Stitch Fix Inc (SFIX) Q2 2023 Earnings Call Transcript

Stitch Fix Inc (NASDAQ:SFIX) Q2 2023 Earnings Call dated Mar. 07, 2023.

Corporate Participants:

Hayden Blair — Investor Relations & Treasury

Katrina Lake — Interim Chief Executive Officer

Dan Jedda — Chief Financial Officer

Analysts:

Youssef Squali — Truist — Analyst

Garrett Klingshirn — BMO Capital Markets — Analyst

Amy Teske — Baird — Analyst

Ed Yruma — Piper Sandler — Analyst

Trevor Young — Barclays — Analyst

David Bellinger — Roth MKM — Analyst

Jesse Sobelson — Wells Fargo — Analyst

Blake Anderson — Jefferies — Analyst

Tom Nikic — Wedbush Securities — Analyst

Kunal Madhukar — UBS — Analyst

Janet Joseph Kloppenburg — JJK Research Associates — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Mark Mahaney — Evercore ISI — Analyst

Aneesha Sherman — Bernstein — Analyst

Noah Zatzkin — KeyBanc Capital Markets — Analyst

Presentation:

Operator

Good day and thank you for standing by. Welcome to the Second Quarter Fiscal Year 2023 Stitch Fix Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Hayden Blair.

Hayden Blair — Investor Relations & Treasury

Good afternoon, and thank you for joining us today to discuss the results for Stitch Fix’s second quarter of fiscal year 2023. Joining me on the call today are Katrina Lake, Interim CEO of Stitch Fix and Dan Jedda, CFO. Also joining us on today’s call is David Aufderhaar. We have posted complete second 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 sections 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 second 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 Katrina.

Katrina Lake — Interim Chief Executive Officer

Thanks, Hayden.

12 years ago, I was inspired by a very simple human problem, to help people look and feel their best. Now, as I find myself back as Interim CEO, this simple mission feels more resonant than ever. I’m proud of the ways that we’ve made our mission a reality, but also motivated by the opportunity ahead. We’re still in the early days of transforming the industry of apparel, and I feel optimistic that Stitch Fix can continue to lead the way in personalization and achieve greater impact in the years to come. While many companies may be starting to define an AI strategy, our company was built on data science from day one. We’ve built technology and systems that leverage the best elements of human stylists, combined with machine learning and the billions of proprietary data points that we have around client and product interactions, our rich meaningful datasets that predict outcomes and help us to understand what clients need.

At the same time, I realize we haven’t met recent expectations. Driving towards an ambitious vision has resulted in a loss of focus. We must, now more than ever, deliver on the client experience, bring focus in our marketing efforts, and drive results for our shareholders. We have clarity on our path long-term and short-term. Long-term, I continue to have great conviction that the market opportunity for a more personalized way to buy apparel is large and growing, and that we have a significant advantage rooted in our decade of experience, and leveraging data to deliver personalization at scale.

Shorter term, we also have clarity. We need to get back to a position of execution and profitability. We have a history of achieving both in the past, and I’m confident we will get there again. There were two major events in fiscal second quarter, intended to help reposition and refocus the Company, to set ourselves up to optimize for liquidity and profitability in the short term, and maximize our long-term growth potential.

First, we restructured our operating model, and made the difficult decision to reduce our headcount by 20% of salaried positions, and to set our operations in our Salt Lake City warehouse. Late last year, we began analyzing the team and determined to restructure the organization, in an effort to create a leaner operating model. This also allows us an opportunity to reorganize and refocus, to more nimbly execute. These decisions are never easy, but we know it was the right decision to achieve our goals of liquidity and profitability, and for the overall health of the business.

And second, we are conducting a search for a permanent CEO. The Board and I realized that the macroeconomic environment, competitive landscape, and even our own business has changed meaningfully over the past few years and we are excited to find the right leader for the present and future of Stitch Fix. I am encouraged by the process thus far, and I’m confident that we can find an inspiring person to lead the Stitch Fix team, and help reestablish the track record of results we were once known for.

In addition, we shared in our press release this afternoon that Dan Jedda will be stepping down as CFO to pursue a new opportunity. The Board and I want to thank Dan for his service to Stitch Fix, and wish him well for the future. David Aufderhaar, our SVP of Finance will succeed him as CFO. David joined us four years ago with an eye towards CFO succession, and working together these many years, I have been impressed and inspired by his depth of partnership with the functional leaders at Stitch Fix, his deep commitment to and understanding of our business and our team. He is a thoughtful and trusted leader, and I’m excited for him to step into the CFO role.

Now, onto the financials in the quarter. Fiscal second quarter revenue came in at $412.1 million, which was at the lower end of the provided range. Despite this, we delivered adjusted EBITDA of $3.8 million, which was at the high-end of our guidance range due to effective cost controls and our corporate restructuring. Dan will dive more into the financials later on, but before handing it over, I want to touch on topics in marketing and our product that demonstrate how the company is rallying around bringing focus and clarity, to better deliver results for our clients and shareholders.

Consistent with the broader company, our marketing strategy aims to preserve liquidity, and achieve profitability, while simultaneously attracting long-term customers to fuel a return to growth. This will be the case as we continue to refine our traditional paid channels, as well as diversify into under-penetrated channels we have yet to scale. We are also continuing to lean into client retention and reengagement strategies, in an effort to continue to increase engagement and optimize our CPAs. It’s worth highlighting that our CPAs were down over 40% from a year ago, which shows, despite a significant reduction in overall budget, we are gaining traction in more effectively deploying our marketing dollars. Overall, we know these are the right things to focus on, and when combined with our efforts to maximize the client experience, and improve retention, should maximize ROI in the short term, and set the stage for a return to growth.

Moving onto the client experience, a complicated macroeconomic environment, and tighter client wallet, make it more critical than ever to reexamine and bring focus to our client experience. The ambitious vision we embraced for the past many months, has resulted in a client experience that is less focused on our core areas of differentiation, and we believe that there is opportunity to drive long-term value, by being really deliberate and targeted about the role of features and functionalities in the Stitch Fix ecosystem. As an example, we’ve recently refined our point-of-view on Fix Preview. Although at the highest level, Fix Preview has demonstrated a positive impact on AOVs, digging into the data, we see a more nuanced story. There, absolutely. are clients who significantly benefit from Fix Preview, but there are also clients for whom showing a preview actually increases cancellations. Acting on this data, we found an opportunity to drive better outcomes and LTV by experimenting with eliminating the preview for some clients, allowing those clients to enjoy the surprise and delight that we know those clients value, while allowing other clients to benefit from the agency of Fix Preview. I share this example of letting data drive our decisions, and providing more intention and focus in the client experience. I anticipate, there are many similar opportunities as we dig into the data and the experience, and we believe these strategies will drive LTV, enabling us to optimize cash flow and profitability in the short-term, while positioning ourselves for an eventual return to growth.

Before I turn it over to Dan, I want to thank the entire team at Stitch Fix. We talk internally about celebrating Stitch Fix grit as one of our core operating tenet, and I’ve been inspired by the grit I’ve experienced day-in and day-out from the team these past few months. I continue to be inspired by the passion I see to deliver value for our clients, and our business, and to make our Company a fantastic place to work. Our continued focus and data-driven decision-making are paving the way for a bright future for Stitch Fix. I believe we are on the right track to get there, and I look-forward to continuing the journey with you all.

With that. I will turn it over to Dan.

Dan Jedda — Chief Financial Officer

Thank you, Katrina, and hello to everyone on the call. Before jumping in, I want to thank the Katrina and the Stitch Fix Board for this opportunity and congratulate David on his new role. David and I have enjoyed a positive and productive working relationship during my tenure, and I am confident, he is the right person to lead the team. David and I will be working together over the next several weeks to ensure orderly transition.

Onto our Q2 results. Q2 net revenue declined 20% year-over-year to $412.1 million, due to lower net active clients and higher promotional activity in the quarter. Net active clients in the quarter declined 11% year-over-year to approximately 3.6 million. As Katrina mentioned earlier, we have continued to diversify our marketing channel, while ensuring we realize positive near-term ROI on advertising spend. Total advertising spend in the quarter was 5% of net revenue, and down 46% year-over-year. We like the trends we are seeing in overall CPAs. Even with the lower spend in advertising, we did see positive year-over-year in gross client adds in men’s in Q2. And while women’s and kids gross adds were down year-over-year, our rates are improving in both lines of business. We do continue to see elevated levels of inactive clients, and continue to focus on improving this, with the right client experience.

We expect advertising to be 6% to 7% of net revenue for the rest of the year, so we’ll continue to be opportunistic if we experience the right ROIs and lean in where appropriate. Revenue per active client declined 6% year-over-year to $516. While our overall average order value is holding relatively steady year-over-year, similar to Q1, our analysis continues to show that all client cohorts are spending less than in prior years. We expect this trend to continue through the rest of FY ’23. Q2 gross margin came in at 41%, down 400 basis points year-over-year, driven primarily by lower product margins due to increased promotional activity, and higher product cost. Total transportation costs were also up year-over-year, due to increased carrier rates. Sequentially, gross margin was down approximately 100 basis-points from Q1, due mostly to increased promotional activity. We expect gross margins to be around 42% for the remainder of the fiscal year, and are actively focused on improving gross margins, as we see opportunities to improve product margin, transportation efficiency, and inventory efficiency overtime.

Q2 adjusted EBITDA came in at $3.8 million, reflecting our ongoing cost control efforts, including a reduction in force, and the closure of our Salt Lake City warehouse. The adjusted EBITDA excludes $34.7 million of restructuring and one-time costs. Net inventory ended the quarter at $159 million, down 28% [Phonetic] quarter-over quarter and down 13% [Phonetic] year-over-year. Free cash flow for the quarter was positive $15.4 million, our first quarter of positive free cash flow since Q1 of FY ’22, and we ended the quarter with $224 million in cash, cash equivalents and highly-rated securities. In summary on our cost structure, with the execution of our restructuring actions, and our reduced advertising levels, we have now executed against all the actions needed to realize $135 million of cost reduction targets for FY ’23. Additionally, we shipped our last Fix from the Salt Lake City distribution center, at the end of January, and we have distributed the inventory across the remaining fulfillment centers in our network. We will begin to see cost savings from the closure in Q4. Our goal remains to achieve positive adjusted EBITDA and free cash flow in the short term, while continuing to position ourselves for profitable growth in the future, and we believe we are well on our way to achieving these goals.

Now, on to our outlook. For the remainder of the fiscal year, we expect to continue to face a challenged and highly promotional operating environment. With that said, we are leaning into our areas of differentiation, and focusing on managing the things within our control. We will continue to responsibly manage our cost structure, with the goal of staying adjusted EBITDA and free cash flow positive for the remainder of the year. For our fiscal Q3, we anticipate revenue to be between $385 million and $395 million. We expect adjusted EBITDA for the quarter to be between negative $5 million and positive $5 million, largely reflecting increased seasonal advertising spend, as we continue into the spring-summer season where our CPAs are generally more efficient.

For the full year FY ’23, we now expect revenue to be between $1.625 billion and $1.645 billion. We expect adjusted EBITDA for the year to be between breakeven to positive $10 million. Going forward, we remain relentlessly focused on liquidity and profitability. The improvements we have made in our cost structure will allow us to invest in growth as we continue to focus on improving our client experience and over time, we expect the improved client experience will enable us to grow our net actives, revenue, and free cash flow.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Youssef Squali with Truist. You may proceed.

Youssef Squali — Truist — Analyst

Great, thank you very much. Hi guys, couple of questions. Good to hear from you, Katrina, again. So, the first question, maybe for Katrina, can you just speak at a high level about, how you see — I mean you talked earlier about you — on the one hand, you had a lot of focus, on the other you have clarity on the path forward. One, maybe can you just expand a little more about what — pinpoint the two or three areas where you felt Stitch Fix had lost its focus and then maybe kind of what gives you the confidence that you are back on the past that should ultimately get you to growth? And then, maybe can you double click a little bit on your EBITDA margin guide of negative $5 million to positive $5 million, and just help us how you get there? Obviously. I think you said gross margins should be around 42%, which really only leaves advertising and sales and marketing and G&A as the other components. So maybe, just provide a little more color on where you see those for the second half of the year. That would be very helpful. Thank you both.

Katrina Lake — Interim Chief Executive Officer

Great, thanks, Youssef. Good to be back. I’ll answer your first question and then I’ll have Dan weigh in on the second around EBITDA margin. On kind of the focus and clarity, I think, there is innumerable examples that I could bring. I think just at a very high level, as we thought about expanding the business in a very ambitious way, we took a marketing approach that probably tried to bring people into a variety of different customer segments, and very notably we spent marketing dollars trying to bring people into a Freestyle-first experience as an example. So that’s a place where, not only did we find that that marketing of Freestyle-first wasn’t as effective as what we have done historically in Fixes, but it also actually made it harder for us to be able to be acquiring people into the Fix channel. And so, that’s, I think one example of how that comes to light.

Another one is around inventory. We definitely built up an inventory in anticipation of a Freestyle customer that it’s a different set of inventory than Fixes and also more unknown. It was the customer we hadn’t served before. It was a channel we hadn’t served before. And so, there was more risk in the inventory and going forward, we can use our 10 plus years of historical data to really be able to buy with confidence on the inventory side, and that’s another good example of focus. And the customer experience as well, I mentioned. I mentioned us looking at Preview as an example and I think there are still other places where we can really kind of clean up the customer experience, so that we’re really maximizing value for the client and value for the shareholders at the same time.

In terms of confidence back to growth, I think, there’s a lot of places where, I think, all of those places are areas where on the inventory front, I think, we can feel confident looking at what we’re doing, going ahead from now. And on the marketing front, I think, we have near-term results that show that things are working. When Dan referenced that we saw customer acquisition costs down by 40% compared to last year, and to me that’s a great example of how focus is kind of creating value in the business today and I think we feel really confident that it’s creating value in the business long-term.

Dan, you want to talk about EBITDA?

Dan Jedda — Chief Financial Officer

Yeah, hi, Youssef. On the EBITDA guide, the negative $5 million to positive $5 million, again, I think we’ve provided, obviously, revenue and gross margin and we also provided that 6% to 7% advertising number for Q3. We’re going to be on the higher end of that 6% to 7% simply because as we enter our spring-summer season, it’s a very efficient quarter for us. We talked — Katrina talked about it and we’re very focused on the efficiencies within our marketing channel, and we just feel as we exited Q2 and go into Q3, we like what we’re seeing. And so, think of Q3 as the higher end of that 6% to 7%, that leaves us, of course, with SG&A excluding advertising on a run-rate basis — after our restructuring, that gets you to that negative $5 million to positive $5 million. Of course, if we’re not seeing the efficiencies, we won’t spend the advertising dollars. So, we feel pretty good about the guidance, and of course, the level of spend that we’re now targeting for advertising.

Youssef Squali — Truist — Analyst

And just to be clear, that $34 million that I think you mentioned in one-time restructuring costs and other that hit the SG&A expense line of $187 million in Q2?

Dan Jedda — Chief Financial Officer

It did.

Youssef Squali — Truist — Analyst

Okay, all right. That makes sense now. Thank you very much.

Operator

Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. You may proceed.

Garrett Klingshirn — BMO Capital Markets — Analyst

Hi. This is Garrett Klingshirn on for Simeon. Thanks for taking our question today. Just noticing in the press release, you guys noted going back to more of a stylist-focused approach. Is that kind of a de-emphasis maybe a little bit from kind of Freestyle because you just mentioned getting inventories right from within the Freestyle versus the Fix business, understanding how those are different. I’m just curious how you guys are thinking about that business going-forward, and how you’re planning your — kind of how to work around some of the challenges maybe you’ve had there.

Katrina Lake — Interim Chief Executive Officer

Yeah. Thanks, Garrett. It’s a good question. I think what we’re — there’s no question that Freestyle add value in ways that Fixes didn’t. And so, I think the most clear way that we think about that is, looking at the assortment data and we’ve shared in calls historically that we’re seeing a different assortment being bought in Freestyle than Fixes were seeing more outerwear, shoes, accessories.

And so, that says to us that this is helping to fill a different need for our clients. That being said, as I mentioned in the last question, I think using Freestyle, the customer acquisition vehicle as an example, that was less effective. And so, what we’re really trying to do is to say where are our areas of differentiation and personalization and styling are really at the core of that, especially if you think about our kind of competitive positioning relative to other, those are spaces that we really uniquely own. And so, as we think about what is the customer experience that that delivers against personalization, against styling, I think, Freestyle can be a component of that, but we’re probably thinking of it more as one ecosystem that has a more clear customer journey, rather than thinking of it as kind of separate business unit.

Garrett Klingshirn — BMO Capital Markets — Analyst

Great, appreciate that. And just as a quick follow-up, I’m just looking at the 42% guidance for gross margins the remainder of the year. And Dan, your comments on how the difference from 1Q to 2Q was about 100 bps of markdown pressure. Are you guys seeing kind of a return to markdown levels where you were going back a few quarters? I’m just curious how you’re planning about markdown pressure for kind of the back-half of the year and kind of what you’re seeing more broadly, within your customers and their ability and their willingness to shop on kind of more of a full-price level compared to kind of a discounted one.

Dan Jedda — Chief Financial Officer

Yeah, the way we approach — we’ve talked about this in the past and thanks for the question. The way we’ve approached markdown is really focused on where we think we have excess or the wrong inventory and using our Freestyle channel to move that inventory and we’ve seen success in that as opposed to the option of selling it out to a third-party liquidator. And so, we’ve seen success in that, and we will continue to utilize that. Although, as you can see from our inventory levels now, we’ve come down considerably and we feel we’ve rightsized our inventory. We feel very good about the inventory position that we’re in now, in terms of total dollars. We still have some buckets to work through. And so, we are using the Freestyle channel for that. In the Fix channels, we are not discounting a lot. We simply aren’t doing that. Clients love what the — the styling service that we give them and we have not seen the need to discount in the Fix business and we don’t anticipate doing that going forward.

Garrett Klingshirn — BMO Capital Markets — Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Mark Altschwager with Baird. You may proceed.

Amy Teske — Baird — Analyst

Hi. This is Amy Teske on for Mark. Thanks for taking our question. On the inventory point, as you work down inventory and pull back on your receipts, what is your level of comfort that you now have the right type of inventory. So, how do you think about the competition of your inventory between casual and dress styles and product categories? Thank you.

Dan Jedda — Chief Financial Officer

Yeah, I’ll take that one. That’s a great question, Amy, and thanks for asking it. First of all, we had talked about inventory in our Q4, again, in our Q1 results, and how we had a lot of inventory and we simply needed to work it down and we’ve done that and a lot of that, of course, was getting rid of excess inventory and or the wrong styles, or brands of inventory. We’re in a much better position now as I mentioned. We still have a little bit of work to do on the inventory that is going to be short term, and that’s included in our guidance going forward, but we feel really good about the brands that we’re targeting with a big focus on our exclusive brands, which are trending very well for us. And in fact, I’ll just share that we did notice in January where we were soft on some of our exclusive brands. Our customers told us they wanted that and we quickly pivoted and where we were short on inventory, we chased back into it, and that’s a great sign for us that our customers love our exclusive and our Stitch Fix only brands that we’re selling. And so, we’re going to continue to focus on that in the very near-term, as we get into spring-summer, and then as we get back into fall-winter a year from now.

Operator

Thank you. Our next question comes from Ed Yruma with Piper Sandler. You may proceed.

Ed Yruma — Piper Sandler — Analyst

Hey, thanks so much for taking my question, and welcome back, Kat. I guess, just a bigger picture question, you guys are really known for personalization, you’ve talked about this a lot today. Can you talk about competitive gaps? Do you think that your competitors have gotten better since [Technical Issues]. Maybe, Kat, do you you have any observations of things that have changed adversely that [Indecipherable] looking to rectify quickly. Appreciate that. Thank you.

Katrina Lake — Interim Chief Executive Officer

Thank you, Ed. I think I got your question here. So in terms of just more of the competitive gap, honestly, I feel really strong about our capabilities and we’ve been able to be in this business for 10 plus years with a history of profitability, with a history of being able to deliver cash flows and there’s not a lot in the competitive set that are able to claim the same thing. So, the focus that we’ve had around data science, the focus that we’ve had around personal basis, I strongly believe that we continue to lead on that front and I feel just as good, if not better, about that coming back into the role.

In terms of things that — I think your question was more just like what has adversely changed I think. I spoke to it on the call, but I really do think it’s focus. I do think hindsight is 2020 and I think we had some really ambitious vision that we were chasing after and with kind of chasing an ambitious big vision came with kind of reduction of focus on what I would consider our core differentiators, which are really around personalization and the styling. And so, I think a lot of what we’ve been talking about internally is just, how can we make sure that everything that we are doing with our valuable resources and time are really focusing against delivering that for our clients, and ultimately our shareholders of being able to deliver an experience that feels personalized for all of our clients, and making sure that everything that we invest in achieves that goal.

Ed Yruma — Piper Sandler — Analyst

Thank you.

Katrina Lake — Interim Chief Executive Officer

Thanks, Ed.

Operator

Thank you. Our next question comes from Trevor Young with Barclays. You may proceed.

Trevor Young — Barclays — Analyst

Great, thanks. First one, Katrina, just on the testing of discontinuing the Fix Preview. Are you getting any sort of signal that keep rates are routing in those circumstances? And then more broadly, big picture, do you feel like the cost base is in a good place now to set the stage for a recovery in some future quarter after we go through kind of the reset on core Fixes here, or is there some work to be done and maybe even some reinvestment to be done on the tech side to get that into a better place? Just any thoughts on that would be appreciated.

Katrina Lake — Interim Chief Executive Officer

Great, thanks. Thanks for the question, Trevor. I’ll take the first one and have Dan talk more about the cost basis. On Fix Preview, I mean, one-way to really think about it is to try to maximize the ROI and LTV at the given cohort. And so, as we do some segmentation, we can see at a high level that overall we saw AOVs go up with the ability to have access to Fix Preview, but once you dig in, there’s going to be some cohorts where we see people more likely to cancel when they see a Fix Preview. And so, what we were really trying to optimize for are those LTVs. And so, I think — what we’re able to do is to fine-tune, I guess, a little bit more in a more personalized level of where we’re going to be deploying Fix Preview to be able to maintain that benefit that you mentioned to keep rate and AOV for the populations for whom we know that that will occur, while at the same time, reducing cancellations and making sure that we are retaining and engaging clients best in all of our cohorts by eliminating Fix Preview from those who we don’t think will benefit from it.

And I’d say also from a customer survey perspective, like, one of the things that we hear is that one of the real benefits of Stitch Fix is surprise and delight. And so, to be able to — for some clients, you can think of it as a lack of agency, but you can also think of it is actually allowing people to have that surprise and delight. Somebody said to me which I love this quote of like, as an adult, you just don’t get a whole lot of good surprises in your life and Stitch Fix can be one of those and so we know that clients who really, really value that, and actually being able to continue and maintain that for those clients is valuable and LTV positive for those clients.

Dan, you want to answer the question on the cost basis?

Dan Jedda — Chief Financial Officer

Yeah, on the total cost, when you look at where we ended Q2 and adjusted for restructuring, we’re back to fiscal 2019 SG&A excluding SBC, and we feel very good about that. Going forward, and there is still more efficiencies to have. In my prepared remarks, you heard us talk about gross margin and the opportunities that we see there. There is also — there’s further opportunity on our footprint to better monetize that as we reduce our corporate office space. We have variable efficiency projects that are ongoing. So yes, I feel the cost structure is in very good place, and I think there’s tremendous opportunity to improve it going-forward. So, we’re in a good place from a cost standpoint and a liquidity standpoint.

Trevor Young — Barclays — Analyst

Great. Thank you both, and best of luck, Dan.

Dan Jedda — Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from David Bellinger with Roth MKM. You may proceed.

David Bellinger — Roth MKM — Analyst

Hey, everyone. Thanks for the question. On the cost for acquisition being down 40% in the quarter, how much of that is internally driven through some type of channel mix shift and the ROI where that’s getting better versus some of, call it, the external factors that play within the broader apparel category?

Katrina Lake — Interim Chief Executive Officer

Yeah. Thanks for the question, David. I can start and might benefit from some of Dan’s weighing in here. But I think honestly a lot of that is really more from perspective of focus. And so, if you think about where we were last year, we were doing more Freestyle-first marketing. We were driving people toward immediate purchase experience instead of driving people into styling experience through Fixes and just very simply put that that Freestyle-first marketing was not as efficient as our core Fix experience. And so, I think just to be able to have the marketing messages, be more clear around the benefits of personalization and styling, and to be really focused on driving people through one channels of conversion, has been driving that efficiency. We definitely are always looking at diversifying our channels. And so, we had our tried and true channels that we know perform and those have performed well as you’ve kind of heard in the numbers, and at the same time, we’re always experimenting to make sure that we’re getting all the emerging channels, and to make sure that we’re kind of exercising that muscle of acquiring and converting clients in all the new places that we see our clients kind of spending time.

I don’t know, Dan, if you have anything to add to that.

Dan Jedda — Chief Financial Officer

Yeah. First of all, I 100% agree with what Katrina said and I think I would simply add that part of the experiences where we really hardened the funnel really helped with conversion of traffic and therefore the efficiency of the marketing spend in addition to just being very focused on the next dollar spent within the channels and is that an efficient spend and I think the marketing team has done a tremendously good job of diversifying the channels, but then focusing on the efficiency and making sure we’re bringing in the right clients which we feel very good about and I think we’ve talked about that in the earlier remarks.

David Bellinger — Roth MKM — Analyst

Great, thanks for that. And just one other follow-up. I think you mentioned some type of chasing inventory. It sounds like you’re more comfortable with the assortment. So, what’s the next step, if we think bigger picture here in getting your core customer back and spending, again? Is there some type of refresh needed on top of that on the inventory side, or is there more of a technology connectivity issue you need with your core customer to get them back again?

Katrina Lake — Interim Chief Executive Officer

Yeah. I mean, I can take that. I think to be clear, like, we are seeing — we’re seeing that customer perform in a pretty healthy way. I mean, we’re seeing our AOVs be pretty consistent on the inventory side. It’s, of course, been gradual over the last few months of kind of evolving into the inventory mix that we want, but we feel really good about where we are on an inventory perspective. That being said, there’s definitely opportunity. I think we see — Dan mentioned, we’re seeing some cohort weakness. There’s no question, there’s some macro headwind, but I’m not willing to accept that it’s all macro. I think there are still opportunities for us to improve the customer journey, for us to improve the ways that we’re serving our clients, so that they can have the best possible experience that then leads to LTV, leads to shareholder value. And so, I definitely still think that there’s a lot of opportunity, but as we kind of dig in and look at how are Fixes doing, how are people feeling in their actual transactions, we’re actually seeing goodness there and I think it’s on us now to be able to deliver more goodness to the rest of the customer experience.

David Bellinger — Roth MKM — Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Ike Boruchow with Wells Fargo. You may proceed.

Jesse Sobelson — Wells Fargo — Analyst

Hi, everyone. This is Jesse Sobelson on for Ike. It looks like takedown inventory was a major source of cash this quarter. So, on the liquidity front, I’m just curious, how much cash do you guys need to run the business, and what should investors expect regarding cash-flow generation throughout the rest of the year?

Dan Jedda — Chief Financial Officer

Yeah, thanks for the question. And so, yes, we did have a source of cash come from our inventory position, which we implied was going to happen last quarter as we brought our inventory down and on a go-forward — how much cash do we need to run the position. From a liquidity standpoint, we’re in a very good position. We have $323 million — $223 million of cash, cash equivalents, and we have a credit facility, which we don’t plan to use. And so going-forward, as we guided to a positive H2 adjusted EBITDA, we talked about EBITDA as a great proxy for cash flow for us, simply because we do not have a lot of capex and we do not anticipate a lot of capex spend over the next several quarters. And so, we feel that both our EBITDA and cash flow are trending positive for H2, and we’ll give more guidance on FY ’24 at a later date. But overall, we feel very good about the liquidity position that we’re in and the cash-flow that we’ve generated in both Q2 and for H2 as we go forward.

Jesse Sobelson — Wells Fargo — Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Blake Anderson with Jefferies. You may proceed.

Blake Anderson — Jefferies — Analyst

Hi, thanks for taking our question. Wanted to revisit the Freestyle topic and how the tone has seem to maybe change a little bit on that. This is more of a philosophical one, but should we expect any strategic changes to that business before a new CEO is announced? Just wondering, Katrina, how much influence we could have on that business in the short term. Thank you.

Katrina Lake — Interim Chief Executive Officer

Yeah, thanks, Blake, for the question. I mean we’re always evolving the experience. And so at a very-high level, I really don’t see a big foundational shift in the strategy. I think this strategy of focusing on personalization, and focusing on styling, and focusing on the areas that we know are valuable areas of differentiation for our client, I think, it’s hard to imagine that we would deviate from that. That being said, like, we are always doing experiments, we’re always doing A/B tests to better understand what are we doing, what can we be doing differently or better in order to optimize that client journey, to drive LTV, to drive value for our clients, to drive profitability and long-term growth. And so, we’re always making changes and so, hopefully, what I can say, it’s like, you can probably exchange — expect to see some small changes in terms of the way that the customer journey evolves over time, but, I honestly, I wouldn’t see them as fundamental big changes. I think we know that Freestyle adds value. We know that — we know which ways in it should add value. And so, really, it’s about how do we make sure to tailor and target the right customer experience so that clients are getting the most value out of their experience with Stitch Fix and thus we are getting the most out of clients that we acquire.

Blake Anderson — Jefferies — Analyst

That’s helpful. Thank you. And maybe I missed it, but did you talk about kind of trends by month throughout the quarter, and any commentary you guys can provide on the quarter-to-date just especially how the budget shopper is holding up? Thanks so much.

Dan Jedda — Chief Financial Officer

Yeah, I can take that. So the — we did not provide trends by quarter for our Q2. I will say that February has largely been as expected for us. We are — again the guidance that we gave, of course, takes into account five weeks of February, and we’re not seeing anything that is out-of-the ordinary, where we’ve seen a change in trajectory to the negative. So, we continue to see our keep rates trending positively. There might be some frequency with the cohorts analysis that we talked about for Q2 to see that trend continue. We haven’t looked at that yet for Q3, but we will, but no real trend update, beyond what we’ve provided in — for the guidance for Q3 and the commentary we gave on Q2.

Blake Anderson — Jefferies — Analyst

Great, thank you. Best of luck.

Katrina Lake — Interim Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Tom Nikic with Wedbush Securities. You may proceed.

Tom Nikic — Wedbush Securities — Analyst

Hey, thanks for taking my question. Dan, quick one for you. Sorry if I missed this. Did you actually say what the marketing expense was in Q2 as either in dollars or as a percentage of revenue?

Dan Jedda — Chief Financial Officer

We did. 5%.

Tom Nikic — Wedbush Securities — Analyst

Got it. Okay. Thanks. And Kat, welcome back to the CEO role in an interim basis, but when we think about the permanent CEO role or the successor, what are you looking for? What skill sets are you looking for? Optimally, who is — what attributes would your ideal candidate have for the permeant CEO seat? Thanks.

Katrina Lake — Interim Chief Executive Officer

Yeah, thanks, Tom. Yeah, so we’ve kicked off a search. We’ve engaged with a search firm and we’ve been having conversations with candidates — quite a few conversations candidate and overall, I feel excited and optimistic about kind of the quality of people that we’re meeting. At the highest level or very simply, like, I really do think it’s having a history of delivering results, of executing a business that — our business is fairly complex. And so, I think, somebody who has had experience in a business that have similar complexity to ours, and have a kind of history of delivering results is, of course, first and foremost important. And then relatedly, we have a large — we have a large company that has a lot of people in different types of roles. And so, that leadership and someone who has a natural leadership and somebody who is going to be able to be successful in leading a diverse organization is really important. And so, at the highest-level, I think those are two things that we’re really looking for, but we’ve talked and we’ve had a lot of conversations, we have a lot of candidates who have first-hand experience with Stitch Fix who know the business well and feel really connected to the business and the customer. And I think we’re excited about the people we’re meeting, so, optimistic.

Tom Nikic — Wedbush Securities — Analyst

Good. Thanks, Kat. Best of luck in the CEO search, and with the business the rest of the fiscal year.

Katrina Lake — Interim Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Kunal Madhukar with UBS. You may proceed.

Kunal Madhukar — UBS — Analyst

All right, thanks for taking the question. One more housekeeping, and then one more longer-term. So, on the housekeeping side, can you help us understand the LTM active clients has been down — has been declining for the past five quarters now. How should we kind of think of the trend for LTM active clients going forward? And then, Katrina, you talked about the eventual return to growth and you also talked about having a lot of — lot more visibility on the business. So can you help us understand, in your mind, how you’re thinking of growth going into 2024 and maybe into 2025, when are we going to get to growth? And part of the reason is, in fiscal 4Q of this year, that is going to be a 14-week period rather than a 13, so the guide does not inspire a lot of confidence. Thank you.

Dan Jedda — Chief Financial Officer

So, I’ll take the RPAC question. RPAC is a trailing metric, it’s a trailing 12-month metric on actives. And so, there is a lot of math that goes into the mix of RPAC. And so — and I know your models take into account RPAC, but I think the best way we can say that is while we are seeing some cohort degradation in terms of spend which will impact RPAC, mix is a bigger impact of RPAC, mix of the tenure of our clients. We’ve mentioned in the past that our older clients spend less, our newer clients spend more as their closets get filled up. And so, we’ll continue to talk about RPAC from an actual basis, but we’re not guiding to future RPAC.

That being said. I think it’s safe to say that where we might see some cohort degradation on spend and some mix, we’re not expecting big reductions in RPAC on a go-forward basis. We will probably see some of that because of the spend in cohort on a year-over-year, but we don’t think it’s going to be material. Our clients do continue to spend with us, they do continue to stay with us. The newer clients that we’re bringing in, as we look at them, our cash flow positive clients that we talked about the near-term ROI, all that will have the effect eventually of stabilizing that RPAC, and then ultimately bringing it up, but that’s going to happen over time.

Operator

Thank you.

Dan Jedda — Chief Financial Officer

Sorry, I think we want to get to the second…

Katrina Lake — Interim Chief Executive Officer

So the part two is more around like how am I thinking about the eventual return to growth. Is that? Okay. I think — I mean, Dan mentioned — I totally agree with everything that Dan mentioned and I would just also that in our business, so much of our business is serving clients that are returning, and that’s a great part of our business. We generate a lot of revenue from our existing customer base. And so, all of the benefits that we — all the things that we are able to do to be able to make that client more valuable, and so all the ways in which we can reengage that client, all the ways in which we can offer those clients reasons to come back also add. And so, we’re always thinking about new clients, we’re also thinking about how do we make sure that our existing base is healthy. And, I think we’ve seen some positive signals that we’ve been excited about and feel really confident that we’re doing the right things, and the things we need to be doing right now.

Operator

Thank you. Our next question comes from Janet Joseph Kloppenburg with JJK Research Associates. You may proceed.

Janet Joseph Kloppenburg — JJK Research Associates — Analyst

Hi, Katrina. Hi, Dan. I just wanted to follow-up on that question is, it seems to me that, and please correct me, where I am wrong, that you’re going to be spending your investment will — spending will shift to a higher degree of investing in Fix and low degree in Freestyle, and that should drive up your active customer participation and your sales. I think that’s what you’re saying, and that you’ll use Freestyle to some extent as a liquidation channel for Fix, but your investment spending will go back towards the personalization Fix business and that that should help to improve the EBITDA performance of the Company as well. And does it mean that maybe the advertising rates can stay below 7%, 8% as we as we go forward, or is that something that needs to be tested and refined? Thank you.

Katrina Lake — Interim Chief Executive Officer

So, I can answer at a high level, and then Dan can kind of weigh-in on more of the specifics, but — I mean I think at a high level, the way to think about it is that that we are really focusing the business around personalization and styling. And yes, Fix is a very big part of that and having a more focused messaging from a marketing perspective helps us to drive marketing efficiency, having a more focus point-of-view around who the client is. I think one of the challenges with trying to acquire Freestyle-first clients was that we were definitely deviating from our historical client and trying to kind of — trying to have many different messages and to actually have an assortment to back that. And so, simplifying on the inventory side also delivers efficiency. And Freestyle definitely still has a role to play in order to be able to help our client to fill in their closet, to be able to engage in between Fixes. And so, we definitely are going to continue to have — to be thinking about how does retail add value to that client experience, but I would say that the investing is more around thinking more holistically around what is the Fix — what is the Stitch Fix ecosystem, and how do all these pieces fill in together in order to drive the best LTV and experience for our clients, but then also, of course, delivering results for our shareholders. So maybe I’ll — and Dan, you want to talk a little bit about the marketing side?

Dan Jedda — Chief Financial Officer

Yeah, on the marketing side, again, Katrina mentioned we’re not marketing a Freestyle-first experience which we had done in the past. That, along with a lot of the product — the client experience improvements we have made, just hasn’t allowed us to focus on that Fix-first client in a very efficient way. And so, well, the advertising drop year-over-year seems large. When you look at the clients that we’re bringing in, we’re seeing very efficient spend, and that was the point when we talked about men’s actually being up on a gross adds basis and women’s and kids’ improving — while still down year-over-year, improving from current trends. That’s with that 46% reduction in marketing and advertising. So, we do anticipate to stay on this trend of lower advertising spend, but focusing on the right client, the Fix-first client and then having Freestyle be a very important incremental opportunity once the client is in the door and engaged in the Fix business. It still is a material part of our business and will continue to be Freestyle that [Phonetic].

Janet Joseph Kloppenburg — JJK Research Associates — Analyst

Thank you both so much.

Operator

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed.

Dana Telsey — Telsey Advisory Group — Analyst

Hi, good afternoon, everyone. Kat, welcome back for the interim period. As you think about the near term and the long term, on the near term, how are you thinking about the core customer? What they’re spending on pricing? How you’re thinking of brands, and how do you think about the differentiation between the Freestyle and the Fix in terms of whether it’s AUR or captivating the customer? And then on the long term, obviously, new processes, it sounds like, are being put in place right now. What do you see as the most incremental driver to return to growth under the hood in terms of operations or logistics or processes? Thank you.

Katrina Lake — Interim Chief Executive Officer

Thanks, Dana. Let’s see. So, on the first part, as we think about like kind of what are we seeing on the customer side, we actually are seeing — we’re seeing AOVs hold pretty strong. We’re seeing AURs hold pretty strong. I think in terms of what the customer is looking for, I think, what’s really differentiated about our channel relative to others, it’s not necessarily price, it’s not necessarily a kind of finding the brand that you love. It is actually around fit. It’s about fit, it’s about style, it’s about finding things that you love, and in some cases finding things that you love that are surprising to you. And that’s something that really only our channel can deliver on. And so, that’s kind of how we’re thinking about who the core customer is. And good news is, I think, there’s a lot of that core customer. There’s some data that we had that most men and even half of women would characterize themselves as not loving to shop and there’s not a lot of other retailers that are focusing on that customer, and Stitch Fix is one that really makes shopping more tenable, and makes it easier. It helps people to look their best without spending a lot of effort to do it. And those are really differentiating qualities in our customer that we can build the right assortment to be able to deliver on.

In terms of what’s most influential under the hood, I mean, that’s a good question, but I mean really for me, I think, the broad umbrella of it really is focus, and it really is around focusing those marketing messages, focusing that conversion funnel, focusing on the inventory side, I think, just really being able to focus on the things that we already know that we are able to deliver on that we have a business that’s 10 plus years old, that have a history of profitability, delivering on this business, to be able to focus back on the things that we know and know that we can deliver, is kind of the core thesis. And I would say, rather than having one big thing, it’s probably a lot of little things like the ones that I mentioned around marketing and inventory and I shouldn’t call them little things. They’re really meaningful and I think you can see that in the marketing numbers that we shared, but I feel optimistic by kind of what we’ve been able to see as we dig into the business and excited to be able to deliver more in the quarters to come.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

Thank you. Our next question comes from Mark Mahaney with Evercore ISI. You may proceed.

Mark Mahaney — Evercore ISI — Analyst

Okay. Thanks. Two questions, please. Katrina, you talked about marketing diversification into newer channels that have yet to scale. Can you provide a little color on what those newer channels could be? And then secondly, I was wondering if I could just get your comment on sort of macro trends. I realize there’s a lot of other factors going right here. You’ve got year-over-year revenue declines pretty consistent in Q1, Q2, Q3 and Q4. So my sense is that maybe overall macro trends are soft, but kind of consistently soft or kind of riding along at the bottom, but can you just comment on whether you think macro trends in the — consumer macro — consumer demand trends are at the margins further softening, stabilizing, or possibly recovering and I know there’s a lot of other factors going on, but I was wondering if you would just address that question? Thank you.

Katrina Lake — Interim Chief Executive Officer

Great. Thanks, Mark. So, firstly on marketing diversification, I think, it’s probably some of the obvious, but we’ve done some experimenting with TikTok that, I think, has some promise. We’ve done some experimenting in YouTube and trying to think about how does YouTube fit into kind of our overall conversion funnel, and then actually return to organic is definitely a big place too. I think we’ve seen, being able to use influencers, both, I think, well-known influencers, but also more of what you would call like micro influencers, the effective, and that’s definitely been a part of the history at Stitch Fix is some of the very early years of growth of Stitch Fix were driven by that kind of at the time was more bloggers, but more of those micro influencer categories. And so, that’s another place that we’re making sure we rebuild the muscle.

And in terms of macro, I mean, I wish I had a crystal ball and that I could tell you what’s happening. From what’s happening in our business, we see AUR and AOV actually be pretty stable. And so, I think, the places where we would expect to see macro headwinds would be probably around more conversion and customer acquisition. We’ve seen some success there as we shared in this last quarter, but I think that’s a place that you could anticipate that we — that there could be some headwinds. And then, I think — and the other places is probably around just longer term like Fix frequency or purchase frequency and I think Dan shared that we had — we’ve seen some softer cohorts and I think we do believe that some of that is macro, but as I said, I’m not willing to accept that it’s all macro. I do think that there are things that we can be doing better, to be able to deliver on a better client experience that delivers more LTVs. And so — I don’t know Dan, if you have any quantification to add, but I wish I could give you a solid answer on what to expect.

Dan Jedda — Chief Financial Officer

I don’t have anything to add. I completely agree with all of that, specifically, on some of the macro, we talked about how we like the trends we’re seeing on gross adds, on the improvement. I think that’s a positive, but we are still seeing some elevated inactives and that’s something that we’re very focused on fixing with improvements in the client experience, and we do believe a lot of that, of course, is macro related.

Mark Mahaney — Evercore ISI — Analyst

Okay, thanks, Katrina. Thanks, Dan.

Dan Jedda — Chief Financial Officer

Thanks, Mark.

Operator

Thank you. Our next question comes from Aneesha Sherman with Bernstein. You may proceed.

Aneesha Sherman — Bernstein — Analyst

Yeah, thank you for taking my question. So, continuing on the theme of the macro and the consumer demand behavior trend, last quarter you talked about the consumer being more judicious with their spending and frequency declines. It sounds like you’ve seen that again. Is the mix shift or higher demand for owned brands over national brands, do you think that is part of it, do you think that — are you seeing the consumer sort of trade down a little bit to lower price points, rather than the national brand? And if so, how does that or does that change your national brand strategy that you’ve been talking about for the last few quarters on increasing your mix of national brands? And can you also talk about how that impacts gross margins because I understand that your own brands are more profitable? Does that change your margin mix kind of looking into next year? Thanks.

Katrina Lake — Interim Chief Executive Officer

Great. It’s a great question, Anita [Phonetic]. I’ll answer the first part and I know Dan is chomping at the bit to answer the gross margin part, but yeah, I mean I don’t know if I would say that it’s necessarily mix shift that’s driven by macro, but I would say, like, historically it’s very interesting in our channel. Historically, national brands do not perform very well in Fixes. And I do think Fixes are a place where you — the apparel is kind of the most stripped down version of itself, and people are really looking at those Fixes to say, is this my style, does this fit me well, and brand is like a very tertiary kind of consideration beyond those. And so historically, we’ve actually not seen national brands perform very well in Fixes, and so a lot of the intention around bringing national brands into the portfolio recently has been to support a better Freestyle experience. And so, as we — I think candidly like those brands haven’t performed as well in the Freestyle experience, although better than in the Fix experience, but we — I think longer-term, the national brands will probably be a smaller part of our portfolio going forward is the way that they were historically with Fixes. I would actually really position that as a positive of being really a testament to our personalization and at the end of the day, like, even if it’s not a brand that somebody recognizes, if you’re delivering jeans that fit someone, someone’s going to buy that.

So, Dan can speak more to that on the gross margin side.

Dan Jedda — Chief Financial Officer

Yeah, just a follow-on to your second point on that question what Kat is saying this idea that we are going to be focused more on our exclusive brands and be tighter with national brands having less of that. That will, of course — we think it’s the right client experience. And also, what that does is, of course, lead to higher margins, simply because the private label and exclusive brands have higher product margins. When I mentioned earlier in the call that we see opportunity in gross margin, the first comment I made was in product margins. That is the big driver of product margins. So, as we get tighter with that, we do expect margins to positively impact margins. We do have some national brands inventory that we’re still working through, although, it’s not a huge number and we’ll get through that and we feel very good of the impact. Our focus will be on product margins. It will also have the impact of making inventory more efficient which is a huge positive to cash flow. So, we feel good about that strategy and how it will impact the financials.

Operator

Thank you. Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. You may proceed.

Noah Zatzkin — KeyBanc Capital Markets — Analyst

All right, thanks for taking my question. Kind of along the lines of the macro question, but maybe I’ll ask it slightly differently. With Stitch Fix traditionally being a full price business, how would you frame are or how do you think about parsing out the impact of the broader promotional environment in apparel and what that’s had on Stitch Fix over the last couple of quarters? And with others in this space talking about inventory beginning to be rightsized or at least having line of sight to more rightsized inventory positions, how are you thinking about potential upside in the model, should the promotional environment begin to normalize over the next couple of quarters? Thanks.

Katrina Lake — Interim Chief Executive Officer

Thanks, Noah. Yeah, it’s a good question. I mean Stitch Fix has been, I would say, kind of oddly resilient to promotional periods and I think we see some marginal impact, but not really as much as you’d expect, and what we see is, in the Fix experience, like, first of all, I don’t think people are coming to Stitch Fix in order to find a deal. That’s not the primary intention. Of course, we need to do rightsize all the time. There is no question about that, but would say that people aren’t coming to our channel in order to get a deal. So, what that means is, people actually coming to our channel because they want clothes that fit them, because they want to refresh their wardrobe, because they want things that are their style. And so, as a result, I would say that we see, like, our AOVs and AURs have kind of held pretty strong. And so, I would say that we see, maybe less of what you would expect in terms of like the highly promotional environment right now, but I would say my hypothesis is that it probably impacts conversion more where they’re probably going to be fewer people that, as they’re looking at their budgets, and as they’re looking at where are they going to spend fewer dollars that they might have in a bank account, that, like refreshing a wardrobe might not be as high a priority as it might have been 10 months ago. And so, I would say our hypothesis is that our existing clients that are in the ecosystem are relatively stable. Like, I think there’s probably the headwind a little bit on the customer acquisition side that hopefully, as things let up, and as we see things turn up the other way, that will alleviate and make things easier for us, but I would say that it’s a little bit of a unique proposition within Stitch Fix that’s not a perfect analogy to the promotional environment that you see outside of our ecosystem.

Dan Jedda — Chief Financial Officer

I’ll take the second part of that question, which I believe was the question on inventory and I hope I’m answering — I hope I’m interpreting that correctly, but from the standpoint of where we see inventory going forward related to the macro and what we’re seeing in our focus on our exclusive brands, we do expect our inventory to be more efficient. When you look at the way we report turns externally, we’ve been as high as 6 turns in the past, and while that was pre-Freestyle, we do believe that we are going to see improved efficiency in the back-half of this year, simply because we’ve taken our inventory down as we ended Q2, and we do not expect significant changes, for it to increase. It may ebb and flow a little bit quarter-to-quarter, but we feel very good about the inventory efficiency and we expect on a net inventory basis to be back about 4 turns in H2.

Noah Zatzkin — KeyBanc Capital Markets — Analyst

Thank you.

Operator

[Operator Closing Remarks]