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Stitch Fix, Inc. (SFIX -0.45%)
Q3Â 2019 Earnings Call
Jun 5, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone. Welcome to the Stitch Fix Third Quarter 2019 Earnings Call. Today's conference is being recorded.
At this time, I'd like to turn things over to David Pearce. Please go ahead, sir.
David Pearce -- Head of Investor Relations
Thank you for joining us on the call today to discuss the results for our third quarter of fiscal 2019. Joining me on today's call are Katrina Lake, Founder and CEO of Stitch Fix; Mike Smith, President and COO; and Paul Yee, our CFO. We have posted complete Q3 financial results in our shareholder letter on 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 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 our result to differ.
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 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 and a replay of this call will be available on the website shortly. I'd now like to turn the call over to Katrina.
Katrina Lake -- Chief Executive Officer and Founder
Thanks, David, and 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'm excited to share our third quarter results which demonstrate our commitment to delivering strong top line growth, while making measured, strategic investments for the long term. We're also raising our revenue guidance for the fourth quarter, reflecting our expectations for continued momentum in our business as we close the year.
As I request on the third quarter, I remain very excited by our position within the retail ecosystem, as well as our resulting ability to capitalize on future opportunities. Personalization is at the very core of what we do at Stitch Fix, and we feel we're highly differentiated. In an environment where many retailers face growth challenges, we remain confident in our ability to deliver personalization at scale using our unique combination of human judgment and data science that continue delighting clients and growing our business.
Now I'll discuss our Q3 results, provide an update on the continued momentum we're driving across our women's and men's categories and share what this means for our newest categories over time. In the third quarter, we generated net revenue of $409 million, exceeding our guidance and representing 29% year-over-year growth. We delivered $7 million in net income and negative $0.3 million in adjusted EBITDA. We grew our active client count to 3.1 million as of April 27, 2019, a 17% increase year-over-year. These results reflect our continued execution across three of our growth pillars. Expanding relationships with existing clients, attracting new clients and growing our market opportunity. On the third pillar, I'm pleased to announce, we officially launched in the UK just last month and are excited to introduce our personalization capabilities to our newest clients.
Over the past several quarters we've discussed the seeds we've planted in newer markets such as kids in the UK, which we believe will contribute less from our revenue and client perspective near term, but represent nice longer term levers for our business. These categories are small today but have significant potential in the years ahead as we continue to drive strong top line growth and capture more and more share within our $430 billion market opportunity. While these new categories are exciting for us as we think about our multi-year outlook, our women's category continues to have so much opportunity and we've been pleased with our recent results.
We shared in Q1, that we deliver the highest keep rate on record in women and in Q2, that we drove strong repeat client demand. This quarter, we continue to delight existing clients but also demonstrate improvement in our ability to attract new high quality clients, who can serve well from the outlet. There are predictive algorithms we believe we're better able to reach clients who are a good fit for our service and who we are able to retain for a longer period. One measure we look at is the number of clients who keep at least one item in their fix and tell us that they're looking forward to their next fix.
This number grew 8% year-over-year in women's in Q3, which is the fourth consecutive quarter of year-over-year growth. This is a sign that the client was satisfied in finding an item that they loved and also excited about the opportunity to build a long term relationship with us. Unsurprisingly we found these positive first fix experiences are often indicative of stronger client retention, stronger revenue per client and higher engagement. As evidenced, women's clients who joined us in fiscal 2019 year-to-date have demonstrated higher retention rates than the comparable 2018 cohort. We're excited to drive enhancements like this in women's not only because it is our largest category, but also because these learnings can often be applied to our other offerings.
I'd now like to turn to men's which has graduated from the early stages kids in the UK today and is now at a point where it has scaled into a category we're excited to discuss in a more specific way. Men's which we launched in September of 2016 continues to benefit from strong product market fit an increasing scale, both of which are factors in driving favorable business results. In the last 12 months, we've significantly improved men's growth margins and we expect to drive further improvement as we continue to grow. Our improved men's assortment reflects rich client feedback from our growing male client base. Most recently, we use this data to enhance our activewear and tailored assortment. In activewear, we responded to style profile feedback by expanding our assortment versatility from workout attire to everyday use.
In addition, we've incorporated affordable and accessible performance attributes such as moisture wicking and UV protection. Another opportunity we thought within men's workwear and special occasion which we call our tailored offering, where we've used client fit feedback to revise our exclusive brand fit blocks, which resulted in higher fit and styles scores. Our ongoing improvements in men's have resulted in year-over-year increases in keep rate in every quarter going back to the launch of our men's category in Q1 '17.
The success of our exclusive brand offering which now comprises more than a third of our men's revenue also contributed to gross margin improvement in Q3. We created multiple brands that look and feel like stand-alone brands each with its own identity and strong point of view. Each brand was created to address specific gaps in the market both in style and price. And we're thrilled that how successful these brands have become. Our exclusive brands have very high sell through which drives rapid inventory turn that contributes to its stronger gross margin profile.
In addition, we've expanded the number of US warehouses that carry men's merchandise from two to three improving shipping costs and benefiting gross margins as well. Our enhanced ability to attract and retain high quality clients and quickly scale categories gives us confidence as we execute on our newer opportunities like kids and UK.
Before I hand it over to Paul, I'd like to spend a moment to provide an update on Style Pass. As you know we are constantly looking for new ways to engage and delight our customers and Style Pass which just celebrated its first anniversary is a great example of it. Today our one-year renewal rate have exceeded 70% across both men's and women's clients. In addition, as of Q3 '19, Style Pass has continued to reduce friction from the client experience and deliver better client and business outcomes. Specifically, the program improved client retention and increased average revenue per client and client satisfaction as compared to non-Style Pass client. We will continue to roll-out Style Pass to clients in a disciplined manner to ensure that the program benefits both our clients and our business.
I'll now turn the call over to Paul, who will discuss our financial performance and outlook.
Paul Yee -- Chief Financial Officer
Thank you, Katrina. Our Q3 results reflect both strong execution by the team and continued commitment to our long term growth strategy. We delivered net revenue above our guidance range, healthy gross margins and positive free cash flow. At the same time, as planned, we made strategic investments that will fuel our future growth, including brand marketing capabilities, UK expansion and talent. Looking ahead, we see top line momentum continuing in Q4, leading us to raise our full year revenue guidance.
Our Q3 net revenue of $409 million represented 29% growth year-over-year, topping our guidance of 22% to 26% growth. We saw a healthy growth in both women's and men's and continue to ramp our kids category. Active clients grew to 3.1 million or 17% year-over-year, driven by our investments in performance marketing and an inventory, which enabled us to better serve new clients.
Net revenue for active client grew 8% year-over-year, representing our fourth consecutive quarter of growth, even with the higher mix of men's and kids clients. This growth is a result of our continued focus on attracting high quality clients, improving our personalization capabilities and driving stronger retention in our women's category.
Q3 gross margin was 45.1%, representing a 150 basis point improvement from 43.6% last year. This gain was driven by both lower clearance activity and lower shrink expense year-over-year. Our improving gross margin is net of the impact of our newer categories. As Katrina discussed, we've also seen gross margin improvement in our men's category, with this increasing scale, enhanced assortments and continued success with exclusive brand.
Advertising was 12.3% of net revenue. As we shared last quarter, we plan to invest more heavily in marketing in the second half of this year with a specific focus on brand advertising. Brand spend comprise $16 million in the quarter or 3.9% of net revenue. Other SG&A excluding advertising was 33.9% of net revenue in the quarter, compared to 32.6% in last year's Q3.
These results reflect the build out of UK capabilities, as well as payroll and SBC investments to track and retain top talent. As a reminder, we include SBC in our EBITDA results. This expense totaled $9.1 million in the quarter. Our strong data science and engineering teams are key differentiators in our business. And we believe SBC is an important lever as we invest in these teams. As a result we expect continued impact from SBC in the quarters ahead.
Q3 adjusted EBITDA was negative negative $0.3 million or a negative 0.1% of net revenue. This was at the higher end of our guidance range of negative $4 million to positive $1 million. Q3 net income was $7.0 million and diluted EPS was $0.07. These results reflect certain one-time tax benefits that were recognized in the third quarter. Year-to-date, we've delivered free cash flow of $51 million compared to $49 million in the same period last year and ended Q3 with zero debt and $367 million in cash, cash equivalents and highly rated securities. Quarter end inventory grew 34% year-over-year compared with 29% at the end of Q2, reflecting our planned second half investments to meet higher demand.
Moving onto our outlook. For Q4 '19, we are raising our net revenue guidance to $425 million to $435 million, representing growth of 34% to 37% year-over-year. This compares to our prior range of 29% to 35% growth and is driven by expectations for continued momentum in net revenue per active client along with consistent active client growth. We also expect to return to positive EBITDA in Q4 and our projecting adjusted EBITDA in the range of $5 million to $10 million, for an adjusted EBITDA margin of 1.2% to 2.3%. For full year of fiscal 2019, we're raising our net revenue range to $1.57 billion to $1.58 billion, for a growth of 28% to 29% year-over-year.
This compares to our prior range of $1.53 billion to $1.56 billion, or 25% to 27% growth. We're raising a lower end of our adjusted EBITDA range to $38 million to $43 million, reflecting an adjusted EBITDA margin of 2.4% to 2.7%. This compares to our prior range of $33 million to $43 million. As a reminder, 2019 is a 53-week fiscal year and Q4 '19 includes 14 weeks. Our full year and Q4 guidance reflects the impact of this additional week, this guidance also includes our continued investment in the UK, which I noted last quarter as totaling approximately $12 million of SG&A expense in the second half of the year.
With that, we're ready to open up for questions. Operator, over to you.
Questions and Answers:
Operator
Thank you. (Operator Instructions) We'll hear first today from Doug Anmuth with JP Morgan.
Douglas Anmuth -- JP Morgan -- Analyst
Great. Thanks for taking the questions. First I just wanted to ask about the brand marketing campaign. You talked about the $16 million of spending, would be great to hear about how you're thinking about the results that you saw there early on and how you should think about that time to client growth in the quarter? And then second, you highlighted the higher quality clients especially in women through predictive algorithms, wondered if there's any more color you can give us there in terms of how you're identifying these clients and what is really driving the difference in these higher quality clients and the better retention that you're seeing? Thanks.
Katrina Lake -- Chief Executive Officer and Founder
Great, absolutely. Brand marketing, so, in the last quarter we spent $16 million in brand marketing and that's very different from our kind of normal brought in by our performance marketing, which is what we really look at in terms of driving client growth results within the quarter. So in terms of the question around tying brand marketing to client growth, that's not the way that we think about that spend. And the key metrics around what we're looking for in -- success metrics on the brand marketing are really around understanding of the brand, awareness of the brand, affinity to the brand and those are metrics that are longer term metrics that you are -- I think right now, we're still too close to the campaign to be able to have a really accurate read.
But what I can say, I think is overall, we're really optimistic and excited about the opportunity to have brand marketing as a lever. It's something that we see as an opportunity, certainly on the high level metrics we talked about, also around reengagement and driving this longer term love for the brand. And so we're excited about what we're seeing so far and hopeful about kind of what results we'll see eventually.
On the women's side, in terms of (Technical Difficulty) tactics that we're using around -- kind of acquiring customers and our performance marketing is really that we're able to better understand what is some attributes that are likely to lead to successful fixes. And so what that means is that we're better able to identify clients that are likely to generate a lot of LTV for us over time. And so it gives us (Technical Difficulty) that we would be happy to pay a $100 for because we are able to have a really great read that, that client is going to deliver a $500 plus in LTV. And so that type of nuance is helping us to be able to acquire better clients that are a better fit for the service and that contributes to the great revenue per client numbers that we're seeing in this last quarter.
Douglas Anmuth -- JP Morgan -- Analyst
Okay, great. Thank you.
Operator
We'll hear next from Ross Sandler with Barclays.
Ross Sandler -- Barclays -- Analyst
Hey. Can you guys hear me?
Katrina Lake -- Chief Executive Officer and Founder
We can.
Ross Sandler -- Barclays -- Analyst
Okay, great. So thanks for the color on the men's gross margin. I guess you guys are probably not willing to disclose the current men's GM versus women's GM. But I guess can you talk generally around like how wide are we around the 45% average between men's and women's or women's and all other? And then can you talk about -- you mentioned the exclusive brands is a big driver in terms of that mix going up within men's. What's the general range of gross margin between the exclusive brands and kind of regular and kind of how do you see this, is this on a sustainable trend that could last multiple quarter, are we at the point where the curve is kind of reached closer to parity and you are not expecting as much from the men's gross margin improvement is what you're seeing right now? Thanks a lot.
Paul Yee -- Chief Financial Officer
Hi, Ross. This is Paul. Thanks for your question. Without sharing the specific margins between men's and women's, I can say that with men is right now in terms of its scale and size, its equivalent with gross margin with what women's was (Technical Difficulty) so we're very pleased where men is at the progression it's making over the course of its past 2.5 years. And you kind of know, kind of the key levers (Technical Difficulty) in our toolkit to help expand gross margins. The men's, just in terms of scaling any better purchasing power with our brand partners. EB we've seen extensive success today and we're continuing to (Technical Difficulty) brands and those do have higher gross margin that really the lens is how do we ensure we are giving products that our clients really enjoy and fit their needs. And (Technical Difficulty) three out of our five distribution centers. So we sold opportunity from our shipping cost standpoint to optimize. So I think on the whole, we're very pleased with men's expansion, we still see opportunity for us to get the benefit at scale and then return, drive higher gross margins in years to come. So high level, we are really pleased with the progress and we're going to see continued improvements over time.
Operator
We'll hear next from Mark Mahaney with RBC Capital Markets.
Mark Mahaney -- RBC Capital Markets -- Analyst
Okay, great. Can I throw up three quick questions. Last quarter we talked a lot about -- you talked a lot about inventory optimization and the impact of that. I know that wasn't a one and done. I assume that that's something that continues to build and that you -- that also bled through into these results. So just talk a little bit about that. I think there's a series of initiatives that wasn't just -- it wasn't just in the last quarter that are ongoing. So just talk about that impact? Secondly could do provided more clarity, or color on the -- or detail on brand advertising. When you say that are there particular brand advertising channels that have been promising for you. I know don't know if you'll get into that, but I just thought, I've to ask you? And then third of the UK, I know it's still very early days, but could you just provide any more color on what you're seeing there. Any particular early lessons from that, anything that makes you -- as you've looked at this trajectory of women's and men's in the US like does it look -- is it too early to say whether that ram could build faster or slower than what you saw in the US. I know there's a bunch of factors you talked about before that made that market particularly attractive. So is there -- the learnings already indicating that you can see faster adoption curve in the UK than in US? Thanks a ton.
Katrina Lake -- Chief Executive Officer and Founder
Great. Thanks for the question. I'll have Mike talk about inventory and then I'll pick it up for brand advertising the UK.
Mike Smith -- Chief Operating Officer and President
Yeah. Hey, Mark, it's Mike. There are -- I think you see most in revenue per client is what Paul talked about increase in revenue per client that we've seen kind of year-over-year. We do think it is still early days and the attributes that will help us even do better -- a better job with matching using that inventory algorithm. So there's so much that we can do and I'd say it's still very early innings. And so we're not near (Technical Difficulty) in particular.
Katrina Lake -- Chief Executive Officer and Founder
And then in terms of the brand advertising, we did a really -- we did a lot of activations that we're really focused on -- both focused around that time with the Oscars, but really broad in terms of channels and the types of things that we did. And so we are able to do some in person, we did some out of home, we did some TV advertising that was focused on some channels. And so I think at this point, we're excited to learn about it. And overall, I think we felt like having the Oscars and having kind of a social moment that meant something to a lot of people was that was an effective way to think about brand advertising, but I think it's still little bit early to tell in terms of any specific channel learnings or what that will look like in future quarters.
And then in the UK, I mean it's just really too early in the UK as well. We launched a month ago I guess and I was just out there and what I can share is that it seems like there is a lot of excitement from the market. I think there are some differences in terms of the audience, but a lot similarities but a lot of differences and I think our approach of really being respectful of those differences and really localizing our merchandise and our service to fit that audience specifically is a strategy that we think is going to be successful. So more to come, but as with all of our kind of seasoning businesses, we're really taking a launch and learn strategy here and so it's definitely early days, but we're optimistic.
Mark Mahaney -- RBC Capital Markets -- Analyst
Okay. Thank you, Katrina. Thank you, Mike.
Katrina Lake -- Chief Executive Officer and Founder
Thank you.
Mike Smith -- Chief Operating Officer and President
Thank, Mark.
Operator
We'll hear next from Heath Terry with Goldman Sachs.
Heath Terry -- Goldman Sachs -- Analyst
Great. Thanks. I was just wondering if you could just give us a sense, when we look at the acceleration growth in revenue per customer, is there a breakdown that we should be thinking about in terms of keep rate product -- average product price frequency of fix that you would say is behind the level of acceleration or just a way to sort of disaggregate the components within that? And then given the comment that you had around the initial success of Style Pass, any thoughts on sort of when or what your decision process will be like as far as making that more available to your existing customers?
Paul Yee -- Chief Financial Officer
Hi, Heath, this is Paul. I'll take the first question and then I turn it over to Mike to talk about Style Pass in more detail. So let me give you some color about the drivers of the growth in our revenue per client metric which was 8% in Q3, our fourth quarter of acceleration to kind of give you some color behind this trend. I would say there are the two major buckets of this improvement. The first is we're getting better at attracting quality clients. Katrina talked about our ability to better target clients who are right fit for our service. And as a result, we're seeing better outcome for the first fixes which in turn translate to retention. So that's one driver is we're seeing with our new core of new clients of women's staying with us longer and hence that's helping drive revenue per client.
The second is more broad around our ability to personalize Stitch Fix. We've talked about our investments in inventory, our breadth there. Style Shuffle is a game now where 80% of our clients are playing and we've now generate 2 billion ratings to date. So I believe to understand our client base and therefore be able to deliver fixes that are curated for them is translating into higher revenue per client. Meaning frankly, the highest keep rate that we saw in Q1 for women's and ability to give clients what they're looking for. So those are the two key drivers are manifesting the momentum we're seeing in Q3 and that's reflective of the raised guidance that I gave for Q4.
Mike Smith -- Chief Operating Officer and President
Hi, Heath. This is Mike. I think we will continue to take a very disciplined approach to Style Pass, we're excited about the capability, we've lapped the year. We're also very excited about the renewal rate. As you can imagine, as we show that we're better at targeting high quality clients, I think there is more of an opportunity to bring more people in the Style Pass and we've a really good understanding what client type will work really well with Style Pass. So again you can assume that we'll be disciplined about it and roll it out to the people that make some more sense for and excited about the metrics that we've seen for other clients who are using Style Pass.
Heath Terry -- Goldman Sachs -- Analyst
Great. Thank you both.
Paul Yee -- Chief Financial Officer
Thank you.
Mike Smith -- Chief Operating Officer and President
Thanks.
Operator
We'll hear now from Ralph Schackart with William Blair.
Ralph Schackart -- William Blair -- Analyst
hi. Can you hear me?
Mike Smith -- Chief Operating Officer and President
Yeah.
Ralph Schackart -- William Blair -- Analyst
Sorry, operator jumped in there. Just in terms of men's exclusive brands, you disclosed it's more than up third today. Curiously, we think this metric can trend longer term. And structurally do you think exclusive brands are better fit for men's or is there also a broader opportunity for women's as well? Thank you.
Mike Smith -- Chief Operating Officer and President
Yeah, that's a great question, Ralph. I think it should go higher, we're very confident in our ability to do it. Again, the reason we use exclusive brands is to fill in where we see gaps, I think structurally in the men's business, we saw more gaps on a price point in style kind of perspective than we see in women's, but we have a healthy exclusive brand business in women's. And as we see continued to get really good at developing exclusive brands, I think you'll see us continue to invest both in men's, women's and certainly kids as well. So there is no ceiling I think to kind of what the number is I don't know, I wouldn't want to speculate on a specific number, but it's a important part of our strategic platform on all three businesses and also in the UK.
Ralph Schackart -- William Blair -- Analyst
Great. Thank you.
Operator
And from KeyBanc Capital Markets, we'll move to Edward Yruma.
Edward Yruma -- KeyBanc Capital Markets -- Analyst
Hey, good afternoon, guys. Thanks for taking my questions. I guess first on the kids business, how would you compare the growth trajectory versus maybe how men's had ramped. Are you seeing any important takeaways? And then second, you guys have a pretty good story to tell on inventory markdowns. Is that a function of the algorithmic buying? And kind of how much more room do you have to kind of keep driving markdowns lower? Thank you.
Mike Smith -- Chief Operating Officer and President
Yeah. I'll take the Kids one and -- this is Mike, and then Paul will take the second question. So from a product acceptance and our ability to do exclusive brands with this business, we're seeing very similar kind of trends that we've seen in men's. The kids clients and their parents love the -- kind of love the service, love the personalization and really love the product. Obviously, the total addressable market dynamics are different and there's potential differences in average order value just because the average unit retail prices of the product is different. And we're very sensitive to that and -- but feel really confident in our ability to have this grow into a very profitable an important strategic planning for the business.
Paul Yee -- Chief Financial Officer
Hi, Ed, this is Paul. In response to your question around sort of the -- I think you're referring to clearance as opposed to markdowns. But we are still, I would say, in the early stages of our abilities to buy the right product, distribute it to the right clients and therefore reduce clearance over time. And I think we're really proud of our results in Q3, we drove 150 basis point expansion in gross margins year-over-year. And that's the function of, not only lower shrink year-over-year, but also lower clearance activity. And that a function again of our strength in inventory management. So as we look forward, I would say we are still investing in algorithmic capabilities to better align our inventory to our clients I would say in the buying and planning side using the rich data we have in our clients to inform our assortments, our mix of buy that's certainly an opportunity. And just overall inventory management in getting products to the right client through styling in algorithms, I would say, are still areas where we continue to invest in and see opportunities in the future. So I think I can tell we're really proud of our Q3 results and that's a function of the capabilities we've been building to date.
Edward Yruma -- KeyBanc Capital Markets -- Analyst
Thanks so much.
Mike Smith -- Chief Operating Officer and President
Thanks, Ed.
Operator
We'll hear next from Eric Johnson with Piper Jaffray.
Eric Johnson -- Piper Jaffray -- Analyst
Hi, guys. Thanks for taking the question. First, just curious if your guidance contemplates any impact from tariffs for this year? And then as we look out further, if lift 4 goes into effect, any thoughts on how you guys have mitigate them? And then do you have any data showing any specific on your customer price sensitivity as it relates to being able to pass through any extra cost you might have?
Paul Yee -- Chief Financial Officer
Hi, Eric, this is Paul. Thanks for your question. I think the first thing to note on tariffs is all of the tariffs enacted to date have had a very minimal impact to our business. So our guidance does reflect any impact of tariffs in place today. And that being said, as you are aware, we are monitoring situation very carefully where there is the potential for the remaining imports from China to be subject to tariffs. And like a lot of other apparel retailers we do source product from China. And should that situation arrive we have three levers in our toolkit to manage that impact. First and foremost, we have a very strong set of relationships with our brand partners and so we're already starting our conversations to contemplate that situation and ultimately how do we read our costs throughout our supply chain to mitigate any costs that come our way. Second with our exclusive brands what we do on the supply chain, we're already in the process diversifying our country of origin and migrating some production from China to other countries. And then finally you alluded to this, one advantage that we have is we do have a really rich data set of understanding our clients and their behaviors response to any kind of changes. And so should we have to surgically pass on cost, we do have I think a good capability to do so. So there are a lot of unknowns that as you can imagine that we're very much monitoring and managing scenarios and we'll obviously give more updates as the news transpires.
Eric Johnson -- Piper Jaffray -- Analyst
Great. Thank you.
Paul Yee -- Chief Financial Officer
Thank you.
Operator
From Suntrust we'll move to Youssef Squali.
Youssef Squali -- SunTrust Robinson Humphrey, Inc. -- Analyst
Excellent. Thank you so much. I have a couple of questions. First would you, Paul. It looks like your guidance, if I look at the midpoint, it seems the continuation of -- or an acceleration -- further acceleration of revenue per active customer per month. But it also seems, I think an acceleration the active clients growth when in the last nine months, it's actually been decelerating from something like 22% to 17%. First, is that a fair assumption? And second, what is behind that expected deceleration is that mostly UK, or I'm sorry, is that UK or is that mostly from the core business in the US? And then the other question is just around the Style Pass. Thank you for the 70% renewal rate info. I was wondering maybe you can comment on the percentage of clients which today have Style Pass and the type of growth you're seeing in that metric? Thank you.
Paul Yee -- Chief Financial Officer
Hi, Youssef, this is Paul. Thanks for your questions. As I shared with the guidance for Q4, I would say we continue to see benefit in growth from both levers which is client count growth and revenue per client. I would say the raise in our guidance for that quarter is driven by the continued momentum in our revenue per client growth. So we've grown four consecutive quarters and we see that momentum continuing. And as for active client count, we grew that 17% in Q3 and we see consistent growth as we look forward to Q4. So again, we see benefits from both. In terms of the drivers of that revenue per active client drivers -- the drivers of that growth, similar to my comments to Heath, it's a whole host of initiatives we have to find the right client and serve them well through better understanding them and through inventory management. So that momentum frankly, continues. Specific to your question in the UK and its impact in client count, we just launched a month ago. And certainly we're very much in early stages than with both the UK and frankly, the kids business, we're still in the very early stages of learning from those businesses and really seeing the impact on the Style Pass 2.5 years into our business. So overall, we are really pleased and you're seeing that raise for Q4.
To your question on Style Pass, I would say a minority of our clients currently today that have frequent Style Pass and it's very purposeful. We want to make sure that the offering we provide them, not only make sense for them, but also make sense for our business and we're constantly evaluating opportunities to bring more people onto the platform, but right now we're really pleased with the results obviously and we'll continue to monitor opportunities to bring more people into the Style Pass family.
Youssef Squali -- SunTrust Robinson Humphrey, Inc. -- Analyst
Thanks.
Paul Yee -- Chief Financial Officer
Thank you, Youssef.
Operator
We'll hear next from Ike Boruchow with Wells Fargo.
Ike Boruchow -- Wells Fargo -- Analyst
Hi. Good afternoon, everyone. Congrats, good quarter. I don't know if this question is for Katrina or Mike, but I want to ask you more about competition. So I know that within the subscription market you guys are by far and away the largest player. But how do you guys think about the rental market, there was obviously a large private player in that space. There's been some specialty retailers who have announced launches into that space. I'm just curious how you think about that competitively. And is that something that Stitch Fix would ever consider adding on to the subscription box service. Thanks.
Katrina Lake -- Chief Executive Officer and Founder
Yeah. Thanks for the question, Ike. We really think of ourselves as focus on personalization and there's really very few other players that are as focused on personalization as we are. That is the core of what we're focused on and the apparel market it's really, really large and we're not seeing any head-to-head competition I would say. Your question about rental, it's interesting. We're definitely looking at that market and it could be a future opportunity for us. I would say that right now, it -- we don't see it as big of an opportunity as the opportunities we have within our core business, so we definitely will continue to monitor that.
Ike Boruchow -- Wells Fargo -- Analyst
Thanks.
Operator
And from Wolfe Research, we'll go to Adrienne Yih.
Adrienne Yih -- Wolfe Research -- Analyst
Good afternoon. Let me add my congratulations. Nice quarter. Katrina, two questions for you. It sounds like the positive fix -- the positive first fix is coming from the back of data analytics. And I'm just wondering, how the evolution of the data analytics versus the personal style is evolving? Secondarily, what specifically can you tell us about what makes a good positive first fix. Is it something they say in their profile, or is it more general kind of psychographic? And then for Paul, just to piggyback off the tariff question, can you give us a general estimate of what you think the indirect sourcing from China is? Thank you very much.
Katrina Lake -- Chief Executive Officer and Founder
Thanks for your questions, Adrienne. Firstly just on first fix and your -- I guess the two sub questions. One is what makes it positive first fix experience, and that's actually we have a definition around that and that's a fix in which you bought at least one item is a fix where you are excited. We ask an exclusive question, are you excited to get your next fix? And that actually -- that signals positive intent, it signals the commitment to our potential retention and so those are metrics that we used to define that. And in terms of what's driving it, yes, it is data analytics that is helping us to better identify clients, but it's really everything that we do. And we think about -- two quarters ago, we shared that we had our highest keep rates in the business. The higher keep rates obviously contribute to more successful first fixes and people being happy with experience, as we improve the merchandise, as we're able to bring in more products that people are excited about that's going to improve that experience. And so I don't think we can share. We don't give all the credit to data, but I think it's really just broadly all of the things that we're working on in the business that improves that experience and contributes to that to the momentum we see there.
Adrienne Yih -- Wolfe Research -- Analyst
Great.
Paul Yee -- Chief Financial Officer
Hi, Adrienne. This is Paul. To your question around sort of our China's -- product sourced from China. So we're obviously in close contact with our brand partners and we do source a healthy portion of our product from China through our vendors and then also directly through our exclusive brand lines and given that outlook we're -- as I noted earlier, really focused on ways should the situation arise to mitigate the impact. And that's what we're closely monitoring as we speak, and again more to come as news progresses.
Adrienne Yih -- Wolfe Research -- Analyst
Great. Thank you very much.
Operator
Our next question will come from Janet Kloppenburg with JJK Research.
Janet Kloppenburg -- JJK Research Associates -- Analyst
Good evening, everyone. Congrats on kind of really super quarter. I had a couple of questions around the exclusive brand development. Are you internally developing that? Do you have a design or merchandising team that is growing within the organization? Or is this done through some of your vendor partners. And just if there's any relative inventory risk there higher versus what it might be with some of your partners? And if the exclusive brand -- I think I'm correct that it's devoted to men's right now, will it move into women's and other categories as well? Secondly, I was wondering, Katrina, if you can talk a little bit about, this is kind of the specific, but in the traditional retail world, seasonal inventory hit a real rough patch in the April quarter because it was so damn cold, and there was a shift in lots of different things that happened. But I was just wondering if you have a special sauce that allows you to mitigate those kinds of risks in terms of seasonality and weather trends? And I also just wanted to ask, given this performance which may be tied in some way to the increased advertising spend, how we should think about your marketing budget going forward? And if you may devote more of your spend to marketing, given the success you've seen? Thank you.
Mike Smith -- Chief Operating Officer and President
Hi, Janet. This is Mike. I'll take the first question and then pass it on to others for questions two and three. So we do both, your question about to do some of the design work with vendor partners or internal. We have internal people depending on the client that are working on some of the designs. But we also -- we have so much data what works and what doesn't work and a very strong kind of product team and tech team that helps us develop product. But we lean on and ask our vendor partners to help us think through it too. And a lot of its new training for them because they get way more data from us than they will get from another partner which actually allows us develop really great product. And that's why you are seeing our success in exclusive brands. And like I said earlier on the call, it's a huge strategic pillar for us, and it's represented in all parts of our business. It is actually in women's too, but we just highlighted the men's exclusive brand development on this call.
Janet Kloppenburg -- JJK Research Associates -- Analyst
Thanks.
Katrina Lake -- Chief Executive Officer and Founder
On your question on seasonality. I think this is one of the many dimensions that we're able to personalize across. And so when our stylists are choosing items for our clients, they're actually able to see the weather in that geography, so that we're really always sending seasonally relevant, climate-relevant products to our client. And I think the other place that we have advantage is because we turn our inventory, because we have the great relations -- because we turn our inventory over six times a year and because we have these great relationships with our vendors, we're able to react more in season than I think many other retailers can. And so we're able to see weekly selling and understand not just what is selling, but understand why behind that, that allows us to be able to react really quickly whether it's something that has to do with weather or something that has to do with trend. And I think that's a big advantage of our model where we are turning the inventory quickly and are able to be a little more reactive.
Janet Kloppenburg -- JJK Research Associates -- Analyst
Thanks.
Paul Yee -- Chief Financial Officer
Hi, Janet, this is Paul. In regards your question around marketing, we still see opportunities to build investments in marketing. As you can tell, we just launched our first innerwear brand campaign in Q3. And I would say even in the life of Stitch Fix, this is a new capability for us that we're building, and starting to infuse data science in that function to better target and frankly reengage our client base. So as you think about our longer margins of 11% to 13%, that reflects our marketing spend of 9% to 11% as a percent of revenue. So I would say we're still in the lower end of that range of marketing. And it's a reflection of the opportunities we do see to drive positive ROI through our marketing investment. So I think we're definitely looking forward to quarters ahead, taking our learnings and reinvesting in capabilities to drive more client loves.
Janet Kloppenburg -- JJK Research Associates -- Analyst
Great. Thanks so much.
Operator
And at this time, I'd like to turn things back to Katrina for closing remarks.
Katrina Lake -- Chief Executive Officer and Founder
Great. Thank you very much everybody for joining us. And we look forward to seeing you on the road in upcoming conferences.
Operator
And that will conclude today's conference. Again, thank you all for joining us.
Duration: 45 minutes
Call participants:
David Pearce -- Head of Investor Relations
Katrina Lake -- Chief Executive Officer and Founder
Paul Yee -- Chief Financial Officer
Mike Smith -- Chief Operating Officer and President
Douglas Anmuth -- JP Morgan -- Analyst
Ross Sandler -- Barclays -- Analyst
Mark Mahaney -- RBC Capital Markets -- Analyst
Heath Terry -- Goldman Sachs -- Analyst
Ralph Schackart -- William Blair -- Analyst
Edward Yruma -- KeyBanc Capital Markets -- Analyst
Eric Johnson -- Piper Jaffray -- Analyst
Youssef Squali -- SunTrust Robinson Humphrey, Inc. -- Analyst
Ike Boruchow -- Wells Fargo -- Analyst
Adrienne Yih -- Wolfe Research -- Analyst
Janet Kloppenburg -- JJK Research Associates -- Analyst
