given the loyal fixed shoppers. So, are you seeing a pivot in the existing base or the customer approach to your company? And if the active client positioning is now competing against traditional retailers, does that change how you focus on running and forecasting the business? And again, If I’m mistaking it or misheard, I apologize. Thanks, guys.

Elizabeth Spaulding — Chief Executive Officer

Yes, thanks, Simeon. I can start and Dan feel free to join in as well. So on the gross versus net adds, I think Dan touched on that, where we did see an increase in clients in our growth add quarter-on-quarter. So Q1 versus Q4. That said, we also saw an increase in clients who haven’t shopped with us in 12 months plus and that is something I think we attribute in part to the macro environment and just the pullback that overall I think the category is seeing in retail spending. We believe that a lot of the efforts that we’re focused on in terms of retaining clients longer, improving the experience, reactivating clients, some of what I talked about on the marketing front, all will be important in terms of driving improvements over time.

The competition with traditional retail, I think what we were referring to there is, quarter-on-quarter we did see increases in things like our AOV and our average unit retail. That said, we did see softness in Freestyle relative to what we would have anticipated and we could see as we compare it to a lot of the pull forward in the promotional calendars of other players in the space that we were impacted by some of those promotional offers that happened, August, September to start earlier than we typically would have seen. And then I think Dan mentioned the cohort-to-cohort spending. Our consumers are telling us that in this macro environment that they’re just being more judicious with their spending. And so while our keep rates and our average order values are holding steady, we are seeing some stretching out of frequency and stretching out of those Freestyle purchases. So we still believe we are very unique in our core value proposition. We compete on things like Discovery and fit and human relationships. That said, I think Freestyle in particular is probably more impacted by really, really promotional environment, which we saw in particular in that August-September-October timeframe.

Simeon Siegel — BMO Capital Markets — Analyst

Got it. Thanks. That’s very helpful. And then just, Elizabeth, maybe just a follow-up on that comment you made about the quarter-over-quarter ASP. How was the year-over-year ASP this quarter?

Elizabeth Spaulding — Chief Executive Officer

Yes. I think quarter-over-quarter, we saw a few percentage points increase on AOV, and similarly on an AFP basis in part. I think AFP was over 10% up quarter-on-quarter. Part of that is seasonal. We do see it leaning into outerwear and goods that are slightly higher priced. But overall, I mean we saw healthy, I would say in general, within our AOV in average unit retails. I think it’s more, maybe a frequency of spending that we saw more of a pull back.

Simeon Siegel — BMO Capital Markets — Analyst

Great. Thanks so much, guys. Best of luck for the rest of the holiday.

Elizabeth Spaulding — Chief Executive Officer

Thanks, Simeon.

Operator

Thank you. And our next question comes from the line of Mark Altschwager with R.W. Baird.

Mark Altschwager — Robert W. Baird — Analyst

Good afternoon, and thanks for taking my question. With respect to the shift in marketing strategy, is this a temporary shift and then the current macro, what are the proof points that you want to see in the transformation to give you confidence to more aggressively go after the TAM of consumers who haven’t engaged with the platform before?

Elizabeth Spaulding — Chief Executive Officer

Yes. Thanks, Mark. I would say, it is in part response to the environment, but also really strong belief that really happy clients and reactivating clients or some of our best channels for marketing and believing there is opportunity to further expand those. In addition to the areas of TAM expansion into some of these new marketing channels that we’ve just historically been under-penetrated. One thing I think we were very deliberate about and I think Dan mentioned this in his remarks as did I, is just being very focused on near-term positive ROI. And so I think what we really worked through is just being more deliberate and really raising the bar of our payback thresholds which we’re always very disciplined. We just essentially made the decision given the ambition of free cash flow positivity, EBITDA positivity. And just what we’re seeing in the macro backdrop to be even more — even more disciplined in terms of those payback periods. We’re also using it as an opportunity to go even faster at really doubling down on opportunities to reactivate clients that have loved us in the past that pool and that opportunity has obviously grown over time as we become a more mature business. And so Dan mentioned that 5% to 6%, that’s our best view for the full year, but we’ll learn over the next few quarters, and based on the paybacks, we’re seeing, we may opt to spend more as we go forward, but it’s not a permanent shift, it’s more, let’s learn into this and be even more disciplined on paybacks in the near term.

Mark Altschwager — Robert W. Baird — Analyst

Thank you. And then just follow-up on Freestyle. It makes sense with the heavily promotional backdrop would impact engagement there. What are you doing or what can you do to kind of manage your competitive position in such a dynamic pricing environment?

Elizabeth Spaulding — Chief Executive Officer

Yes, it’s a great question. I mean I think we’re very focused on, first of all just continuing to invest in our biggest differentiators. Things like outfitting, things like focusing on new arrivals that are most relevant to each of our clients. Part of what we’re hearing from consumers is making more value out of the wardrobe that they already have and we know that our outfit-based feed showing new arrivals in the context of outfits is highly converting. One example recently is we do a new outfits email every week we added dynamic content that’s one-to-one for each consumer. That shows them how to wear items for our new arrivals, that we spoke to each client and we saw a 30% increase in conversion rate on those emails. So part of our strategy, I think it’s just being more relevant and differentiated on the things that make a special and relevant week-to-week enrolment. I think the other is, we never really had any sort of limited-time offer, clearance valves, pre-Freestyle. So over the course of this year, we have been experimenting with episodic events that we feel like meet the moment within the promotional calendar. Roughly, I would say around once a quarter, but our goal is not to become a promotional retailer, but to really deliver value on these differentiators of Discovery, Fit, human relationship and really focus there first and foremost, while also recognizing Freestyle creates an opportunity to map more fully to the retail calendar and be relevant with what consumers are seeing.

Mark Altschwager — Robert W. Baird — Analyst

Thank you. And Happy Holidays.

Elizabeth Spaulding — Chief Executive Officer

Thanks, Mark.

Operator

Thank you. And our next question comes from the line of Edward Yruma with Piper Sandler.

Edward Yruma — Piper Sandler — Analyst

Hey, good evening, guys. Thanks for taking the questions. I guess, first is a bigger picture question and making sure we’re framing this correctly. Are you effectively saying that until the environment becomes less promotional, that you’re going to kind of trade off net add for profitability and are we fair to assume that until that changes that net adds will remain negative? And then as a follow-up, as you think about the promotional environment thing, particularly prolonged. I know that you’re obviously not in the percent-off game or coupon game, but are there other ways you can drive a stronger price-value relationship if that’s what the consumer ends up pivoting towards? Thank you.

Elizabeth Spaulding — Chief Executive Officer

Yes. Thank you, Ed. On the first point, in terms of where we’re focused. I think both Dan and I emphasized that, that first and foremost, this return to free cash flow positivity and EBITDA profitability is our main focus. So we are very much emphasizing that and I would say, given the current macro environment and the deliberate and intentional decision to pull back on marketing spend for the focus of being very near-term ROI positive, we’re not predicting a return to inflecting that sequentially the sequential net active client base this year. That said, all of the things that we’re working on that I talked about in the background, both the client experience to improve retention, adapting our focus on marketing to do more with the clients that already know us, we believe really sets us up for healthy client growth in the future, particularly as the economy improves. So I would say we’re very focused on profitability together with the most critical places of our customer experience.

And then on the promo environment, we have always had our buy five discount within the Fix offering, which we know delivers value to clients. We have our style pass offering for customers that have kept over 10 items where we offer them essentially unlimited Fixes. Those are places that we see as a jumping-off point for the expansion of our loyalty program over time. Nothing to announce there yet, but that is on our roadmap to deliver value to our customers, really across what we now know is such a compelling ecosystem between Fix and Freestyle, and to some extent an untapped opportunity to really bring all of those elements together in a more systematic program. So we definitely see something there down the road. Nothing specific to announce just yet in terms of timing.

Edward Yruma — Piper Sandler — Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of David Bellinger with MKM Partners.

David Bellinger — MKM Partners — Analyst

Hey, thanks for taking my questions. So first one on the revenue guidance for the year. So, Q1 fell within your range albeit towards the lower end. So did you see trend slow materially towards the end of Q1 and so far into Q2? And have you subsequently adjusted each quarter of the year down further since then? Just how should we think about the change in the pace of which it took shape in terms of the revenue guidance for the year?

Dan Jedda — Chief Financial Officer

Yes, I’ll take that one. We did see, as we mentioned, some impact of the deep discounting in the retail industry, which impacted our October sales, which is the last month of the quarter and on a go forward basis how we’re looking at the revenue guide is a function of what we saw — what we saw in the holiday period and the deep discounting and expecting the macro environment to continue as is, but also taking into account some of the marketing initiatives that we’ve talked early on — earlier in the call. So the way — the way I would think about that guide going forward is, it’s more of a similar change on a year-on-year basis for the rest of the quarters as it is with Q1 just given that the guide that we gave of the negative $1.6 billion to $1.7 billion for full-year revenue.

David Bellinger — MKM Partners — Analyst

Got it. And then my follow-up. Just bigger picture if we step back, do you think your inventory position is holding back revenue growth and client growth in some ways? Is there some type of larger inventory issue at play for Stitch Fix and do you need sort of a reset or refresh in order — in order to again connect with your core customer base?

Elizabeth Spaulding — Chief Executive Officer

Yes. I can start and Dan, feel free to chime in. I mean, I think we feel like over the course of the last year plus, we introduced a really healthy mix of national brands together with our strong exclusive and Stitch Fix-only brands, which the latter make up the majority of our inventory. We onboarded north of 80 brands in FY ’22. We’ve been able to grow our different product categories with Freestyle in particular like footwear and outerwear and dresses and we have a refresh rebuy approach to our exclusive brands that makes us reasonably adaptable that we will keep leaning into.

So I think we actually have a lot of the right product. Now of course for true category expansion, getting into the layers of growth we see possible as we really go after expanding our TAM. That I think is setting ourselves up as we work towards this fiscal year on some of the client experience. Some of the other work that we’re focused on in the background are things like a unified data platform, which I think I’ve mentioned some of this on prior calls that our infrastructure was built very rapidly to scale our fixed business into multiple lines of business like women’s, men’s, kids in the UK. It didn’t have the foresight to know we launched Freestyle or the foresight to say let’s get into a lot of different product categories. So we’re essentially slowing down a bit to speed up in the future by preparing our infrastructure so that we can add on more of these new categories as we get into fiscal year ’24. But that all said, we feel like we have the right assortment for our consumer. We’re very focused on a combination of what we call our Super Mom within women’s as well as leaning into Fashion Easter and we know we’ve actually grown the penetration of that Fashion Easter clients over the last 12 months.

Operator

Thank you. And our next question comes from the line of Ike Boruchow.

Jesse Wilson — Wells Fargo — Analyst

Hi, everyone. This is Jesse Sylvie Wilson on for Ike. I was just curious with the Freestyle offering being a little bit challenged with the promotional environment today. Do you guys ever plan on evolving the offering to be maybe more in line with general retail business practices and the general retail landscape with the calendar of promotions and such? Thank you.

Elizabeth Spaulding — Chief Executive Officer

Hey, Jesse. Thanks for the question. Can you just clarify when you say more like traditional?

Jesse Wilson — Wells Fargo — Analyst

A lot of traditional retailers typically exhibit promotions on a typical calendar such as deeper discounts during the holiday period or summer sales depending on what is this that they’re selling whereas I kind of understand Freestyle to be a little bit more full-priced. So, I was curious if there was any interest in potentially adapting the offering to be more in line with the cadence of some other apparel distributors of the industry?

Elizabeth Spaulding — Chief Executive Officer

Yes. Okay, got it. Yes. So I mentioned this a little bit earlier. I guess a few things I would offer. First, in terms of some of our highest converting areas within Freestyle, I think we’ve shared this in the past between 40% to 50% of our conversions happen and outfit-based shopping, which is a big differentiator. We’re helping clients see what items could go with something that they’ve already purchased as well as outfits they shopping based on what we think is trending for them as well as in any of our product detail pages being able to see items in the context of algorithmically generated outfits, as well as the outfits that have been curated by our stylist.

So, those characteristics. One thing that’s interesting as we have done episodic limited-time offers. Now that we can flex that muscle similar to traditional retail is that we see a halo effect to full-priced items during those same time periods as people come into the site experience. So I think we absolutely will continue to experiment and likely lean forward. We had our first Black Friday, Cyber Monday event which we saw good lift in terms of what we were able to offer to our clients and that window. But I think we really want to strike a good balance of being relevant in those seasonal time periods, but ultimately do what we do best which is differentiating based on style discovery fit. And as I mentioned to one of the prior questions I got on the notion of loyalty, we’ve always had this Style Pass Program, but we see down the road no timeline yet to share here being able to offer just rewards factor our clients the same way they rewarded if they buy five items in a Fix. So I think rather than trying to just replicate the retail calendar, we would like to be really focused on what’s unique to us.

Jesse Wilson — Wells Fargo — Analyst

Great, thank you.

Operator

Thank you. And our next question comes from the line of Tom Nikic with Wedbush Securities.

Tom Nikic — Wedbush Securities — Analyst

Hey, everybody. Thanks for taking my question. Is it safe to assume that the cut to the revenue guidance is predominantly because of more conservative assumptions, a lot of [Technical Issues] when the business is like traditionally growing again, would be predominantly driven by a recovery in the Freestyle business? Thanks.

Elizabeth Spaulding — Chief Executive Officer

Hey, Tom. You cut out a little here. I think I’ll let Dan answer, but just to playback. I think your question was, is the reduced guide largely driven by Freestyle, so is that the question or can you just clarify?

Tom Nikic — Wedbush Securities — Analyst

Yes, that’s right. And then like, would you expect the recovery to be driven by Freestyle as well?

Dan Jedda — Chief Financial Officer

Yes, I can take that. It wasn’t driven entirely by Freestyle. We talked a little bit about the reduction in advertising. We talked a lot about the reduction in advertising. Certainly, that’s some of the reduction in revenue that we guided to. We also part of that is just net actives and where we are today. And so, while I do think Freestyle will — as the economy improves Freestyle will improve and that will help with growth certainly Fix is critical and important to our business as well. And Elizabeth talked earlier about a variety of areas that we’re focusing on to drive re-engagement, engagement in clients who have filled out their style profile but never purchased with us, etc. So that is also going to be the catalyst to grow going forward. And of course, the macro environment, as we talked about, will be a catalyst when that does improve as well.

Tom Nikic — Wedbush Securities — Analyst

All right. Thanks very much and happy holidays.

Elizabeth Spaulding — Chief Executive Officer

Thanks, Tom.

Operator

Thank you. And our next question comes from the line of Kunal Madhukar with UBS.

Kunal Madhukar — UBS — Analyst

Hi. Thanks for taking my question. A few if I could. One is on the inventory side. So I go back to Q3 ’22 earnings call, where you talked about the supply chain and the improvements that you’ve made and I’m literally reading from the transcript, one of the big benefits of our business, we can make adjustments pretty rapidly, especially given the nature of how many goods we are actually in control of directly. And when I compare that to what you said earlier in this call today, the inventory was higher because of long lead time. So can you help us understand exactly what’s happening with the inventory? Are you in control of the supply chain, are you not rapidly flex up and down? That will be the first.

Dan Jedda — Chief Financial Officer

So, let me just explain. First of all from order placement to receipt of inventory for a lot of our products, especially of course our exclusive brand product which is made to order is about a six-month lead time. So there are other areas, specifically within national brands and other areas that we can flex up or down in, but we have a fairly sizable exclusive product and those are pretty long lead times. Actually they are probably even longer than six months. So what I was referring to in why our inventory was — it’s higher now is because we had placed those orders when we had a different demand trajectory six months to nine months ago. We have since adjusted, which is why we expect inventory to go down in Q2 and then continue to go down throughout the rest of the fiscal year. That said, where there are pockets of opportunity we absolutely can chase into that demand depending on where it is and we do that fairly well. But we do have these slightly longer lead times for exclusive and our — well, our exclusive product.

Kunal Madhukar — UBS — Analyst

Got it, thanks. So the second one would be, you’ve guided to 5% to 6% of — so advertising cost of like 5% to 6% that is significantly below anything that you did pre-COVID and you were extremely disciplined even then. But what that means is this quarter your advertising spend was down 19% year-over-year when sales were down 22% year-over-year. For the rest of the year, you’re guiding to sales being down 20% in each of the following quarters but the advertising spend will be down about 50% in each of the quarters. So what gives us the confidence that sales should not be even lower than the guide right now?

Elizabeth Spaulding — Chief Executive Officer

Yes, Kunal. I can start on that and Dan feel free to add on. I mean, first of all, I think we’ve always been very disciplined about how we manage our marketing spend and I think we both touched on that to some extent on the call. We are opting to be even more rigorous in the time period of payback than we typically are just in the spirit of the macro backdrop this uncertain time and really ensuring that we have very near-term ROI on our marketing spend. A certain portion of our revenue to be clear comes from subsequent sales of existing clients that we’re marketing to through channels like CRM and engaging them to come back in, but it’s not as much of the results of our paid spend.

So our growth rate is in part due by new customer acquisitions. But it’s also in part based on the installed base of our customers that are on auto-ship and subsequent sales. So I don’t think you should expect to see a perfectly one-to-one correlation with that downshift in marketing spend relative to our revenue rate. I’d say overall in terms of, is that a permanent shift or not? I think we got that question earlier. We are going to measure as we always do day-to-day, week-to-week and make adjustments accordingly, and some of the new areas that we’ve been leaning into that are under-penetrated for Stitch Fix SCO, SCM influencer affiliate as we start to see goodness there, we will begin to scale those, of course, that number may change over time. But I’d say net-net, the delta between those two rates, is that part of the growth rate as an installed base and part of the growth rate is new customer acquisition.

Kunal Madhukar — UBS — Analyst

Got it, thanks. And one last one if I could. And this is with regard to the comment around keep rates and AOV are flat, but we see stretching frequencies. So is that — can you give us a sense of like how the frequency is stretching and could that stretch into once every six months or once every 12 months in order to further push the Fixes into maybe next year kind of a thing?

Elizabeth Spaulding — Chief Executive Officer

Yes. I can start on that. Our clients are all university — universally like every three months. We have a mix of cohorts, some of which will get fixes every six weeks, some of which are every three months, some of which are biannual. It’s more of that and then a certain amount of our clients are what we call manual. They’re episodically ordering Fixes and they tend to occur at a certain frequency. I’d say a few things are probably driving that stretching out. One is a little bit of stretching across all of those cohorts. So it’s not like everyone’s going from three to six, somebody might have been six weeks and maybe they’re skipping a shipment and then going back to that six-week cadence.

It also as we’ve slowed down the new ad cohorts, they tend to have some of the higher frequencies and so some of the stretching is also a result of the mix shift of our client base in terms of the cohort age. But I think our goal is really overall on just continuing to be meeting the moment for our clients, helping their dollars go further with things like what I was describing with outfits being incredibly effective of how we’re listening and frankly it’s having the right assortment. One thing we’ve seen is that we have sort of a sweet spot of where we’ve seen very strong velocity with price points under $100 blazers sort of contemporary apparel and women’s at the $150 price point. So just really making sure we’re meeting them with what they’re looking for regardless if they are extending a little bit or at the same frequency that they’ve been with us over time.

Kunal Madhukar — UBS — Analyst

Got it. Thank you so much.

Elizabeth Spaulding — Chief Executive Officer

Thanks, Kunal.

Operator

Thank you. And our next question comes from the line of Trevor Young with Barclays.

Trevor Young — Barclays — Analyst

Great, thanks. Just first on the increase in the cost reduction target to $135 million [Phonetic]. Do you expect to realize all of that in ’23 since most of that is advertising, and then within that, how much is really advertising and durable versus just more kind of near-term pulling back, given the current environment?

Elizabeth Spaulding — Chief Executive Officer

Yes, thanks, Trevor. I can start, but I definitely would love Dan to chime in here. As we said in prior quarters, we had that $40 million to $60 million. We shared that we were tracking to that and likely to go beyond it. Now, this increased $135 million, a meaningful chunk of that is in fact advertising dollars together with fixed and variable productivity. In terms of when we will see it realize. Dan, do you want to just share more on that?

Dan Jedda — Chief Financial Officer

Yes, that will be realized in our fiscal year. That’s how we — that’s why we are quoting it the way we do because a lot of it is advertising, and when you model out that 5% to 6% of revenue, you’ll see that. And then of course the remainder is a combination of fixed and variable efficiencies and leverage, which on the — to answer your second part on a go-forward basis, as we mentioned on the advertising, that will — we look at that very closely, we look at the ROI on that, we’ll spend into where we have near-term positive ROI and we’re not — we’re going to pull back where we don’t. And so we’ll manage that very closely. For the rest of the year and of course into our fiscal ’24 and then all the — on the variable and fixed, obviously, that is indefinite, we won’t continue going forward as we see those efficiencies and take advantage of them.

Trevor Young — Barclays — Analyst

Great, thanks.

Operator

Thank you. And our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon, everyone. As you — as you’re talking about the customers delaying spending. Is there any particular cohorts that you’re seeing it from more or less? And then can you talk about product trends in terms of what you saw and in terms of pricing both on Freestyle and what you’re seeing requested in Fixes. And lastly, with the advertising spend, moving from 9% this year to 5% to 6%. What made $5 to 6% the right number and what are you looking forward to see if you need to increase advertising given what the revenue impact may be? Thank you.

Dan Jedda — Chief Financial Officer

Yes, I’ll start with that and I’ll ask Elizabeth can take the second part of that question. When we look at It’s a good question on the cohorts and we looked at this in many different ways across our cohorts and we — I mentioned in my prepared remarks, we didn’t see a broad spending reduction across all our cohorts. So clearly, the macro environment is impacting spend. Whether it’s a client who has in 50 plus Fixes or clients in their first 15 Fixes and regardless of tenure, we looked at it every which way. And while we had seen increasing spend quarter-on-quarter in these cohorts for many quarters back and even a couple of quarters back, we see — saw an increase. We clearly saw the spending go down across the broad set of cohorts in this latest fiscal quarter and we do expect that to continue, just given the high inflationary environment, the competitive landscape and the overall macroeconomic factors.

Elizabeth Spaulding — Chief Executive Officer

And Dana, I can touch on the trends question on the marketing question. So maybe I’ll start with some of what we saw in the quarter and some of the trends we’re seeing and then we’re about to release our style forecast, our annual style forecast will come out next week. So I can’t give a preview to some of what we’re hearing there from our 3.7 million clients, from our stylists, from consumer surveys and industry data which are sort of our — some of our predictions for the coming calendar year. But in terms of what we saw this quarter, I would say in particular for women’s back to work.

Clients shifting into workwear over more of that casual end use that we saw a year ago so structured Blazers was an area where we saw particular growth a real sweet spot in the sub $100 I believe their price point. Those were up north of 120% year-on-year. We also saw a shift to dressier outerwear with a variety of kind of Wolfe styles and silhouettes. We also saw strength within booties and heels against last year, up over 25% year-on-year. So clearly a female consumer who is going out again, night out and workwear styles that can transition into the evening.

We also saw with men’s some similar I would say trends in terms of going back to work very strong velocity within our workwear segment and with outerwear seeing strength in things like shirts, jackets and then kids have stayed more casual, I would say with graphics and cozy attire. Within our forecast, some of the things that we’re seeing now and coming forward is a real focus on getting back to holiday parties and holiday trends brighter and bolder colors is something we’re expecting in the future, and then a tendency towards wide leg bottoms, which started several seasons ago, but we’re beginning to really see that shift occurring in a more meaningful way. And then on the marketing spend, the 5% to 6%, I would say it was kind of a combination assessment of really being very focused on our free cash flow and EBITDA ambition for the year and really holding ourselves to this very strong threshold of the timeframe of payback together with the belief that there is opportunity for us to be doing more in areas that I mentioned on the prepared remarks, like reactivation of clients who have not shopped with us as recently and being more productive going after those segments as well as that group of clients we often call our signed up prospects and so together that was our estimate of what we could do to still create momentum with clients but be able to really be more efficient in the back half of the year.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Mark Mahaney with Evercore ISI.

Mark Mahaney — Evercore ISI — Analyst

Well, thanks. I think most of my questions have been answered, so I’ll just ask one. Just on free cash flow and the ability to sustain positive free cash flow going forward. Outside of the macro recovery, what would be the key factors that will cause that to happen or not to happen? Like what are the — what are the variables that you can most control outside of macro that will allow you to sustain positive free cash flow over the next several years? Thank you.

Dan Jedda — Chief Financial Officer

Yes, I can take that. I mentioned towards the end of the prepared remarks just our overall contribution margin, which is very healthy at 25% to 30% ex-marketing and so really it is that inflection on revenue, of course, getting — growing again at some point. We do feel like our order and unit economics are very strong. We are rightsizing our cost structure. We do have a lot of opportunity for variable productivity. All these work streams are in process, and part of the cost savings initiative, the $135 million that we stated on the call. So we feel good about the second half in terms of and obviously, our EBITDA guide, our adjusted EBITDA guide shows that that we feel good about the second half and going forward, we do think there’s leverage on top of that. So it’s a combination of continuing on these areas that we’re — that we’ve embarked upon to streamline our cost structure and of course, we will — we need to get the revenue growing again at some point, whether that’s through category expansion and or all the initiatives that we’re working on right now inclusive of the new marketing — the new advertising models that we’ve talked about.

Elizabeth Spaulding — Chief Executive Officer

Mark, I would just I think that really sums it up in terms of where we see that long-term return to free cash flow. I guess a couple of other things I would add on that gross margin side of things. The majority of our goods, our exclusive brands Stitch Fix only and those have very meaningful gross margin kind of delta between those national brands. And that’s just continuing to be a strength for us. There is a several hundred basis point difference. We’re just continuing to make sure that we’re investing in the right brands, the right price points that we’re building exclusively for our clients. And then I think that marketing piece that we’re making the shift on, we really do believe that we can get stronger over time with the combination of these newer channels were less penetrated in but also doing more with keeping our clients happier longer, better conversion, better retention, better reactivation that should drive more productivity in the P&L as well.

Mark Mahaney — Evercore ISI — Analyst

Thank you, Dan. Thank you, Elizabeth.

Operator

Thank you. And our next question comes from the line of Aneesha Sherman with Bernstein.

Aneesha Sherman — Bernstein — Analyst

Hi, thank you. My question is around inventory. So, Elizabeth, you talked about national brands being slightly lower margin. I’m curious if you’re seeing more interest from vendors, particularly national brands as they try to clear their own inventories this quarter and probably going into next quarter as well. Is there an opportunity there in terms of gross margin from a better buying environment that you may be seeing right now? And then a follow-up also on inventory. You mentioned the six month lead time as your typical lead time. So I guess I would assume that the goods that you have now are spring-summer ’23 goods. What — how do you think about the risk of sell-through for that product, especially if you see macro continuing to be weak into the next quarter or two? Thanks.

Dan Jedda — Chief Financial Officer

Yes, I can — I can take that question. No, we’re not. We’re not seeing that and it’s not something we considered in terms of national brands. Of course, we’ve been selective on bringing in the right national brands that we think our customers are going to love that do well within Fix or within Freestyle, but we haven’t seen anything changed beyond that in terms of being approached for national brands top load inventory and really with our focus on exclusive brands and our Stitch Fix only brands, which is not only higher margin but it’s what our clients love.

We just feel there’s an opportunity to continue to invest in those areas. With respect to the question on inventory, we talked a little bit about summer, spring in Q4, we took — we took some inventory reserves to account for that. We feel that we’re in a very good spot in terms of what we’ve reserved for it. And we’ve also — as Elizabeth mentioned, we also have different avenues to focus on overstock inventory mainly limited-time offers and/or clearance events, whether at the end of the season, which we often do to help us clear out some of the inventory, excess inventory that we do have. So while we do have a high inventory, we watch it pretty closely. I’m not concerned about the health of the inventory at this point again. We looked at this in our Q4 and took the appropriate level of reserves and have since clearance a lot of that inventory out. Very focused on fall-winter right now which we’re just getting going into that season. And so, we’re watching how that does and again, as we expect inventory to come down sequentially over the next three quarters, we feel we’re in a good spot going forward.

Aneesha Sherman — Bernstein — Analyst

Okay. Thank you.

Operator

Thank you. And our final question comes from the line of Lamont Williams with Stifel.

Lamont Williams — Stifel — Analyst

Hi. Thank you for taking the question. Just — and pardon me if this was already answered. But on the Freestyle penetration, I believe you’ve talked about that being pretty consistent around 30% for women. Is that still the case today?

Elizabeth Spaulding — Chief Executive Officer

Hey, Lamont. Thanks for the question. Yeah, I think overall, we look at it across our base. But yeah, it’s kind of in that 25% range and it stayed pretty steady. I would say in terms of new client adoption and then holding steady there. We do have things on the horizon that we’ll be launching in the back half of the year like SMS encouraging were app downloads those things. We believe — we still believe there is opportunity for that to get higher but it stayed pretty stable I would say over the last several quarters.

Lamont Williams — Stifel — Analyst

Okay, thank you.

Operator

[Operator Closing Remarks]