Stitch Fix, Inc. (SFIX) Q1 2021 Earnings Call Transcript

Stitch Fix, Inc. (SFIX 2.36%)
Q1 2021 Earnings Call
Dec 07, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Stitch Fix first-quarter 2021 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr.

David Pearce, vice president of investor relations. Please go ahead, sir.

David Pearce -- Vice President of Investor Relations

Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2021. Joining me on today's call are Katrina Lake, founder and CEO of Stitch Fix; Elizabeth Spaulding, president; and Mike Smith, president, COO, and interim CFO. I would also like to mention that we are joining you remotely today from our home offices. We have posted complete Q1 financial results in our shareholder letter on the IR section of our website investors.stitchfix.com.

The link to the webcast of today's conference call can also be found on our site. We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance.

Please review our filings with the SEC for a discussion of the factors that could cause the results to differ. 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 the 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 -- Founder and Chief Executive Officer

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 and strategies, as well as the press release, announcing the appointment of Dan Jedda as our new chief financial officer. Today, I'll be sharing our first-quarter results and highlighting three key themes that position us to accelerate top-line and client growth in the year ahead. First, our business has great momentum and reached several multiyear highs in Q1.

Second, the secular shift to online shopping and the share gain opportunity we've discussed in past quarters is well under way, and we expect accelerating active client growth to play a significant role in our full-year outlook. And third, we're enhancing our fixed and direct buy offerings to expand our addressable market, deepen client engagement and grow wallet share over time. Before I dive into these themes, let me first discuss our Q1 results. In Q1, we generated net revenue of $490 million, reflecting 10% growth year over year and 11% growth quarter over quarter.

We delivered net income of $9.5 million and adjusted EBITDA of $6.9 million. During the quarter, we grew our active client count to nearly 3.8 million. This represents a year-over-year increase of 347,000 clients or 10% growth and a quarter-over-quarter increase of 240,000, our highest sequential client addition on record. This surge of new clients who are still early in their spending journey with us resulted in an expected decrease in year-over-year net revenue per client of 4%.

Even early in their journey with us, these new clients have demonstrated very strong purchase behavior in their first Fixes that we believe to be a strong signal of future satisfaction, retention and lifetime value. Q1 was a quarter that saw great momentum in client growth and in our business more broadly. Our offering continues to benefit from strong product market fit. In a time period where many traditional brick-and-mortar retailers are still experiencing double-digit year-over-year revenue declines in their most recent quarter, we delivered an increase of over 240,000 net active clients quarter over quarter, a return to double-digit year-over-year active client growth which we expect will increase further this fiscal year.

In their very first experience with us, these recently acquired Fix customers are demonstrating both strong purchase behavior and satisfaction. We previously shared a measure that we internally refer to as a successful first Fix, which we define as the percent of clients who purchase at least one item in their first Fix and look forward to their second Fix. In each of the last two quarters, nearly 80% of our first Fixes met this criteria, which is the highest level we've seen in five years. Even as we acquired a high volume of clients, we're very pleased that we're able to meet their needs and preferences.

The strength of these recent cohorts are due in part, to our ability to shift our inventory to meet the client in the moment but also our longer-term efforts in improving our recommendations by leveraging our growing data set to bolster our style graph and power our algorithmic models. We believe that establishing a favorable first Fix outcome is a strong indicator of future client engagement and retention that will serve as a tailwind in the quarters to come. We saw strong client outcomes in our newest clients and also in our broader existing client base. We're pleased to share that, across our entire Fix offering, we've increased success rate every year on record.

And in Q1, we delivered our highest level yet. We believe this strength is driven by our ability to leverage data to generate insight that allow us to relentlessly adapt our inventory assortment and continually strengthen our recommendations. In women's, for example, we've grown our athleisure assortment as a percent of our women's inventory by over 150% compared to pre-COVID levels, helping us to serve elevated demand for these products and meet our clients' work-from-home needs. In kids, we've used sourcing speed to our advantage.

We're now sourcing a meaningful portion of some of our most in-demand styles using a rapid sourcing model where product arrives to our distribution centers in as little as 10 weeks. This contributed to a strong back-to-school season in which we grew first Fix shipments by 60% year over year. We've also reacted to the current environment by expanding our assortment of more affordably priced products across categories which have resonated well with women's and men's clients and led to outside success rates. As we look ahead, we have growing confidence that our track record of strengthening personalization capabilities, paired with our nimble supply chain, will allow us to deliver better client and business results.

As we look to the remainder of fiscal 2021, our strong foundation of client and business trends sets the stage for the quarters ahead. We are pleased to reinstate annual guidance that reflects the momentum we're seeing. As Mike will discuss later, we expect to deliver net revenue growth of 12% to 14% year over year in Q2 and to drive further acceleration in the second half of the year, resulting in full-year revenue growth of 20% to 25% year over year. There are several drivers underpinning this outlook, but most notable is our expectation of further acceleration of our active client growth.

While the apparel industry is currently contracting, we expect to take share and drive higher new client sign-ups as the relevance of our model of personalized discovery and convenience grows. In Q1, we delivered first Fix growth exceeding 25% year over year. As the large majority of our new clients choose to receive Fixes on a recurring cadence, we expect this will drive strong engagement and repeat purchase behavior in upcoming quarters. In addition, we shared in September our plan to hire over 2,000 stylists outside of California, and we're pleased to share that due to such strong demand for our styling role, we've already met this hiring target and feel well-positioned to serve higher Fix demand in the remainder of fiscal 2021.

In addition to our strong outlook for Fix demand, we believe that direct buy will serve as another catalyst as we attract new clients, convert prospective clients and reactivate lapsed clients. We've continued to see direct buy's penetration grow across our men's and women's client base, and we plan to introduce it to new and prospective clients later this fiscal year. These strong trends we've seen in our business, combined with ongoing market share shift to Stitch Fix, gives us excitement for the quarters ahead. In Q1, the combination of record quarterly client additions, strong auto-ship retention, multiyear highs and successful first Fix rate and our highest success rate to date demonstrate the resonance of our offering and the power of the personalization engine that fuels our business.

With that, I'll hand it over to Elizabeth to share more on the enhancements we're making to our direct buy and Fix experiences as well as some of the exciting marketing initiatives we're investing in to capitalize on the retail share shift that is under way.

Elizabeth Spaulding -- President

Thanks, Katrina, and hello to all of you on the line. I'd like to begin today by sharing more about how we continue to evolve the offerings within our Stitch Fix ecosystem, which we believe will give us more ways to win. Our goal has always been to deliver the most personalized shopping experience to every client, and what has enabled us to do this so well is the nearly 10-year advantage we have building an algorithmically driven engine for highly personalized, apparel-based shopping. As I'll share in a moment, we're currently in the midst of further enhancing our core Fix experience, which has generated billions of dollars in revenue since the company's inception.

In addition, we've embarked on our next form factor, direct buy, which we expect will expand our addressable market, deepen client engagement and grow wallet share over time. Let me begin by sharing more on how we're enhancing our direct buy experience, including leveraging the usage of our proprietary Style Shuffle experience. Since its launch, Style Shuffle has proven to be a highly engaging experience. We have collected over six billion ratings with millions of clients having played.

During Q1, we've seen, on average, more than 50% of our app-engaged users playing daily. With such strong client engagement, Style Shuffle has evolved into a key vehicle for data collection that has strengthened our algorithms and allowed us to build enhanced features that improve client outcomes. We think these elevated levels of engagement showcase the opportunity that we have to create a powerful, speed-based commerce experience that allows clients to become a partner and co-creator in designing their personalized Stitch Fix storefront. As such, in November, we expanded our direct buy capabilities with the beta launch of Shop by Category, which leverages our rich Style Shuffle data, as well as the valuable insights we've learned about our clients over time, to create a highly personalized shopping feed for each client.

Underlying these distinctive data assets is the proprietary style graph that we leverage for each individual client feed. Each category shop is built around specific themes, like athleisure, sweaters or seasonal staples, which are curated using each client's real-time Style Shuffle likes, along with algorithmically generated recommendations inspired by these likes. Through this item-based format, clients now have the ability to purchase specific items that they see in Style Shuffle. Over time, we intend to algorithmically generate a wide array of categories relevant to each individual client based on signals we gather from them across various facets of our experience.

While still early and available to a limited number of clients, we have seen strong traction with Shop by Category to date with approximately 80% of clients who have engaged with the offering completing at least 1,000, demonstrating how fun and relevant this personalized shopping experience can be. It also complements Trending For You, our outfit-based recommendation feed, enabling higher-intent participations for specific items. Shop by Category is just one example of how we're leveraging our data flywheel to create a differentiated, engaging and personalized shopping experience. The offering addresses a broader range of client shopping needs and marks an important step in our evolution of direct buy as we move closer to using it as a vehicle for client acquisition in the quarters ahead.

Specifically, we believe this new category-based experience will provide a compelling gateway for the cold start experience where we can provide relevant, personalized recommendations to clients as they enter Stitch Fix for the first time. With our Fix form factor, we're enhancing the client experience to leverage our styling team to deliver stronger outcome. From a survey of our prospective clients, those who have completed our style profile but not yet converted to ordering a Fix, approximately 45% responded that they would convert if they have the ability to preview what they might receive from our stylist-based experience. Based on this insight and the magnitude and potential that this prospect base represents, we recently rolled out an initiative in the U.K.

called Fix Preview where we show clients proposed items for their next Fix. This new experience enables clients to engage more directly with their Fix before it ships and have more agency in selecting the items they receive. We began testing this feature in August and recently introduced it to 50% of U.K. clients based on strong early results that demonstrated higher client satisfaction and retention, as well as improvements in keep rate and average order value.

Based on this early success, we plan to roll out this Fix Preview capability to 100% of U.K. clients, and we have begun testing it with U.S. clients with the intent to learn and scale in the quarters ahead. We believe Fix Preview appeals to an even broader set of clients and allows us to drive customer confidence by efficiently showcasing our ability to pair them with the product they will love.

As a result, we believe that Fix Preview, along with our ongoing momentum in direct buy, will allow us not only to attract high-quality clients, but also to convert our large prospect population that we estimate is in the millions, clients who are at the precipice but have not yet converted to Stitch Fix. As we continue to focus on accelerating our penetration of a redefined apparel retail market with our superior personalized offerings, I'd like to briefly touch on some of the marketing innovation that is allowing us to capture share. Given ongoing dislocation in the brick-and-mortar retail space and our belief in the increasing relevance of our personalization model, we're investing in marketing and leveraging our predictive modeling capabilities to capitalize on the share shift under way. One of these exciting new initiatives is feed-based product ads.

Beginning in June, we began to roll out ads which dynamically match creative selections based on algorithmic recommendations of what will most resonate with each individual user. To date, we have seen meaningful improvement in these CPAs with more than double-digit decreases compared to other ad formats, and we expect to increase spend in this medium given the efficiencies. To capitalize on significant store closures as well as an influx of clients migrating to online shopping, we're also launching highly targeted campaigns across specific geographies to highlight our value proposition versus peers and attract customers whose spend is more likely to be up for grabs. While new, we're continuing to test these highly targeted initiatives, and we plan to share more on our progress in the quarters ahead.

As you can see, we remain very excited about the opportunity that lies ahead and our ability to capitalize on a forever-changed apparel retail landscape. Our time is now to connect with new customers, understand their individual needs and help them discover relevant, radically convenient and fun ways to shop and find what they love. With that, I'll hand it over to Mike to provide more on our financial performance and our outlook.

Mike Smith -- President, Chief Operating Officer, and Interim Chief Financial Officer

Thanks, Elizabeth, and hello to everyone on today's call. We're pleased with our first-quarter results and have continued to see strong momentum across our business that gives us confidence in our Q2 and full-year outlook, which I'll share in a moment. But first, I'll provide more color on our Q1 results. In Q1, we generated net revenue of $490 million, representing 10% growth year over year and 11% growth quarter over quarter.

In the quarter, we grew active clients to nearly 3.8 million, an increase of 347,000 clients and 10% year over year and over 240,000 net active clients quarter over quarter. Net revenue per active client of $467 declined 3.7% year over year. As Katrina referenced earlier, this is driven primarily by a recent surge in new client growth. During periods of elevated growth from clients who are early in their spending journey with us, revenue per client may temporarily lower until these new cohorts of clients have more time on our platform.

In addition, the trailing four-quarter calculation includes the impact of our Q3 '20 COVID trough, which will be lapped later this year. Q1 gross margin was 44.7%, representing a 60-basis-point decline from the same quarter last year, driven by higher shipping expense, partially offset by lower inventory reserves and clearance rates. Advertising was 10.5% of net revenue in Q1, compared to 11.4% in Q1 of '20 as we capitalize on efficiency gains in the quarter. Other SG&A, excluding advertising, was 38.2% of net revenue in Q1, compared to 33.8% in Q1 '20, driven by ongoing investments in technology; talent; and the associated stock-based compensation, or SBC, expense; as well as higher marketing expenses year over year.

Q1 adjusted EBITDA, which excludes SBC, was $6.9 million, reflecting solid revenue growth and lower inventory reserves and clearance rates offset by higher shipping and marketing expense. Q1 net income was $9.5 million, and diluted earnings per share was $0.09. Our net income this quarter included a tax benefit from the net operating loss carryback provisions of the CARES Act. And finally, in Q1, we delivered free cash flow of $51.4 million, reflecting our strong sales and margin performance, timing of payments and our capital-light model.

We ended the quarter with no debt and $429.9 million in cash, cash equivalents and highly rated securities. Now on to our outlook. Our robust demand trends, along with our improved supply side position, give us greater visibility and confidence to reinstate our quarterly guidance and share our first-quarter outlook. While we have planned for a wide range of scenarios, one note of caution.

Our guidance today does reflect that our fulfillment centers will continue to remain fully operational and won't face any significant disruption from potential government-related COVID mandates. First, on Q2. We've seen improving growth trends across our business since the Q3 '20 COVID trough, and we expect further acceleration in Q2 and throughout the back half of fiscal 2021. In Q2, we plan to deliver net revenue of $506 million to $515 million, reflecting 12% to 14% growth year over year, which we expect will be fueled by active client growth.

In past Q2 periods, we traditionally pulled back on advertising during the holiday season given that clients tend to be focused more on intent-based purchases and gifting to others. And as a result, we saw lower marketing efficiencies. However, with our direct buy offering, we can now play a greater role with clients' intent-based shopping during the holiday season. As such, we plan to lean in and anticipate that advertising as a percentage of revenue will be between 11% and 13% in the quarter.

We will continue to take a disciplined approach to our marketing strategy focused on positive ROI across a diverse mix of channels and believe that this investment will attract more active clients to our offering in Q2 and also be accretive to our additions in the back half of the year. Factoring in this investment, we expect Q2 adjusted EBITDA loss in the range of $6 million to $3 million. Now I'll turn to our full-year outlook. With the momentum we've seen in our new client sign-ups and the expected expansion of our direct buy experience, we see further opportunity to take share and drive growth in 2021.

Specifically, we expect our year-over-year active client growth to continue to accelerate and allow us to deliver net revenue of $2.05 billion to $2.14 billion or 20% to 25% growth year over year. This implies growth between 29% and 40% year over year in the back half of this year. Given our opportunity to invest to drive growth over the course of this year, we will hold off on providing a specific adjusted EBITDA range at this time. We plan to revisit it in future quarters.

In summary, we're very pleased with the start of our year and remain confident in our Fix and direct buy momentum, paired with accelerated active client growth, will position us well for the remainder of fiscal 2021. Before we turn to questions, I'll pass it back to Katrina to share more on our exciting CFO announcement.

Katrina Lake -- Founder and Chief Executive Officer

Thanks, Mike. Following a very thoughtful and extensive search, we're thrilled to be welcoming our new CFO, Dan Jedda. Dan joins us from Amazon where he spent the last 15 years. His background and experience is an ideal fit to help us to continue to scale and drive the next phase of Stitch Fix's growth.

Dan officially started today, and we are excited for you to have a chance to meet with Dan in future investor meetings and to hear from him on our second-quarter earnings call in March. I would also like to thank Mike for his nearly nine years of leadership and partnership at Stitch Fix. Most recently as our interim CFO and COO, he also launched and ran our men's business, had a critical role in launching the U.K. kids and so many other milestones along the way.

Not only has Mike achieved a lot, but he's done it in a way that has inspired, challenged and enabled our business and our people to grow. Thank you, Mike, for everything you've done for Stitch Fix. We're excited that you've now joined our board and will continue to be part of our journey. With that, we're ready to open up for questions.

Operator, over to you.

Questions & Answers:

Operator

[Operator instructions] We'll hear first today from Ross Sandler with Barclays.

Ross Sandler -- Barclays -- Analyst

Congrats on the quarter, guys. And Mike, congrats on your future plans. My first question just on the advertising expense guidance. So you guys normally don't ramp up the marketing in the holiday quarter for obvious reasons that you just mentioned.

But if we use that range that you provided, it looks pretty massive year on year, like 70%-ish or thereabouts. So what are you seeing in terms of CAC relative to that expense ramp? And are you going to see the -- I know you report clients on a TTM basis. But is the current-quarter client growth going to reflect something closer to that ad spend growth? Any color there would be helpful. And then if I can squeeze one more in.

Sorry for the long questions. The 80% conversion on first Fixes, that looks great. And can you guys parse out how much of that is coming from all the different things you're doing around personalization versus some of your customers probably have more disposable income right now going toward retail than -- or going toward e-commerce than they are other discretionary spending category? So is that macro? Or is that stuff that you're seeing in terms of the personalization? That's all.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. Why don't -- thank you very much for the questions, Ross. Why don't I actually just take your question on successful first Fix on the 80% number? And then -- and on the advertising side, I think Elizabeth and potentially Mike can weigh in as well. On the 80% successful first Fix metric, I think we -- it's probably a little bit of both, honestly.

I think there is no question that the macro environment right now is kind of enhancing and increasing our product market fit. I think as more and more people are looking for e-commerce solutions and as more and more people who may never have bought jeans, as an example, online are trying to figure out like what are the best tools out there to help me to find jeans, I think there's no question that the kind of the macro environment and the kind of drive toward e-commerce is definitely a contributor. That being said, like, we are always A/B testing improvements in our algorithm. We definitely really believe, especially in women's and in kids, that the speed with which we shifted the assortment to be able to meet our client where we were, and we've talked about this for the last couple of quarters, but being able to get out of the categories like workwear and the things that are less relevant and be able to be in the categories, like athleisure, and even, to some extent, sport, like those are definitely changes that really helps our business to kind of not just survive but really thrive during this time.

And so I think it's a combination of both the macro environment as well as kind of things that we've done to be able to improve those client outcomes. And then I'll pass it over to Elizabeth to answer your question on marketing.

Elizabeth Spaulding -- President

Yeah. Thanks for the question, Ross. I think a couple of things to point out. One is just we've overall seen this really significant sign-up rate of first Fixes which we talked about in Q1.

And I think for like the shoulders of Q2, not sort of the peak of what we just were in, in terms of Black Friday and Cyber Monday, which really is somewhat countercyclical to our model, but more just the ability that we're seeing with consumer shifting so dramatically online right now, we're anticipating to have opportunity there in kind of the later weeks of December and into January. And January tends to be a very good month for us overall. And just the kind of efficiencies that we've seen in CPAs have been really significant, albeit typically not during the peak holiday weeks. And so that's a big part of it is that first Fix opportunity.

The other is just the opportunity to reactivate those dormant clients as well as beginning to experiment with our prospective client base with our direct buy offering. And so all of those things are providing opportunity, and it is a range that we're giving on that marketing spend. And we, of course, make dynamic decisions as we go. We show that 11% to 13% range, and it will depend on what we see in the weeks to come over the course of the quarter.

But we're basing it on the optimism of what we've seen in terms of clients really migrating to our model over the course of the last several months.

Operator

We'll hear next today from Youssef Squali with Truist Securities.

Youssef Squali -- Truist Securities -- Analyst

Hello. Hi. Sorry about that. I had you on mute for a sec.

Congrats from me as well. And Mike, best of luck. Two quick questions. First, can you maybe speak to the promotional pricing environment activities going on there? How are you guys able to hold the line, which is pretty impressive? I saw the 4% decline in ARPU.

But it seems like, again, that may not have anything to do with promotional environment. It would be great if you guys could comment on it. And then on one particular category which you highlighted last quarter, and that's the plus category, can you just kind of speak to the opportunities there? We've seen some pretty big announcements around store closings for some large players, like Lane Bryant and other off-line players. So how big is it for you guys today? And how big is it of a needle mover for you over the next several quarters? Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. Thanks for the question. On the first around promotional environment, I mean, look, we can certainly see it. I think -- we talked about it at one point over the summer.

Obviously, right now is the time when we see a lot of promotional activity. But the reality is because Stitch Fix is a place where people really are buying and investing clothes that they -- investing in clothes that they want for the long haul, I think that the thing that we win on is fit and relevance. Those are things that I think a lot of other retailers are not as good at delivering and, frankly, probably aren't as relevant for some of the categories that do really well in Stitch Fix. And I think if you're thinking about a pair of jeans or even a pair of sweatpants that are going to be the sweatpants that you wear every single day, you're not necessarily looking for the sweatpants that's 80% off.

You're looking for the one that fits you really well, that feels really good on your body. And so I think that those -- the kind of the capability of being able to personalize has actually never been more relevant in the kind of crowded environment that we have today. And so I think that -- and the other thing that I would mention is just we did mention in the call that we have -- of course, during this kind of time of economic challenge, we certainly are seeing success in some of those lower-priced categories. And so -- those lower-priced products.

And so I think especially in our men's and women's businesses, we have reacted to the macro environment in that way and seen a lot of success there. On the question around plus size, it's absolutely a significant opportunity. I think it's -- the store closures that we're seeing in plus size, I mean, frankly, I think that we're seeing store closures really across the board in apparel retail. And I think plus size is certainly a place where there's been a ton of acute opportunity for a while, and that's a business that we've seen be enormously successful leading into COVID, certainly into COVID right now.

And we've continued to invest in making sure that we have the best products, that we have the right -- that we have the best fit. And it's a category that I think is definitely one that will drive a lot of growth for us in the future, and I think we'll be there to be able to capitalize on the trends to come.

Operator

We'll move next to Heath Terry with Goldman Sachs.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you very much. Katrina, when you look at the combination of direct buy and the trends that you're seeing in keep rate, how would you characterize what's going on in terms of spend per customer? And particularly to the extent that you're seeing segmentations within your customer base, is there anything notable that you would say is happening, whether it's regional, whether it's time your customers have been on the platform, new customers versus old customers, in terms of trends that you're seeing within that spend now that you have multiple options for your customers to be able to spend with you?

Katrina Lake -- Founder and Chief Executive Officer

Yeah. I can kick off, and Elizabeth may have something to add. At a high level, honestly, I mean, what we're seeing is that the two experiences are really additive. And I think some of what's really exciting about what Elizabeth shared in the category look -- in direct buy is that we're -- there are times when you are generally looking for ways to refresh your wardrobe.

And then there are also times when you are looking pretty specifically for things and you still want a personalized view but that you have kind of a category or a look or an aesthetic that you're specifically looking into. And so what we're finding is that these are actually -- I think there is a broader hypothesis that like direct buy and Fixes will allow us, the kind of combination of those two things will allow us to address many more types of clients. And what we're also realizing and it's really also -- it's unlocking, I think, both client opportunity but also pretty significantly on the wallet share opportunity side where if you're looking for a down jacket to eat outside, as an example, you'd actually love to buy that through Stitch Fix in a more frictionless way, and direct buy is going to be a great way to do that. I don't know, Elizabeth, if you have anything to add.

Elizabeth Spaulding -- President

Yeah. I mean, I think what we're overall seeing is just we're fulfilling more occasions for the consumer and really believe that we are providing the best browse-based and discovery-based shopping in a world that, for online, has been more characterized by search. And so what we're seeing right now in the marketplace with so much structurally shifting from off-line to online, we believe something like 10 points of share might shift in the next several months, but usually it was around 1 or 2 points a year is those purchase occasions that used to be in a store when you were looking around, we're now making those more easily available through our experience. And that notion of the shopping feed and especially what Katrina was alluding to with the categories where people can input their preferences and immediately see recommendations on categories they're looking for, that is highly additive to the surprise and delight of our Fix experience for those occasions that you might have gone into the store to look for something.

And so there's a real complementarity. It does show up very much in the penetration of the categories we're seeing. There are meaningful differences of more accessories, more footwear, more men's pants than we would see in our Fixes, as well as some interesting trends that we're seeing in price points with people, leaning into things that they really want to get. We have seen kind of deepening of higher price points with consumers we usually think of being a little bit more price sensitive, which we think is just a great signal that we're curating and surfacing items that are relevant to the consumer.

Heath Terry -- Goldman Sachs -- Analyst

Great. Thank you, both.

Operator

And from RBC, we'll move next to Mark Mahaney.

Mark Mahaney -- RBC Capital Markets -- Analyst

OK. Thanks. Mike Smith, congrats. That's a heck of an exit.

Congrats on what you've been able to succeed. Wishing you all the best going forwards. A couple of questions. I really like this idea of the Fix Preview.

I would also think that that would improve success rates. So did you also see that in the U.K.? I can't imagine that it would do anything but elevate those when you roll them out in the U.S. So just maybe talk about how long you plan to test before, if you get good results, you would actually roll it out into all of the U.S. And then on these record number of customer adds that you had, could you just peel that back a little bit? How much of that was due to gross adds versus reduced churn or increased customer retention, all of these new -- this functionality, the improved -- the relevance of personalization? I would imagine the bigger impact has been on customer retention, reducing churn, but any more color on that would be really helpful.

Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Thanks for the great question, Mark. Why don't I start with actually the client ad side, and then we'll have Elizabeth who can certainly talk a little bit more about Fix Preview. So I mean, it's probably a little bit of both, but the bigger driver is actually first Fix. And so what we've been seeing is that we've seen great efficiency.

We've seen really strong product market fit. So new client adds are really the most significant driver on that 240,000. And of course, we still see really strong retention trends. So that, of course, to your point, that contributes as well.

But we've seen strong retention trends for a while, and so the bigger move on the dial is definitely the new client kind of goodness that we've been seeing. Of course, we still see opportunity for those to get better, and we signal a little bit of that especially on the new client ad side. But definitely, a lot of good trends we've seen on that side of the business. Elizabeth, do you want to talk about Fix Preview?

Elizabeth Spaulding -- President

Yeah. Thanks so much for the question, Mark. And I think you really are spot-on in terms of the intuition of that being able to drive higher success rates and AOV, and we absolutely have seen that in the U.K. We're weeks into beginning to roll it out in the U.S.

and really in testing mode right now to make sure it's a great experience. And obviously, we have a more established client base here and some differences that we want to understand better. But overall, the early signals are positive here as well. And so we're actively working on how can we scale this up, how can we make it a better and better experience.

And it's both for the clients that are already in our pipeline but also making people aware that they can preview things before they buy, which we think will have an impact on our conversion funnel as well. So we're really excited about it. And just in general, I think what gets us excited is just our client's happiness is absolutely going up, and just being able to create the right experience is great. And the other thing is the way we've been testing it is you can opt into it.

We're making it available. And what's interesting is not everybody opts in. A lot of people are, but some people do love surprise and delight, and so we want to make sure we continue with that. And for those who want to have more of that peak into what they're getting and some engagement with a stylist ahead of time, we think this is going to be a great offering, particularly for those prospects that are the ones that I think, in particular, have been looking for this.

So yes, it's really a positive set of signs that we've seen. Excited to more fully roll it out.

Mark Mahaney -- RBC Capital Markets -- Analyst

Thank you, Elizabeth. Thank you, Katrina.

Operator

We'll move next to Cory Carpenter with J.P. Morgan.

Cory Carpenter -- J.P. Morgan -- Analyst

Great Thank you. I have two. Maybe starting on direct buy. Customers have a number of ways to interact with the product today from Shop by Category to Shop New Colors, just to a new a few.

So I guess my question is curious which of these direct buy initiatives had a base impact. Are you seeing clients engage with the most, thus far, and looking forward, where you still see the most opportunity from a product perspective? And then as a follow-up, maybe for Mike. Understanding you're not providing specific guidance, but curious if you still expect to see leverage year over year, and if not, maybe some of the puts and takes there. Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thanks. I'll probably have Elizabeth talk to your first question here, and then Mike can tell you -- can talk a little bit more about your leverage question.

Elizabeth Spaulding -- President

Yeah. Hi. Thank you, Cory, for the question. The number of ways that we're beginning to roll out the experience, maybe just to step back for a second, we launched first with Shop Your Looks, which were curated outfit feed based on -- showing outfits based on items you purchased in the past, which made a ton of sense for our embedded customers who had already bought items.

Then we launched Trending For You, which is the outfit-based feed that is generating recommendations, just based on anything that we know about you. And that's been very successful, and that's really been the bread and butter, so far, of this nascent direct buy offering. The category offering, we just began in an allocation of a beta in November. So it's a little too early to tell which are people using the most so far.

We really see them as complementary because the outfit feed is very much surprise and delight and just sort of getting a sense of really browsing and seeing what you might be interested in, whereas category is a little bit more like, "Oh, great. There's sweaters. I'm going to go find a sweater, and I was looking for that," or athleisure, and we'll be expanding those categories over time. So I think each lend themselves to browsing, but probably the categories are more indicative of things that are closer to search or that you might be looking for a particular item.

So we see them as reasonably complementary. And also, the outfit feeds, we're finding, are really inspiring to people because they can recognize and understand how to use that item. So I'm sure we'll share more in the quarters to come as we scale the full experience up and offer more features, but the intent is really to be able to address all of the different purchase occasion needs that our customers have.

Mike Smith -- President, Chief Operating Officer, and Interim Chief Financial Officer

Cory, this is Mike. I can take the leverage question. I mean, as I said in Q4, when we see these opportunities to invest and given the macro environment that we feel like there's plenty of opportunity to take share and we're seeing really healthy returns on marketing, we're going to invest. And so while we didn't provide any, like I said, any specific adjusted EBITDA guidance, I would expect us to continue to invest kind of in the back half of the.

Year when we see those opportunities. So I think more to share in future quarters to give kind of a better answer on actual leverage versus no leverage. But we're pleased with what we're seeing kind of in the marketplace and kind of the returns on investments that we're making.

Cory Carpenter -- J.P. Morgan -- Analyst

Great. Thank you.

Operator

We'll hear now from Erinn Murphy, Piper Sandler.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks. Good afternoon. I guess two questions for me as well.

First on the sales guidance. If we were just to take the midpoint, implying to the back half, that would be the highest dollar growth that we've seen on you guys. Are there other new initiatives baked in? Or is this just the benefit of scaling some of these opportunities, like direct buy, Fix Preview? And then my second question is just in the shareholder letter, you talk about chasing inventory. I guess I would love to have an update on what you're seeing from the vendor community and then how you're seeing the balance between vendor brand versus your own private label.

Katrina Lake -- Founder and Chief Executive Officer

Thanks for the question, Erinn. I try to take those. I mean, I think on the sales guidance, I mean, the way that you should -- that you can really think about it is like as we acquire new clients, those clients generate some revenue in that quarter, but they also just generate kind of continued compounded revenue in the quarters to come. And so when we see a quarter like this last one where we added 240,000 clients and we actually -- just to step back, since COVID, has kind of been building momentum both on the revenue side but also in the building of the client base side.

So a lot of -- so that kind of -- that momentum that we see in clients benefits us now but actually really benefits us as we look out to the year. And so it is the new client growth that we're seeing. It's the new client growth that we've already had. It's also new client growth that we are anticipating as we are looking into the months ahead.

It is the goodness that we've been seeing in the business around success rate, around retention rates. So all of that has flowed in. There is some initiative working there. I mean, direct buy certainly has been a significant contributor.

And we believe that as we continue to innovate in direct buy, that can continue to contribute. Things like Fix Preview, honestly, are a little bit kind of too early to really know exactly what that's going to deliver to the business. But I think those -- there's a lot of -- at any given time, we share in these earnings calls a few of the exciting things that we're working on, but we're running A/B test all the time. And we're always including kind of a balance of those kind of initiatives and hypotheses into our model.

But really, a lot of the growth is really around just our existing client base and what we've seen and also what we're anticipating as we look out into the quarters to come. On your second question around chasing inventory, I mean, we've -- it probably depends a little bit on business line also. I mean, in a place like kids, as an example, we've really been able to leverage our exclusive brands to be able to deliver that quick turn product, to be able to grow that business as we've seen really great demand on that side. I think in a place like women's, we're still very reliant on our vendor base.

And on the women's side, I think what we found is that our vendors are in a point now where they are really having to choose who do I believe is going to be a partner with me for the long term, and we are really happy that we are basically always at the top of that list. And so while it's definitely been a challenging time for everybody as demand has been up and down and preference just has been all over the place, at the same time, I think it's actually helping our vendor community to be stronger and to be better partners with us. I think they've been really excited that we've been able to deliver growth for their businesses during this time, and they see us as really valued partners. And so as we are doing things like exploring new inventory models and trying to figure out ways that we can be more flexible on the inventory side, we are finding that those relationships with our vendors are stronger than ever.

So it's definitely a balance in business by business that changes. But we feel really, really fortunate to be that vendor of choice, to be that retailer of choice for our vendors.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thank you.

Operator

And from KeyBanc Capital Markets, we'll hear from Edward Yruma.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hey, guys. Thanks for taking the question. Mike, best of luck going forward. I guess just two quick ones for me.

I guess, first, obviously some exciting data points on direct buy. From a logistics perspective, I guess, how much more investment is necessary as you continue to scale that business? Can you deliver or do you need to kind of moderate growth there? And then second, as a bigger-picture question, hopefully, we all start to live life again sometime in calendar '21. Do you anticipate a big fashion shift? And I guess how do you start to position your inventory or your buying around a potential resurgence in apparel demand? Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Thanks, Ed. Why don't I answer the bigger-picture question? And then I'll have Mike talk a little bit about logistics. On the big-picture question, I mean, it's a great -- I mean, all of these -- I think these last nine months have been a real test of everybody's resilience and flexibility. And I mean, I think at this point, we all acknowledge that we don't have a crystal ball.

But we, of course -- I think the thing that has big -- been our biggest asset is the flexibility and the ability to be able to learn really quickly what's changed and react. And so rather than trying to predict the future, I would say that our efforts are really channeled toward how can we make sure that we are the most flexible that we can be and how can we make sure that as behavior changes or as we see things that are different, that we can see it first and we can react quickly. And so kind of the reference point that we made to the kids inventory and being able to use a rapid sourcing model, and that's kind of an example of something that we're doing there. And so I think we do expect that there will be a shift.

I mean, how things will shift, at what rate things will shift, like when will things shift, I mean, these are still questions we don't have the answers to. But we want to be really prepared when those things start to change, that we can really react to it. And Mike, why don't you take the question on logistics?

Mike Smith -- President, Chief Operating Officer, and Interim Chief Financial Officer

Yeah. I mean, I'll start with more generally, and then I'll get to a specific question, Ed. I mean, generally, I'm so proud of our team kind of on the supply side with warehouses and styling. Katrina mentioned kind of being able to hire into the stylist needs that we had and sort of exceeding our expectation for how quickly we got back up to speed and styling, but warehouse is the same thing.

I mean, they're really, really resilient kind of during a very tough period. So specifically on direct buy, it helps to have a couple of quarters kind of in the past of having done direct buy, but we're super well-positioned in direct buy from a logistics perspective, and it's the same inventory. It's within the same four walls. So it's no different, so we're ready.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Thanks, guys.

Operator

And Rick Patel with Needham & Company has our next question.

Rick Patel -- Needham & Company -- Analyst

Thank you. Good afternoon, and best wishes to Mike as well. I was hoping you can expand upon the offering of more affordable price products across women's and men's. Any particular categories or brands to call out as we think about the evolving assortment? And should we expect this to have a negative impact on AOV going forward? Or would you expect success from Fix Preview to offset that potential pressure?

Katrina Lake -- Founder and Chief Executive Officer

Yeah. It's a great question, and I probably will only be able to answer directionally for you, just because I think some of these things we are also curious to see how it shakes out. So I think what we're seeing is we are seeing more success at kind of the lower end of our price ranges, as you would expect. I think you've heard this in other retailers' calls that I think there definitely has been some economic pressure on wallets.

And so what we've really been doing is -- it is kind of similar inventory to what we've already had, but making sure that we have the right depth, making sure that we have the appropriate amounts of it, and that has resulted in higher success rates. And so we shared that we are having the highest success rates ever in the business, and this is one contributor to that. And so when we see those really high success rates, then we see there's kind of pro and there's also an uptick in -- well, there's a little bit of washing out effect in AOV because as people are keeping more things in their Fixes, that, of course, contributes to higher AOV even though we have -- we also have like, I guess, both sides of the coin, right? And then, of course, as we think about future initiative work -- and also, I think there's a little bit of a hypothesis that this is temporal. And Elizabeth spoke a little bit about like what we're seeing in direct buy, as an example, is that we're seeing people who might be more price sensitive in Fixes actually be excited to splurge in direct buy.

And so I think we're not quite at a point that we're going to know where all these numbers land right now, but we're seeing great success rates. We're seeing the product resonate really well. I think we have some hypothesis that there's a temporal nature, I think, of just the economic pressure that we're seeing right now and us being able to meet the client where they are. And that's, of course, a good thing now but may not be a permanent trend.

And then things like Fix Preview, to your point, those, we would believe, would have some pretty meaningful impacts on things like success rates in AOV in the future. And so I think there's a lot of kind of puts and takes. But like directionally, I think you're seeing which direction the arrows go, and I think the question for us is just like where does everything net out in the next six months or a year.

Rick Patel -- Needham & Company -- Analyst

Thanks. And I'm hoping we can get more insight into the plan to introduce direct buy to prospective clients later this year. I'm just curious what that's going to look like from a consumer perspective. Do we still need data from their style profile? Or is the goal here to use predictive analytics to attract customers that aren't in your database right now?

Katrina Lake -- Founder and Chief Executive Officer

Yeah. I think I'll ask Elizabeth to jump in on this one.

Elizabeth Spaulding -- President

Yeah. Thanks, Rick, for the question. We're very excited about this. And you kind of hit the nail on the head with one of the questions, which is what we call from an algorithmic standpoint like how do you make a great cold start experience and make it very low friction at the same time.

And so part of what I described with the category-based shopping and the fun engaging way of leveraging something, like Style Shuffle, we absolutely think could be a part of that new entrant. We also have very significant base of prospective clients where we actually already have their style profile and they probably would be very interested in this offering. And so that kind of gives us the benefit of both, and then, of course, just beginning to experiment with a new sort of introduction and onboarding flow into Stitch Fix. That's probably quite a bit simpler than our typical profile for the stylist-led experience.

So all of those things are what we're in the flight of building and testing right now, but with a lot of confidence and optimism that we can create pretty solid recommendations even without limited -- with limited information because we're not just using the information of that individual. We're using the information of individuals that have a lot of similar preferences like them, of which we have -- with 3.8 million active clients, we have a lot of benefit of being able to understand those style preferences, leveraging our style graph. And so we are kind of in the early days of doing a number of tests. And to Katrina's point, we're always testing things.

And so we're confident that this will be part of FY '21. The exact timing of really scaling it up is yet to be seen, just to make sure that it's a terrific experience for new customers.

Rick Patel -- Needham & Company -- Analyst

Very helpful. Thanks very much.

Operator

And from Deutsche Bank, we'll move to Kunal Madhukar.

Kunal Madhukar -- Deutsche Bank -- Analyst

Thanks for taking the question. Just a quick follow-up on the direct buy and rolling it out to nonsubscribers. In terms of timing, and you mentioned you're doing some testing, what is the key factor that you're looking for or you're waiting for before you actually make that final go, no-go kind of a decision? And would maybe a reopening of the market kind of be a decision that plays into it? And then I have a follow-up.

Katrina Lake -- Founder and Chief Executive Officer

Sure. Why don't I start? And I might have missed -- so your first question -- the first part of your question, just so I'm clear, is just what are we waiting for before we roll out the direct buy to non-clients. Is that right?

Kunal Madhukar -- Deutsche Bank -- Analyst

Yeah.

Katrina Lake -- Founder and Chief Executive Officer

And then the second part of that was --

Kunal Madhukar -- Deutsche Bank -- Analyst

Second part of that was, as you look at marketing, and Mike just talked about how you will invest for growth but you will be doing it in a disciplined manner, one is, how do you intend to kind of spend on brand versus performance around this direct buy rollout?

Katrina Lake -- Founder and Chief Executive Officer

Got it. Got it. OK. Yes.

Let me take a pass on that, and Elizabeth can certainly jump in, if I missed anything. I mean, firstly, what we're really trying to optimize for is converting people into the right experience in Stitch Fix. And so we've been doing some testing around what is the best way to introduce direct buy and like what is the best way for us to actually figure out like this is somebody who should be on a conversion path to Fixes versus this is somebody that we actually should have into direct buy first. And so that's actually -- so right now, we're kind of testing to make sure we're looking at everything from an LTV perspective.

And so just to be -- like just to put out a real -- a very real example, like if we go and acquire 1,000 clients who like actually really would benefit from Fixes, throwing them into a direct buy first experience actually might be degradative to their LTV. And so there is, of course, all of the cold start challenges that Elizabeth spoke to. But there's also this onboarding question around just how do we make sure that we get the right people into the right conversion path and how can we make sure that we're getting that right optimization. And so we're -- we want to do some more continued testing to make sure that we are really maximizing for LTV at that very first juncture of making sure that we are kind of getting people into the first step of the right experience.

And then on the second question around just how we're thinking about our -- we've always been very disciplined with our marketing spend. We've always been optimizing for really good ROIs on that, and that won't change with direct buy. And I think what's really exciting about having direct buy be separate is that it actually opens up all of these additional marketing channels to us that weren't actually available before. And so there are things -- there are some SEO channels, as an example, that weren't available, like suddenly you can actually compete in some of the items-based marketing that a lot of retailers compete in.

And so we view those as likely to be lower CPA channels that actually can allow us to have kind of incremental path into Stitch Fix. And to date, we haven't spent -- we shared, I guess, now, I guess, maybe a year or two years ago when we did some brand spend and as we look into the future, I think there's definitely opportunity for us to be exercising more of that brand muscle. We -- I think, to date, we have so much opportunity just in the low-hanging fruit of introducing people to Stitch Fix and to introducing people originally to the direct buy experience that I would not anticipate having a lot of brand spend connected to that. But I certainly think that's a big opportunity for the business.

I think especially once kind of the cloud lifts a little bit and the kind of tumult that is apparel retail right now, I think there's really going to be an opportunity for us to establish ourselves as the preeminent brand.

Kunal Madhukar -- Deutsche Bank -- Analyst

Great. Thank you so much.

Operator

And our final question today will be from Mark Altschwager with Baird.

Mark Altschwager -- Baird -- Analyst

Good afternoon, and thanks for taking my question. Mike, best of luck to you with your next chapter. So Mike, starting out, I want to ask about gross margin. Can you maybe speak to some of the puts and takes as we think about the second quarter and back half? And how we should think about potential scale benefits on the gross margin line as the revenue growth accelerates to the levels that you're anticipating? And then Katrina, just separately, really remarkable progress with the new stylist hires.

Could you maybe talk about your early learnings here and really a pretty significant shift in the stylist space in a relatively short period? And then looking ahead, how should we be thinking about the opportunities from a productivity standpoint as these new stylists ramp in the coming quarters? Thanks.

Katrina Lake -- Founder and Chief Executive Officer

Yeah. Thanks for the questions, Mark. I'll start out with your question around stylists and hiring, and I'll have Mike speak to gross margin. On the stylists side, we are just -- like I think stylist hiring is a place where we've really just gotten better over the years, and this is a really unique job.

This is a job where you can work from home. I guess not -- that's maybe not so unique these days. But this is a job where you can sustainably for -- you have been able to and will in the future be able to work from home and work from home in a pretty flexible way. And so this has always been a really attractive job.

And while we were optimistic that we'd be able to have these kind of aggressive hiring plans met quickly, we are -- it's just a big testament to the team that we were able to do that as quickly as we were. And I think some of it is that we've been able to improve the way that we market the role. I think there's definitely ways that we've been able to kind of leverage what we know about what makes a stylist successful today and make sure that we're bringing the right people in. And so this is a muscle that we've been exercising for the last eight years or so and one that we've just gotten better and better at.

In terms of leverage on the styling side, I mean, the way I think about it is that these stylists, like it's such an incredible asset that we have, these thousands of people who are spending high-quality time thoughtfully delivering Fixes for our clients. And so over time, I think that real thesis is more how can the algorithm do more and more of the things that we know that the stylist doesn't need to do and then at the same time, how can we actually use that stylist's capability in a more powerful way. And so there's a couple of tests that I would point to. We have done some live styling tests in the U.K., where we have stylists who were doing a more hands-on experience with clients, and that's certainly been something that's been super exciting to see in the U.K.

Also, we've had some stylists who are actually helping to create content for us. And so that's another really high value-add way that the stylists can be adding value. And so I think we're really excited about the trajectory that we've seen for hiring stylists. And I think we're really excited as we look into the years and the future of just being able to be more creative with the way the stylists add value to our business.

Mike Smith -- President, Chief Operating Officer, and Interim Chief Financial Officer

Mark, I mean, one of the things I'm really proud of also is just kind of the rebound that we saw in gross margin, as we talked about with you guys before, from the Q3 COVID trough to where we are today. As I look out in future quarters, while we don't guide the gross margin, I feel like you should see consistent performance from us on gross margin. To your question about puts and takes, obviously, there is a little bit of headwind in shipping. We experienced it less than most because we have less of a peaky kind of holiday business.

But the things that kind of help us how to be consistent is the scale you mentioned. It's the increase in just the brand, and it's actually just the success of businesses, like kids in the U.K. as they grow and they get closer to kind of where men's and women's are. So I think we have more tailwinds than headwinds, but I would expect that we have -- see more pretty consistent performance from a gross margin perspective throughout the fiscal year.

Operator

And at this time, I'd like to turn things back to Katrina for any closing remarks.

Katrina Lake -- Founder and Chief Executive Officer

Thank you. Thank you very much. Thank you all for joining us. We look forward to seeing you virtually or maybe even in person in the coming quarters.

Thank you.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

David Pearce -- Vice President of Investor Relations

Katrina Lake -- Founder and Chief Executive Officer

Elizabeth Spaulding -- President

Mike Smith -- President, Chief Operating Officer, and Interim Chief Financial Officer

Ross Sandler -- Barclays -- Analyst

Youssef Squali -- Truist Securities -- Analyst

Heath Terry -- Goldman Sachs -- Analyst

Mark Mahaney -- RBC Capital Markets -- Analyst

Cory Carpenter -- J.P. Morgan -- Analyst

Erinn Murphy -- Piper Sandler -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Rick Patel -- Needham & Company -- Analyst

Kunal Madhukar -- Deutsche Bank -- Analyst

Mark Altschwager -- Baird -- Analyst

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