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Stitch Fix, Inc. (NASDAQ:SFIX)
Q4 2018 Earnings Conference Call
October 1, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Stitch Fix fourth quarter 2018 today earnings conference call. Today's conference is being recorded. At this time, I'd like to turn things over to Mr. David Pearce. Please go ahead, sir.

David Pearce -- Head of Strategic Finance and Investor Relations

Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year for 2018. Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix, Paul Yee, our CFO, and Mike Smith, our COO. We have posted complete Q4 and full fiscal year financial results in our shareholder letter in the IR section of our website, investors.stitchfix.com. A link to the webcast of today's conference call can also be found on our site.

We would also like to remind everyone that we will be making forward-looking statements on this call which involved 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.

Also, note that the forward-looking statements on this calla re 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 shareholder letter on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website. A replay of this call will be available on our website shortly.

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

Katrina Lake -- Founder and Chief Executive Officer

Thanks, David. Thank you for joining us. After the market closed today, we issued our quarterly shareholder letter with more details on our results, which I encourage you to read. I'll take a moment to highlight our results from the fourth quarter and full fiscal year and discuss how we are executing against our strategic roadmap.

In the fourth quarter, we delivered net revenue at the high end of our guidance range and adjusted EBITDA that exceeded our guidance for the quarter. We grew our active client count to 2.7 million as of July 28th, 2018, an increase of 548,000 and 25% year over year. We generated net revenue of $318 million, representing 23% year-over-year growth.

In Q4, we generated $18.3 million in net income and $11.1 million in adjusted EBITDA. These results demonstrate our continued focus on delivering disciplined growth while making significant investments in future categories and capabilities.

Stitch Fix is transforming the way people find what they love, one client at a time and one fix at a time. We're proud of what we've accomplished in our first year as a public company and the momentum we've built as we enter fiscal year 2019. We are excited about the growth opportunities ahead. In the last year, we've delivered over $1.2 billion in net revenue, reflecting 26% growth year-over-year, while generating approximately $45 million in net income and $54 million in adjusted EBITDA.

During this period, we also expanded our total addressable market, with our July launch of Stitch Fix Kids and introduced new innovations to our core services through efforts such as Style Pass and Extras, adding flexibility and enabling us to further personalize our offering.

The capital efficiency of our model enabled us to make these investments, while also generating $56 million in free cashflow in the year and end fiscal year 2018 with a cash balance of approximately $300 million and no debt.

In past quarters, we've discussed three growth pillars that serve as the foundation for our strategic roadmap. Firstly, expanding relationships with existing clients, secondly, acquiring new clients, and thirdly, growing our addressable market. Today, I'd like to spend a moment on the first and third pillars with updates from Q4.

First, I'll share an update on Style Pass, a service that we rolled out in December 2017. It offers select clients unlimited styling for a $49.00 annual membership fee. To date, Style Pass has outperformed the results from our pilot as we continue our disciplined rollout of the program. As of Q4 2018, the number of Style Pass clients grew nearly 60% compared to the prior quarter, Q3 2018.

In addition, we have found that Style Pass clients spend more per fix, receive Fixes more frequently, and have higher satisfaction ratings compared to non-Style Pass clients. Services in new initiatives such as Style Pass add flexibility to our offering, allowing us to drive increased client satisfaction, and also serving as a strong catalyst for client reengagement. At the time of our IPO, we shared that from the beginning of Fiscal 2014 through the end of Fiscal 2017, over 650,000 unique clients had been reengaged by checking out a Fix after more than 16 weeks of inactivity.

Updating this figure to include Fiscal 2018, we've now successfully reengaged over 1 million unique clients. In Q4, we also expanded our addressable market through the launch of Stitch Fix Kids. The offering allows us to effectively serve the entire household and comprises both market and exclusive brands in the offering. To date, we've received strong interest from our existing clients who have signed up their children with early positive feedback on the offering.

While Kids remains a strong portion of our business today, we look forward to providing you with updates in future quarters. As we look ahead to Fiscal Year 2019, we are excited to announce our plan to launch in the UK by the end of the fiscal year. Our successful previous category launches across men's, plus, and kids gave us confidence in our ability to execute on this international growth opportunity.

Based on consumer research and planning, we believe that our personalization capabilities will resonate with UK clients and that we can be a strong partner to international brands with whom we don't already work. Our engineering and data science capabilities will allow us to build a localized presence to effectively serve UK clients with the same highly personalized approach we've used in the US.

We look forward to sharing more information and updates on this initiative in the quarters ahead. Now, I'll turn it over to Mike, who will walk you through some operational highlights from the quarter.

Mike Smith -- Chief Operations Officer

Thanks, Katrina and hello to everyone joining us on today's call. I'd like to take a moment to provide an update on our Q4 marketing initiatives and learnings, as well as discuss a few ways we began using Style Shuffle data during the quarter.

One key marketing focus in Q4 was to drive channel learnings associated with TV and to better determine channel efficacy through a series of incrementality tests. To achieve this, we temporarily ceased our national TV campaign for ten weeks to measure our channel efficacy. Through this testing, we learned that TV was a more effective acquisition channel than we have previously modeled, as measured on a cost per acquisition basis.

The tests also enabled us to evaluate and quantify the interaction between TV and other advertising channels, which we believe will help us better determine the optimal ratio of advertising spend between TV and our other portfolio channels in future quarters.

Last quarter, we shared details on Style Shuffle, an interactive mobile and web-based game in which participants rate an assortment of Stitch Fix merchandise. This game enables us to collect significantly more client preference data on each apparel item than we could have before the game was introduced and allows us to improve our personalization capabilities. We have begun leveraging this Style Shuffle data to enhance the overall client experience and drive business results.

In Q4, we began incorporating the data into our women's stylist client matching algorithm, which drove an increase in average order value as compared to the prior algorithm. Style Shuffle data not only improves outcomes for clients who play the game, it also helps us better serve those who have not yet played.

In Q4 of '18, we used the data to drive increased revenue per client and engagement among both playing and non-playing clients, which believe highlights the network effects of our data and the broad applicability of this Style Shuffle data. I will now turn the call over to Paul, who will walk you through our financial performance and outlook.

Paul Yee -- Chief Financial Officer

Thank you, Mike. In December, on our first earnings call as a public company, we shared a commitment to grow the topline in a responsible, profitable manner, to reinvest free cashflow in improving the client experience and expanding our addressable market.

Looking back at 2018, I'm proud to say that we delivered on this promise. We expanded our client base and generated strong revenue growth. We drove positive adjusted EBITDA and free cashflow and we invested in talent, marketing, and new categories with a long-term in mind. As we look ahead to 2019, we're committed to propelling this cycle of growth and reinvestment.

Our shareholder letter provides details on our financials for the fourth quarter and full year, but here are highlights. In Q4 '18, besides delivering another quarter of revenue growth of more than 20%, we expanded our gross margin, our adjusted EBITDA margin, our EPS, and our free cashflow year-over-year.

These results reflect the cumulative benefit of the investments we've made over the past few years and our efforts across the company to drive scale, efficiencies, and working capital rigor. Net revenue for the quarter was $318 million, representing 23% year-over-year growth. Our performance is driven primarily by an increase in both women's and men's active clients. Kids launched at the end of the quarter and did not meaningfully contribute to our active client count or net revenue.

Gross margin was 44.4%, our highest quarterly gross margin of Fiscal 2018 and 90 basis points higher than last year's Q4. This improvement was driven by a decrease in inventory reserve, lower clearance expense, and reductions in shrink, all reflections of our initiatives to strengthen our operations and inventory management.

We also continued to scale men's, which in Q4 saw improved gross margins as we expanded from two to three warehouses and increased initial markups or IMUs across all merchandise subcategories.

We also drove leverage in SG&A. Other SG&A excluding advertising was 32.8% of net revenue in the quarter, a 140-basis point improvement year-over-year. Variable labor drove 90 of these basis points, reflecting warehouse efficiencies enabled by system enhancements. The balance was due to leverage of non-payroll expenses, such as professional fees and facilities.

These efficiencies more than offset our investments in our technology talent. We ended the fiscal year with 180 engineers and 100 data scientists. We also drove leverage in our advertising spend this quarter, realizing a 10-basis point improvement year-over-year, as we continued to invest responsibly in our marketing programs.

Adjusted EBITDA for the quarter was $11.1 million or 3.5% of net revenue. This was just above the high end of our guidance range, driven by higher net revenue, gross margin expansion, and variable labor savings. Q4 net income was $18.3 million and diluted EPS was $0.18. These results reflect a credit of $9.4 million in the income tax provision line as a P&L, primarily due to stock-based compensation deductions associated with shareholder activity in the quarter. We also realized tax benefits from R&D credits and certain other deductions.

Finally, we delivered free cashflow of $55.6 million in Fiscal Year 2018. We finished the year with capital expenditures representing less than 1.4% of net revenue. On the working capital front, we continued to narrow the gap between our inventory growth and our revenue growth, with year-end inventory up 26% year-over-year, inclusive of investments in categories like Kids. For the year, we turned inventory six times on a merchandise cost basis.

Looking ahead to Fiscal 2019, I'll now provide our guidance for Q1 and the full year. For Q1 '19, we expect net revenue in the range of $354 million to $360 million, representing growth of 20% to 22% year-over-year. We expect adjusted EBITDA in the range of $5 million to $9 million, for an adjusted EBITDA margin of 1.4% to 2.5%. For full-year Fiscal 2019, we expect net revenue in the range of $1.47 billion to $1.53 billion, representing growth of 20% to 25% year-over-year.

We expect adjusted EBITDA in the range of $20 million to $40 million, for an adjusted EBTIDA margin of 1.4% to 2.6%. Finally, we expect CapEx to represent approximately 2% of net revenue for the year as we invest further in warehouse automation, headquarter space, and proprietary software.

Please note -- our revenue guidance does not include any impact of the UK launch, which we expect to occur at the end of the fiscal year. Our adjusted EBITDA guidance, on the other hand, reflects the people and infrastructure investments we're making to support our international expansion. The investments, combined with the launch of our Kids category, represent the vast majority of the decrease in adjusted EBITDA year-over-year. Finally, please note that 2019 is a 53-week fiscal year and that Q4 19 will include 14 weeks. Our 2019 guidance reflects the impact of this additional week.

With that, we're now ready for your questions. Operator, I'll turn it over to you.

Questions and Answers:

Operator

Thank you. At this time, if you do have a question, please signal us by pressing *1. Again, that will be *1 for questions. We'll hear first today from Chris Merwin with Goldman Sachs.

Chris Merwin -- Goldman Sachs -- Analyst

Okay. Great. Thank you very much. Two questions from me -- I think last quarter, we saw the growth acceleration in the business. One of the reasons you all gave was improving customer retention. I was wondering if you could just talk about the underlying trends there you're seeing for retention for core women's and also how we should be thinking about the incremental contribution of men's, plus, and kids in the context of your Fiscal 19 guidance. Then I've got a follow-up. Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thank you, Chris. In terms of underlying trends in retention, I think there are two data points I would point you to. One is we saw really strong revenue per client numbers this quarter. I think that's really a testament to the cumulative efforts of retention and reengagement. We also share da new reengagement number updating our number to 1 million clients who have been reengaged between 2014 and 2018. I think both of those are a testament to the strength that we're seeing on the retention side and what we're excited about.

I guess in terms of the contribution of the businesses, I can have Paul take that.

Paul Yee -- Chief Financial Officer

Sure. Our 20% to 25% revenue growth guidance for 2019 reflects sort of the trend we saw in 2018, which is continued strength in the core women's business as we've added flexibility to the offerings, as we've added style paths to engage clients more often, as well as scaling our newer businesses. So, men's had its two-year anniversary this past year as well as kid's is just sort of early out the gate. We see a momentum on both fronts and that's reflected in the full-year guidance for the year.

Chris Merwin -- Goldman Sachs -- Analyst

Got it. Just on gross profit, I guess gross margin specifically, obviously we saw a very strong quarter there. You called out, I guess, reduction in inventory reserve and clearance expense. As we look into Fiscal 19, should we think about a continued improvement in gross margin as you continue to scale the men's and plus businesses and become more efficient with those as well? What is contemplated within the guidance? Thank you.

Paul Yee -- Chief Financial Officer

Sure. So, our EBITDA guidance for 2019 reflects the same dynamics that we saw in 2018. So, underlying our businesses, we have the dilutive impact of new categories. So, men's, plus, and now kids have lower gross margins today than women's, given that they're still very early in the journey. What's exciting that we saw in Q4 and something we're focusing on for the next year is we're going to strive to soften those impacts on three fronts.

The first is our inventory management capabilities are really playing out. Our ability to buy product upfront correctly and getting through to the right client has really helped us reduce clearance over time. That's things like tools we're giving our merchants to reby and decide the inventory correctly, and also the algorithms are driving our stylist tools to match project and client.

Secondly, we're really excited that we're able to reduce shrink year-over-year and quarter-over-quarter. That's been a big focus for us and capability we're continuing to build into near year. Finally, while we're investing in new categories, we're seeing scale. Men's hitting its second year has allowed us to increase that margin for the business both quarter-over-quarter and year-over-year. We added a third warehouse this past quarter for men's. That's reduced shipping costs.

All of those dynamics are really helping us mitigate the impacts of new categories. Again, we're excited about the TAM expansion as a result of that. The gross margin dynamics are reflected in the guidance we've given for 2019.

Chris Merwin -- Goldman Sachs -- Analyst

Great. Thank you.

Paul Yee -- Chief Financial Officer

Thanks, Chris.

Operator

We'll hear next from Douglas Anmuth with JP Morgan.

Douglas Anmuth -- JP Morgan -- Analyst

Great. Thanks for taking the question. I had a couple. First, I was hoping you could provide a little bit more clarity just on the 4Q revenue growth and the trajectory relative to what we saw in the third quarter, the 29% versus the 23%. Second, on Style Pass, Kat, you talked about some of the early metrics, at least qualitatively. I'm curious if that changes or perhaps accelerates in any way how you roll that out and expand it to more users. Then third, on marketing, I know you're seeing better returns on the TV side than you expected. Any more color you can add on the plan around marketing as you go into Fiscal 19? Thanks.

Katrina Lake -- Founder and Chief Executive Officer

Great. I think in terms of the overall revenue growth, we're really focused on the full year here. What we shared at this point has been very consistent, I think, for a couple of years around this 20% to 25% range. We're looking at that on an annual basis and really proud of the consistency that we've shown this year and I think reflects the way we're thinking about next year. So, driving this profitable growth and balancing between profitability and growth is something we've been committed to. I think the results reflect that.

On your question on Style Pass, we've been really excited about the early results. These are clients whoa re performing in a really, really healthy way. They're contributing a lot to the business. I think right now, we feel like the program is rolled out to the proper audiences, but absolutely over time, as we see that our business is getting better, as we see there are ways we can lift all tides, it gives us optimism that there might be a broader opportunity for Style Pass, but for now, I think we're really pleased with what we've seen with the roll out and just really excited this has been away to continue to keep clients excited over a long period of time.

Lastly, on the marketing, I think what we've learned from the TV broadcast is really more around how does TV actually perform in terms of delivering clients and also, how does it impact other channels. I think the way to think about that is it's really us fine-tuning, understanding how all of our different marketing channels contributes to our portfolio.

Marketing diversification is something we've talked about for a long time. We always knew that TV was an important component of that, but I think having gone through this test and really understood how granularly TV impacts, I think we feel like it's a really important part of the portfolio and you'll continue to see us invest there.

Douglas Anmuth -- JP Morgan -- Analyst

Great. Thank you.

Operator

From Barclays, we'll move to Ross Sandler. Mr. Sandler, you might be on mute. Hearing no response, we'll move next to Mark Mahaney with RBC Capital Markets.

Mark Mahaney -- RBC Capital Markets -- Analyst

Okay. Great. Three questions -- one, just to follow-up on Doug's advertising question, is the idea then that you've already turned back on that TV advertising? I know you talked about having turned it off. Is it already turned back on? Secondly, in terms of reducing the wait times for kids that you talked about. Has that challenge already been addressed or is that TBD, to be figured out?

Then maybe the last question, just in terms of the Fiscal 19 guidance -- and maybe this one is for you, Paul -- the guidance implies potential for acceleration as you go through the year, but you're not including a UK contribution. Broadly, what would cause that to happen? What would cause the high-end of the growth range to be higher as you go through the year or the beginning of the year? Is that just the additional week? Thank you very much.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thanks, Mark. I'll start out with the advertising question and then I'll probably have Mike and Paul chime in on the other two. I get the easiest question. The answer is we have turned TV back on. TV is an important part of that portfolio. It is pretty easy to turn back on and the great news is that now it's even more measurable. We understand its contribution even deeper and you'll see us on the air. I'll have Mike talk about kids.

Mike Smith -- Chief Operations Officer

Mark, to your point, we have improved every week in terms of solving the more demand than we expected in the kids business. It really was focused more on older kids and girls specifically and we've been able to chase into inventory to improve that situation week over week. So, it's in process, but we're really close to having it back to the normal wait times that we expected when we started the business.

Paul Yee -- Chief Financial Officer

Mark, in terms of your question on FY 19 guidance, the 20% to 25% growth rate reflects the impact of the 53rd week, which is approximately 2 points of growth for the year. But it also reflects a whole series of initiatives we have laid out from a product and marketing perspective. We think that growth rate is a healthy growth rate.

It allows us to deliver great client experience and also maintain profitability and be able to invest in new geographies like the UK. So, the ability to kind of hit the high-end of the range is really the impact of those initiatives we laid out. Certainly, we'll give you an update. We're two months in. We'll give an update on future calls.

Mark Mahaney -- RBC Capital Markets -- Analyst

Sorry, if I could -- any particular reason why you chose the UK as your first international launch versus other markets?

Katrina Lake -- Founder and Chief Executive Officer

Yeah. The UK, I think there are a lot of reasons why we're really excited and optimistic about the UK. International, I think, overall, it has been an opportunity that people have asked us quite a bit about and one that we spent a lot of time looking at. I think internationally broadly is an opportunity we're excited about. Looking specifically about the UK, there are a couple of attributes about the UK consumer that I think are especially interesting.

One is really that it's already a very apparel e-commerce-heavy audience. So, clients there and customers there are spending more online in apparel than they are in the US. That's definitely an element that we like. It's also an audience that is a little bit less discount-oriented than the US. There's not as much discounting there as there is here. That is also a helpful attribute. Then lastly, I think, from a product market fit perspective, the idea of personalization, of having a personal shopping alternative to other e-commerce players is a really differentiated model in the UK and I think one that consumers are really excited about.

So, I think us being able to take an approach that truly is personalized and localized to the market allows us a greater possibility of success there and we're really excited about the market for all those reasons.

Mark Mahaney -- RBC Capital Markets -- Analyst

Okay. Thank you, Katrina. Thank you, Paul. Thank you, Mike.

Operator

And from Piper Jaffray, we'll move to Erinn Murphy.

Erinn Murphy -- Piper Jaffray -- Managing Director

Great. Thanks. Good afternoon. A couple questions from me -- I recognize you took the TV off during the majority of the quarter, but if you were to, knowing what you know now about how effective that is, if that had been throughout the quarter, as you may have had in the past, what would customer net ads have looked like? Is there a way to kind of back into that? Then I guess the second question as it relates to the advertising spend, it still went up year over year despite not having TV. Maybe share some of the mediums or other areas you're spending on within the ad budget.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. I can take those. I think the first question around TV and the specifics of it, unfortunately, we don't have that data to share. The TV dark test is really less about volume in the quarter as much as it was really about understanding and learning the impact. From that perspective, it was really successful and really important for us to run that test in order for us to run TV with confidence in future quarters and really understand how it contributes to our business. So, I think that's really what we were looking for in that test.

On the latter question, year over year, our advertising spend was up, but also our client growth was also. We're at 25% net ads on the client side. So, we're really happy with the returns that we're seeing on the advertising and marketing side. That continues to be true. And again, just as a philosophy, this is not a company where we are throwing all of the fuel in the kitchen sink and the fire on the marketing and advertising side.

We really operate within ROI mindset. We look for quick payback on those marketing dollars spend. That continues to be true this quarter and certainly, the learnings we had this quarter help us that it's even more accurate and true in future quarters.

Erinn Murphy -- Piper Jaffray -- Managing Director

Okay. Thank you. Then just two more, if I can -- one, I guess for Paul, on the guidance for Q1, you are expecting it to decelerate a little bit further, even though you'll have the full impact of kids. I guess I'm curious if you're being conservative on how you're planning kids to ramp or is it reflecting more of a deceleration in women's? Then a bigger question for you -- my last one for you, Katrina -- it's just on voice commerce. I'm curious what role you're seeing that playing in wardrobing and is that an area of investment that you're thinking to lead the team toward? Thank you.

Paul Yee -- Chief Financial Officer

I'll take the Q1 question and turn it over to Kat. Our 20% to 22% revenue growth guidance for Q1, it fits into the broader full-year guidance of 20% to 25% growth. We've made a series of choices in terms of the investments we're making in our core business as well as new categories. There's going to be puts and calls between quarters, but there's nothing specific to call out to Q1 versus the rest of the year. We think it's a good growth rate and one that plays out for the long-term.

Katrina Lake -- Founder and Chief Executive Officer

Erinn, thanks for your question on the voice side. I think voice commerce is in the bucket of a lot of other technologies that we see that we're certainly keeping an eye on. To date, a lot of the voice commerce applications you've seen have really been around the value proposition of like cheap, fast, and convenient.

I think what we've found more broadly is that with apparel, there's so much more nuance, so much more to understand, and that cheap, fast, and convenient value proposition just really isn't enough to help solve the true discovery element of, "How do I find clothes that fit me and my style and my occasion?"

So, we look at a lot of the technologies that are being adopted out there on the market and haven't yet been adopted in the market and this is certainly one of them. But when we think about what are the most powerful tools that help people to discover the things that they love, this isn't one that we see as being a primary tool in the toolkit yet.

Erinn Murphy -- Piper Jaffray -- Managing Director

Great. Thank you, guys.

Operator

We'll go next to Ryan Domyancic with William Blair.

Ryan Domyancic -- William Blair -- Analyst

Good afternoon and thanks for taking my question. Regarding the kids launch -- have you begun putting meaningful advertising dollars behind that new vertical yet or are you marketing to that client base? I think it's about half your client base that currently has kids. Then if you haven't started putting paid advertising dollars behind it yet, when do you intend to put more dollars behind that new vertical throughout 2019?

Mike Smith -- Chief Operations Officer

Yeah. This is Mike, Ryan. I'll take that. We have not put a lot of paid advertising against that. As you referenced, one in two of our existing client base has kids and they understand Stitch Fix and are excited about Stitch Fix. So, it's not an easy sell to convert them, but it's cheaper to go organically with our existing client base.

We just look at the kids business as trying to build it, just as we have in all of our businesses, build it the right way, meaning from a profitability standpoint, balancing growth and profitability primarily to deliver a great client experience. So, unclear on when we'll put a lot of paid against it, but I think we're comfortable with the growth plans for kids and really excited about the organic demand that we're seeing in kids.

Ryan Domyancic -- William Blair -- Analyst

Alright, Mike. Thank you very much.

Operator

And we'll hear now from Ross Sandler with Barclays.

Ross Sandler -- Barclays -- Analyst

Great. Can you guys hear me this time?

Mike Smith -- Chief Operations Officer

We can.

Ross Sandler -- Barclays -- Analyst

Okay. Just two questions -- first, on the gross margin cadence, you guys have talked about new categories take a while to build up to where the core women's business is. Do you feel like the mix shift to plus and men's is fully cycled through at this point and we should be in a position to see steady gross margin improvement into the future permanently? Given that the UK is more of a geography rollout, not a new category and you guys have a lot of history with the existing women's category, how will the UK rollout impact gross margin, if at all, once that gets up and running.

Then the second question is just back to the retention kind of net ads earlier question -- so, if we look at client net ads, quarter on quarter, they were only up about 54,000 from last quarter. That cadence was a little bit lower than the previous trend line. So, is that mostly just cutting back the TV program or is there a different mix of one and dones from these new categories that are growing fast, any other color on the net ads would be helpful. Thank you.

Paul Yee -- Chief Financial Officer

Ross, I'll take the gross margin question. Looking ahead to 2019, we do expect the penetration of our new categories, namely men's, plus, and now kids to be increasing at a higher rate than it was in 2018 and therefore, there will be a mix shift impact resulting from the higher penetration. That being said, we're really excited to see the strength of men's in particular, the scale we're getting from that, as well as being able to offset some of that dilution from the various cost efficiencies and other cogs, focus areas that we've shown in Q4, frankly. So, certainly, we'll see those dynamics playing out.

Specific to the UK, we do expect the gross margins to be lower early on, just like men's and so forth. It's going to be a smaller scale business, obviously, early on. So, our buyers will be smaller. We'll also be investing in inventory up front to make sure that we kind of really are able to serve our new clients well and that will probably translate to higher clearance.

So, we have a roadmap here as we launch new business or new geographies that we certainly would derive benefits over time as we scale and learn along the way.

Katrina Lake -- Founder and Chief Executive Officer

Then Ross, I can take your question on retention. I think we're looking at a year over year rate. We saw active clients grow 25% year over year. We're really happy with the foundational fundamentals that really helped us to achieve the higher end of our guidance range. We don't have any of -- we wouldn't say this is a quality issue that we have more one and dones. If anything, this is a business where we're really focusing on client quality and really focusing on ROI and LPD and how clients are demonstrating value over the long-term.

The more that we're able to learn through things like the TV incrementality test, the more we're able to hone that and really improve that over time. So, I think our topline revenue is consistent with where we shared that we would be and consistent with where we plan to go in the future. I think the underlying fundamentals are ones that we're happy with.

Operator

Anything further, Mr. Sandler?

Ross Sandler -- Barclays -- Analyst

No, that was great. Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Thank you, Ross.

Operator

Thanks. We'll move on to Youssef Squali with SunTrust.

Youssef Squali -- SunTrust Robinson Humphrey -- Managing Director

Okay. Thank you very much. One clarification on a couple of questions. So, as you're expanding to the UK, do we know whether you are going to be going with women first or with the entire offering? That's the first clarification, please.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. Thanks for the question. We're planning to go with women's and men's. Kids is a newer business for us, so women's and men's will be part of the offering.

Youssef Squali -- SunTrust Robinson Humphrey -- Managing Director

Will that include plus as well or just women and men?

Katrina Lake -- Founder and Chief Executive Officer

We're a little bit early to share the really specific sides around which sizes we're going to cover. There are also sizing differences between the UK and the US. So, I'll think we'll probably wait to share details around that when we get closer to market.

Youssef Squali -- SunTrust Robinson Humphrey -- Managing Director

Okay. That makes sense. I know you don't break out growth by segment, but could you just help us maybe gauge the health of growth in core women, either on year on year basis or whichever, just to kind of get a sense of how your oldest business continues to perform? That's one question we often get.

Then lastly, just broadly speaking on the competitive landscape, maybe you can just update us if there are any changes you've seen out there that may make you change your mind either on a TAM or whatever. Amazon obviously made a lot of noise last week with Scout. Just for example, as you take that as an example, how much of a threat is that to the growth in the business over time? Thank you.

Mike Smith -- Chief Operations Officer

Yeah. This is Mike. I'll take the core women's question. The core metrics of the business have been healthy. I can give a couple of category stories, I think, that kind of help demonstrate that. We've mentioned in past quarters that we were expanding our offering in premium brands and lower price point brands and we're seeing increased satisfaction scores and success rates in both of those offering.

The other thing in premium brands that I continue to be excited is this idea of evolving the conversations that we have with our premium brands. For example, over 50% of our product now in that category is exclusive to us and I would say all of our conversations with contemporary brands and premium brands is around doing special product for us. The business is very healthy and the underlying metrics are healthy, but we do believe there's a TAM opportunity to continue to expand in women's and we believe that our investments in adding assortment as well as using some marketing against that will help realize that TAM expansion.

Katrina Lake -- Founder and Chief Executive Officer

And then to answer your question on the competition. Apparel has always been a pretty competitive space. I don't think that's changed too much in the seven or so years that we've been doing the business.

In particular, I think a lot of the innovation that we've seen over the years has really been around this cheap and fast value proposition and we really haven't seen anybody address the really hard part of shopping for apparel, which is the discovery element, of, "Which jeans are going to seem right for me? Which dress is going to be right for the occasion?" Those are still things we don't see a ton of. We don't see a lot of other businesses that are really approaching it with a similar solution that's truly personalized and really incorporating the human element.

Specific to your question on Amazon, we obviously watch Amazon closely. They also have 8% of the apparel market share. So, if you think about how much market opportunity there is out there, 92% of that opportunity is out there, a lot of it is in stores, a lot of it is in a dispersed set of retailers.

We really think it's differentiated to be focused on how do we help people find what they love and really applying a truly human element to this very nuanced category. So, I think we of course keep an eye on what's going on competitively. We are very aware that it's a competitive industry. But at the same time, we have a lot of confidence in the differentiation of an approach that is a very human, personalized approach.

Youssef Squali -- SunTrust Robinson Humphrey -- Managing Director

Okay. Thank you very much.

Operator

As a reminder, that is *1 for other questions at this time. We'll move next to Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo -- Managing Director

Hi, everyone. Thanks for taking my question. Two questions -- first on the UK investment, maybe if you can explain a bit what's behind the additional spend that you're making this year. Then just putting some of that commentary together, is it a fair assumption to say that all else equal without this UK push EBITDA dollars this year would actually be higher year over year?

Paul Yee -- Chief Financial Officer

This is Paul. I'll take that question. So, as is the case with a lot of our investment, it flows through the P&L. So, with our investment in the UK launched by the end of this year, a lot of that will be around talent. We know as a personalization company, we need to have an ability to understand our clients well. So, we are building a buying team in country and also will be ultimately building a styling organization over there. So, the build up of capabilities next year, we'll be hiring ahead of the launch and making sure we have the right assortment and capabilities to do a very successful launch.

In terms of your question around broader EBITDA impact, as I note in my comments, a lot of our year over year decline in EBITDA as implied in my guidance is due to the launch of the UK and to a lesser extent kids. I would also note that as we look at marketing. We really see that as an opportunity for us to drive returns and in 2017, we spent 7% of revenue and we increased that to 8% in 2018. We do see an opportunity stepped up further in 2019.

Not only do we have a diverse set of channels in which we can communicate our offerings, we're also, with Deirdre Findlay, our new CMO on board, we really try to think about brand and how to we continue to build that love with both our existing and future clients. So, we see it as an opportunity to expand our marketing spend that's also embedded in that EBITDA guidance for 2019.

Ike Boruchow -- Wells Fargo -- Managing Director

Got it. Then just a quick follow-up -- sticking with the UK, how do you think about scaling that market relative to the US market. I believe the UK is a much smaller apparel market and online penetration rates are lower than in the US. So, I'm just curious how you frame the ultimate opportunity there versus what you guys are working on here in the US.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. I think the data to us is optimistic in terms of the size of the market. It's a market where there are 50 million people. Yes, that's smaller than the US, but it's a really sizable opportunity, I think, relative to some of the other markets out there. Actually, what we found is there's a much higher penetration of e-commerce shopping in the UK than in the US. I think it's a smaller country. Shipping times are faster. People are much more used to shopping apparel in an e-commerce format than they are in the US. So, I think both of those give us some really positive signals that the UK is a really ripe kind of opportunity for us.

Ike Boruchow -- Wells Fargo -- Managing Director

Great. Thanks so much.

Operator

We'll hear now with Edward Yruma with KeyBanc Capital Markets.

Edward Yruma -- KeyBanc Capital Markets -- Managing Director

Hey, guys. Thanks for taking my question. I guess first, on the UK spend, how should we think about the shape of the UK spend through next fiscal year? Is it back end weighted? And then I guess second, you used to give some detailed cohort performance data in terms of that core women's spend. I guess when you look at that core female that's maybe three or four years a customer at Stitch Fix, how has her spending changed and are you starting to see some better results from things like extras that can increase that take rate? Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Great. I'll have Paul start out and I'll jump in on the cohort.

Paul Yee -- Chief Financial Officer

I think directionally, given a good portion of investments in the UK is talent, it will be increased over the course of the year. We've hired a general manager and a head of buying and they'll be starting to fill out the team now that we've publicly announced the launch. So, you will see that ramp up over the course of the year.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. And the question on cohorts, I think when you're looking at three to four years out, we are operating on an ROI mentality when we're thinking about marketing. So, we're really looking for quick payback. As cohorts get to those three, four, five, six-year mark, they continue to add value to the business. That's all really incremental to the spend, the initial spend there. That's something that is really important to the business.

I think revenue per client is probably one good place to look at to really think about how we've been able to generate more value from those clients. Extras definitely has something to do with that. Style Pass, which we shared some enrollment numbers or enrollment expectations around and being able to see a lot of opt in on Style Pass, those are clients that are spending more, that are higher value clients.

I think these are all initiatives that really help us certainly in those first few years, but definitely in those years three, four, and five as well as we're kind of looking at cohort health and continue to be excited about what we see there.

Edward Yruma -- KeyBanc Capital Markets -- Managing Director

Great. One final, if I may, I know you've had some favorability from a shrink perspective, is that tied to how you would have initially thought the new categories would have out-progressed or is that against the core women's business. I guess as we think about all the new categories and soon a new geography, how do we think about your opportunity to continue to move that shrink number lower? Thank you.

Mike Smith -- Chief Operations Officer

Sure, I'll take that. Yes, we've seen shrink increase over the past one and a half years. While we've seen that across the board, as we've expanded in new categories, notably men's and premium brands, we have seen a correlation there. I think you are seeing the results of our concerted efforts across our organization to be very tenacious on managing that through engineering work to make sure we validate credit cards as well as helping our customer service agents upfront identify clients who are likely fraudulent.

So, as we expand to geographies as well as new categories, rest assured, we see this as a capability we need to continue to bolster and to strengthen, but again, I think Q4 is exciting to see the results of our efforts today.

Edward Yruma -- KeyBanc Capital Markets -- Managing Director

Great. Thanks so much.

Katrina Lake -- Founder and Chief Executive Officer

Thank you.

Operator

And with that, I'd like to turn things back to Katrina Lake, Founder and CEO.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thank you again for joining us today. We look forward to seeing you on the road and keeping you updated on our performance.

Operator

And that will conclude today's conference. Thank you all for joining us.

Duration: 47 minutes

Call participants:

David Pearce -- Head of Strategic Finance and Investor Relations

Katrina Lake -- Founder and Chief Executive Officer

Mike Smith -- Chief Operations Officer

Paul Yee -- Chief Financial Officer

Chris Merwin -- Goldman Sachs -- Analyst

Douglas Anmuth -- JP Morgan -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Erinn Murphy -- Piper Jaffray -- Managing Director

Ryan Domyancic -- William Blair -- Analyst

Ross Sandler -- Barclays -- Analyst

Youssef Squali -- SunTrust Robinson Humphrey -- Managing Director

Ike Boruchow -- Wells Fargo -- Managing Director

Edward Yruma -- KeyBanc Capital Markets -- Managing Director

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