Stitch Fix, Inc. (SFIX) Q2 2021 Earnings Call Transcript

Stitch Fix, Inc. (SFIX -1.79%)
Q2 2021 Earnings Call
Mar 08, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Stitch Fix second-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 second quarter of fiscal 2021. Joining me on today's call are Katrina Lake, founder and CEO of Stitch Fix; Elizabeth Spaulding, president; and Dan Jedda, CFO. I would also like to mention that we are joining you remotely today from our home offices. We have posted complete Q2 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 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 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 -- 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 strategy. On today's call, we'll focus on three themes that demonstrate the momentum we're seeing in our business. First, we are continuing to see clients migrating to our offering at the highest rates we've seen in years, and we're excited about the opportunity to accelerate our share gains over time.

Second, we continue to evolve our Fix offering to enhance conversion and retention of new and existing clients. And third, direct buy is resonating with our existing clients, and we're preparing to roll it out to first-time clients at the end of fiscal Q4. Combined, our demand strength, product innovation and planned launch of direct buy to new clients give us confidence as we look to the quarters ahead. As I'll discuss in a moment, we also see near-term factors that we expect will impact the back half of this fiscal year.

And as a result, we've updated our full year outlook. Before I dive into these themes, let me first review our results from the quarter. In Q2, we generated net revenue of $504 million, reflecting 12% growth year over year. Within our Fix offering, first Fix shipments in the quarter increased to their highest growth level in five years.

However, due to the pandemic, carriers faced unprecedented volume during the holidays, and we saw increased cycle times. This resulted in us not being able to recognize all the revenue from Fixes we shipped during the quarter. We define cycle time as the duration between when we style items for a Fix and when we receive and process any items back from the client in our warehouse. And unlike other e-commerce companies, we recognize revenue for Fixes at client checkup, not at the point of shipment.

Adjusting for the impact of these increased cycle times, we believe Q2 revenue would have been within our guidance range. In response to these delays, we've made adjustments in our ship planning process to ensure we meet our promise delivery dates. We are taking steps to diversify our outbound carrier mix, and we are partnering with our primary carrier, the United States Postal Service, to process our returns more efficiently. In January of Q2, direct buy helped us achieve our strongest month-over-month revenue growth of any January on record and demonstrated the power of our new offering to complement our core Fix form factor.

That said, we also learned more during the holiday period about seasonality of direct buy. We saw a softer holiday performance than we anticipated and believe that self-purchase behaviors subsides in this window similar to what we've historically seen in our Fix offering and is replaced with a gifting mindset. In Q2, we also grew our active client count to nearly 3.9 million, representing a year-over-year increase of 408,000 clients or 12% growth. It also reflected a quarter-over-quarter increase of 110,000 clients, which is more than twice what we delivered last holiday quarter.

With this growth, we've generated more net client additions in the last two quarters than we did in all of fiscal 2020, and we plan to continue expanding our client base in the remainder of the year. Dan will review our results in more detail later on this call. Now I'll share more on how we continue to capture share amid the ongoing shift in the retail landscape and why this gives us confidence in our long-term opportunity. The first COVID-19 stay-at-home government mandates were enacted nearly a year ago.

This resulted in a massive share shift acceleration online as consumers increasingly moved away from predominantly shopping for apparel in physical stores. Industry observers estimate that approximately five years' worth of online share shifts occurred in the past year alone, and forecast now calls for nearly half of U.S. apparel spend to have moved online by 2025. As a result, we believe that consumers embrace of our offering is here to stay, and the demand trends and client growth we're seeing demonstrate that our model of personalized discovery and radical convenience position us well to capture more than our fair share.

As the country begins to reopen and the broader environment normalizes, we believe overall demand for apparel will increase and will be incredibly well positioned to win. In the second quarter, growth in first Fix shipments accelerated to nearly 50% year over year, which is our highest growth rate since 2016 and was up from over 25% growth last quarter. This growth was driven primarily by strength in our women's category, which delivered its highest year-over-year first Fix growth in the past five years. Given that our Women's category comprises a large majority of our business and addressable market, this acceleration is particularly exciting and highlights our strong product market fit and the migration that is under way.

As we look to the back half of our fiscal year, we continue to see significant opportunity, but there are also factors that have emerged that are important to consider. From a demand standpoint, we're seeing first-time clients migrating to Stitch Fix at multiyear highs. And to support this demand, we are investing across inventory, styling and operations to have the product and throughput to serve these clients well for the quarters ahead. But we're also seeing longer cycle times, mainly comprising carrier and client delays, which continued in February.

These longer cycle times impact in-period revenue recognition and delayed subsequent Fix orders, both of which can dampen our top line. We saw this in Q2. In addition, we expect some product feature rollouts tied to the direct buy launch to first-time clients to move to later in this fiscal year, which would push out some of the anticipated revenue growth. As Elizabeth will discuss in a moment, direct buy performance remains strong, and we're investing the time and effort to enhance the product experience before our plan launched to first-time clients at the end of fiscal Q4.

Given these moving parts, we believe it's prudent to adjust our revenue outlook for the fiscal year. Dan will discuss this in more detail later in the call that our confidence and excitement around the products we're building and the demand we're seeing remains unchanged. Now I'll hand it over to Elizabeth, who will share more on some of the enhancements we're delivering across our offerings.

Elizabeth Spaulding -- President

Thanks, Katrina, and hello to all of you on the line. Today, I'd like to share more on the strategic innovation we're investing in to drive long-term growth. We believe these investments across our Fix and direct buy offerings will increase the relevance of our personalized service and allow us to play in a full suite of shopping occasions, which we expect will increase the value we get from existing customers and expand our addressable market of new customers. As we shared last quarter, we continue to evolve our Fix offering by leveraging our data science capabilities and capitalizing on our large talented filing team to deliver stronger client outcomes and cement long-lasting relationships.

Our vision is to elevate our nearly 6,000 stylists who we view as a unique competitive advantage in our personalized offering as style experts. And as a result, we're investing in product experiences that we believe will drive greater personalization, increase wallet share and enhance lifetime value. The first of these experiences is Fix Preview, which, as we discussed last quarter, give clients the opportunity to view proposed items for their next fix before it ships. We expect Fix Preview to increase client conversion rates because we give clients more agency in the Fix experience.

An added benefit of this feature is that we're also able to collect rich and meaningful feedback that improves the efficacy and efficiency of our algorithm. Initial results from our Fix Preview launch, which included nearly half of U.K. clients, demonstrated strong client engagement with nearly three-fourths of these clients opting in for the future as of Q2. When compared to outcomes without Fix Preview, we also saw higher keep rates, which drove a 10% increase in average order value and improved client retention.

With these encouraging results, we recently scaled Fix Preview to 100% of our U.K. clients, and we plan to ramp to all of our U.S. clients by the end of the fiscal year. We're also investing in additional client-facing experiences that further leverage our stylists to deliver personalized, collaborative engagement that extends beyond the transaction to form long-lasting relationships.

One of these experiences that we've begun incubating is live styling where clients join their stylists for a 30-minute session hosted by a video call to talk through styling advice and to partner with their stylists to co-create their fix. As this offering evolves, we believe that it will improve client retention and deepen client trust with the heap and guidance that our stylists are able to offer. While still early, experiences like Fix Preview and live styling enhance our interactions with clients, and thus, the quality and dimension of data we gather from those interactions. These multi-touch points provide an opportunity to learn additional ways that clients would like to engage with our offering, creating jumping off points for new experiences that we may pursue in the future.

To accelerate the rollout of these product experiences, we're investing for the long term by growing our styling community and product engineering team. Over time, we believe this will allow us to increase conversion, improve client outcomes and expand lifetime value. Now let me discuss some of the exciting progress we've made with direct buy where the offering continues to scale among our existing clients and increase client engagement and purchase behavior. With nearly one-fourths of our women's active clients having made a direct buy purchase to date, we're pleased to see such strong engagement from our largest client category.

In addition, since launch, nearly two-thirds of these women's clients have returned to make repeat purchases within six months of their initial purchase. We've also found that clients we've acquired through paid marketing channels in the past few quarters are actively engaging with direct buy and are delivering higher early lifetime values than previous cohorts. Specifically, we've seen that these clients are generating more cumulative contribution profit in their first three and six months than clients one year ago who were largely Fix clients only. This incrementality gives us more optimism to believe that as our direct buy offering expands, client lifetime values will continue to grow.

The momentum and client engagement we've seen increases our confidence as we look to introduce direct buy to new clients at the end of the fiscal year. We have a solid foundation in place, and our development efforts are largely focused now on expanding the experience for first-time clients. This includes evolving our client onboarding process and user interface, tightening logistics and operations, and streamlining client style collection information. Specifically within the client experience, we're focused on expanding the breadth of our assortment to accommodate clients' individual preferences while balancing the browse and discovery experience to ensure direct buy remains highly personalized and engaging.

We believe that taking the time to optimize the experience in this way will allow us to more effectively scale direct buy and bring the offering to life for first-time clients later this fiscal year. Our goal is to help clients begin their journey with Stitch Fix in the best possible way, starting with either Fix or direct buy as soon as they enter our ecosystem, and we expect that direct buy will help drive greater engagement and fuel client acquisition in the years ahead by unlocking the full addressable apparel market. Before I hand it over to Dan, I'd like to quickly touch on our efforts to vastly expand the selection that we can offer to clients as we position the company for accelerated long-term growth. Historically, we've used a wholesale inventory model, which has been very effective, but places inherent limitations on the breadth and depth of our assortment.

Earlier this fiscal year, we began exploring new inventory models, including vendor-managed inventory and drop ship. We believe moving to a multi-inventory model will enable us over time to meaningfully expand selection, allowing us to attract more clients, drive higher demand and create a flywheel of accelerated growth. We look forward to sharing more details on this topic in the quarters ahead. As you can see, our focus on innovating our Fix experience, scaling and ungating direct buy, and evolving our inventory models demonstrate our commitment to creating more ways to win in this new apparel retail landscape.

This gives us confidence in our ability to continue taking share and driving long-term growth. With that, I'll turn it over to Dan.

Dan Jedda -- Chief Financial Officer

Thanks, Elizabeth, and hello to everyone joining us on today's call. I'm just over three months into the role, and I've had the opportunity to dive into the business. A few things stand out that I wanted to share. First, the passion and dedication of the team to innovate in this space and provide a unique and personalized client experience is unmatched.

Second, I'm incredibly impressed with the data science moat and creative styling capabilities that the team has built. And finally, the investments we're making to evolve our Fix offering and scale direct buy give me excitement in our long-term growth trajectory, and I look forward to helping meaningfully scale our business over time. I couldn't be more excited to be part of the Stitch Fix team. With that, I'll discuss our Q2 results.

In the quarter, we generated net revenue of $504 million, representing 12% growth year over year, which is an increase in growth over Q1. As Katrina mentioned, revenue for the quarter was impacted both by increased cycle times for Fixes, which are largely related to carrier and client delays as well as direct buy softer-than-anticipated performance during the holiday period. Adjusting for the impact of these increased cycle times, we believe Q2 revenue would have been within our guidance range. In the quarter, we grew active clients to nearly 3.9 million, an increase of 408,000 clients and 12% year-over-year.

This also resulted in an increase of 110,000 active clients quarter over quarter, which is more than twice what we delivered in our last holiday quarter. Net revenue per active client of $467 declined 6.8% year-over-year, consistent with our expectations. As we shared last quarter, this decline is driven primarily by our increasing new client growth. With an influx of new clients that are early in their spending journey with us, revenue per client may be lower until these new cohorts of clients have more time on our platform.

In addition, our trailing four-quarter calculation continues to include the impact of our Q3 2020 COVID trial, which we will lap next quarter. Q2 gross margin was 42.9%, representing 190 basis point decline from the same quarter last year, primarily driven by increased shipping expense, largely due to higher rates with our carriers. In addition, the decline was impacted by increased inventory reserves due to higher inventory level as well as some select men's inventory targeted for near-term clearance. This is a function of our men's category rebounding more slowly from the impact of the pandemic than women's and kids.

We believe men are shopping less frequently during these COVID times, but we expect these trends to improve as we emerge from this backdrop. Advertising was 8.3% of net revenue in Q2 compared to 7.9% in Q2 2020. During the holiday period, we saw higher CPAs in certain channels, so we pulled back on advertising in December. Entering January, we saw significant improvement in CPAs and increased our advertising spend accordingly, which contributed to our strongest month-over-month growth in revenue and active client additions of any January on record.

Other SG&A, excluding advertising, was 42.6% of net revenue in Q2 compared to 35% in the same period last year. The increase year over year was driven by higher compensation and benefits expense, including increased wages at our fulfillment center tied to an hourly wage increase to at least $15 per hour for all full-time U.S. warehouse associates. In addition, it reflected higher marketing expenses and increased COVID-related costs.

Q2 adjusted EBITDA loss of $8.9 million, reflecting the impact of lower revenue in the quarter, higher shipping costs an investment in our people and operations. Q2 net loss was $21 million, and diluted loss per share was $0.20. And finally, we ended the quarter with no debt and $369.4 million in cash, cash equivalents and highly rated securities. Now I'll turn to our outlook.

We are seeing strong new client acquisition trends, healthy auto ship retention levels and increased client engagement with direct buy. That said, there are also near-term factors that may impact the back half of fiscal 2021 and are reflected in our updated full year guidance. First, we saw longer cycle times in Q2 that persisted in February that we believe could impact revenue in the second half of the year. These longer cycle times, mainly comprising carrier and client delays, impact in-period revenue recognition and can delay subsequent Fix orders given that a large majority of our clients receive recurring Fix shipments.

In addition, there's still a lot of uncertainty given COVID, and as a result, we're taking a more measured approach to our outlook. And second, our direct buy offering, we're very excited about the momentum we've seen with our existing clients, and we look forward to rolling it out to first-time clients. As Elizabeth mentioned, our product teams have focused on expanding features of the user experience to ensure that direct buy is a great experience from the onset to onboard new to Stitch Fix clients. As such, we plan to continue testing the product through fiscal Q3 and into Q4 before a full-scale product launch in late fiscal Q4.

This rollout time also plays a role in our revised guidance. Given these factors, let me now share our Q3 and full year 2021 guidance. For Q3, we expect net revenue in the range of $505 million to $515 million, representing growth of 36% to 39% year over year. We expect adjusted EBITDA in the range of negative $9 million to negative $5 million or negative 1.8% to negative 1%.

This reflects our ongoing investment in advertising, operations and styling that we discussed earlier. While we expect these investments to benefit client growth in the quarters to come, it will also weigh on adjusted EBITDA in the near term. For full year 2021, we now expect net revenue in the range of $2.02 billion to $2.05 billion, representing growth of 18% to 20% year-over-year driven primarily by accelerating year-over-year active client growth and increasing spend from our newest client cohorts as they mature on our platform. From an investment standpoint, given that there are several moving pieces, including the precise timing of product launches, we'll hold off on providing full year adjusted EBITDA guidance at this time.

In summary, we remain excited by the demand trends we've seen over the last few quarters, giving us confidence that this, combined with our investments in new product and innovation, position us for long-term growth. With that, we're now ready for your questions. Operator, I'll turn it over to you.

Questions & Answers:

Operator

[Operator instructions] We'll hear first today from Edward Yruma with KeyBanc Capital Markets.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Good afternoon guys. Thanks for taking the questions. I guess two first. First, are you starting to see any kind of early cycle signs that we're seeing a rotation in apparel demand? For example, are you seeing an uptick in going out clothing, workwear? And then as a follow-up to your commentary on launching direct buy and cold started people in direct buy, were there other initial signs that indicated that the product needs kind of more work before launching? And kind of help us understand a little bit more clearly kind of why that was delayed.

Elizabeth Spaulding -- President

Yes. Ed, this is Elizabeth. Happy to take both of those. Those are great questions.

First, I think your first question was about are we seeing differences in kind of consumer demand patterns. And we continue to just see very strong growth in casual and activewear. Both of those have had outsized growth. And then not surprisingly, slower growth rates in kind of career and workwear type items.

And there are specific categories we've seen particular strength in, sneakers being one, knits, not surprising, items that people are wearing in this work-from-home environment. We have tried to keep a pulse on markets that are opening up a little bit more quickly, markets that have moved out of lockdown phase, and the trends are largely similar. A little bit stronger in some of those workwear categories, but they're still down on a year-on-year basis, which is interesting. And so I think some of these work-from-home trends were anticipating kind of this casualization to continue to persist with COVID, but more to come there.

And then on direct buy, we continue to be really excited about what we're seeing in terms of our active client demand. As we mentioned on the call, one-fourths of our women's clients are now in that offering. The contribution margin and lifetime values have been very strong and incremental relative to last year when we were really more of a Fix-only offering. And then in terms of our timing, we're building a zero is to one product, and we just want to make sure we really get it right as we roll it out.

And so some of the things that we mentioned on the call that we're working on is really expanding the access to our assortment and selection in a personalized way. The cold start that you mentioned of onboarding new customers is for sure one of those areas, but also exposing our assortment in the right way. We talked about our categories beta the last call that we have, and we continue to work on generating those categories in a very unique way. We thought about it internally, a little bit akin to kind of the genres you might see in Netflix that are being dynamically generated based on your preferences.

So it's areas like that, that we're continuing to work on and to make sure there's adequate selection and breadth for those new customers when they join.

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Thank you.

Operator

We'll hear next from Dana Telsey with Telsey Advisory Group.

Dana Telsey -- Telsey Advisory Group -- Analyst

Good afternoon everyone. As you think about the supply chain and the capacity issues with delivery, what's your sense in terms of timing as how we move through this? How do you see inventory progressing as we go through the balance of the fiscal year and the impact on the expense side?

Dan Jedda -- Chief Financial Officer

I can take the second part of that question on inventory. We have seen inventory increase in our second quarter as we get ready for our direct buy expansion and our roll up and also as we are expanding selection. So we are continuing to invest in selection, both breadth and depth, and we'll continue to grow our inventory as we get ready to launch direct buy to non-Stitch Fix customers and continue to expand our Fix offering. And can you repeat the first part of that question, please?

Dana Telsey -- Telsey Advisory Group -- Analyst

As you think about the time line of the delays in receiving of goods and diversifying capacity, when does it normalize? When do you think deliveries start to normalize?

Dan Jedda -- Chief Financial Officer

Yes. We have about 90% of our product coming in through the West Coast ports, specifically L.A. We haven't been too impacted on our inbound on that yet. We are watching it very closely.

It hasn't impacted either our selection or our inventory at this point. Again, something we're monitoring very closely, and we can update you if it does impact us on future calls. But to date, it hasn't materially impacted us.

Operator

From Barclays, we'll move to Ross Sandler.

Ross Sandler -- Barclays -- Analyst

Hey guys. So just a couple of questions on the gross margin, kind of follow-up on that last one. Our understanding is that in any given quarter, you have more or less pretty good sense of how many Fixes you're going to process based on demand and inventory and that most likely you would contract for that much outbound shipping volume ahead of time. So I guess what happened here in the fourth quarter? We know that they were pretty tight across the industry, but do you have over dependency on Postal Service? Or was there some blowup among one of the shipping partners? And then, like, what are you doing to sort that out on a go-forward basis? And then it looks like the Men's side of the business has this clearance issues.

So any more color on that? And given the ramp-up of inventory, do you still have the same level of confidence on a go-forward basis around gross margin given the men's clearance issue in the January quarter? Thanks a lot.

Dan Jedda -- Chief Financial Officer

I'll take the first part of that, Ross, and I'll ask Elizabeth to take the second part on the Men's category. With respect to shipping, obviously, during the holiday period, there was unprecedented volume across all the networks and shipping, and we were impacted by that. We have standard contracts. As Katrina mentioned, we do use USPS, although we also use other carriers, including FedEx as well.

And so not only did we see higher shipping rates, but we also saw holiday surcharges that was not unexpected to us. And so it did impact our year-over-year margins. We are very active in focusing on diversifying our carrier network, both on the outbound of the client and on the returns, the reverse logistics, and something we're going to monitor closely. We do monitor closely.

We strike the right balance between costs and making sure our clients get their Fixes in a timely matter. But carrier diversification is something that's very important to us. And we're also working at getting our Fixes out the door from the time of style to the time it exits our warehouse very quickly so we can alleviate some of that cycle time holding we talked about earlier. But with respect to your question, carrier diversification is something that we're focused on, again, balancing that trade-off between getting the Fixes and the direct buy orders to the client, along with trying to keep our carrier cost in check and in line.

Elizabeth, I'm going to let you take the men's category.

Elizabeth Spaulding -- President

Yes. Ross, yes, I can touch on men's. I mean I think what's been exciting for our business is that we've just seen continued incredibly strong growth across Women's, Kids, the U.K. men's is one area that we just think that consumer has come back a little bit more slowly and just believe it's a function of that client set.

And frankly, it was a little bit softer than we expected in Q2. And some of that resulted in us incurring some higher inventory reserves. I think in addition to that, we probably were a little bit slower to shift as dramatically into some of the lounge and athleisure wear that we're seeing in the highest demand from that client segment. So we've been very focused on rightsizing our assortment, better balancing that with both demand and also better positioned to capitalize on the market overall will be open and when we expect to see Men's demand start to come back in a more fulsome way.

Operator

Move on Youssef Squali with Truist Securities.

Youssef Squali -- Truist Securities -- Analyst

Great. Thank you. A couple of questions for me. Maybe starting with you, Dan.

On the full year guidance on revenue, I was wondering if you can maybe unpack that a little bit for us between the longer cycle time, which you've seen sustain into February, and then just the slower direct buy rollout. In your initial guidance that you shared with us three months ago, when did you guys assume that direct buy was going to roll out versus now you're saying at the end of the year? And second, maybe can you discuss the state of the U.K. business? And just your appetite for additional geos over the next year or so. Thanks.

Dan Jedda -- Chief Financial Officer

Youssef, thanks for the question. With respect to the guidance, first of all, let me talk briefly about what we're seeing on cycle times. When we entered February, we did see modest improvement in cycle times coming off of January. And we like the trend that we saw.

We saw the trends it certainly wasn't back to pre-COVID levels, but it improved from January. And then the weather hit us as it did many in the South and in the Midwest, and that has impacted us over the last two weeks. So it's been a mixed bag of cycle times in February. We do expect cycle times to stay elevated throughout the quarter, although we expect it to improve from where they are now.

And to your second point, with respect to the delay of our direct buy to non-Stitch Fix clients, we didn't say when we were going to roll that out in previous guidance, although it is a cause for our revised guidance. We plan to roll that out late in Q4 now as we get the product right, as Elizabeth mentioned earlier. But we're not breaking out what the impact was, except to say that it is still planned for launch this year. It's just going to be later in the back half of the year than we originally anticipated.

I'm going to let Elizabeth take the U.K. question.

Elizabeth Spaulding -- President

Yes. Youssef, thanks for the great questions. On the U.K., we continue to see really great momentum there. We saw particularly strong first Fix demand over the quarter driven primarily by women's.

And we've also just seen continued very strong momentum in contribution per Fix and just continuing to elevate our product market fit. Within that market, we saw about a 30% year-on-year growth in both keep rate and AOV. And then as I mentioned on the call, we also have used that market to incubate Fix Preview, which has been additive in that market as well. And so we're feeling really good about just our ability for our model to travel internationally.

In terms of other geographies, we don't have any specific timing yet to share, but we'll say that the promise that we've seen in that market gives us confidence that we can take our model globally. So more to share on that over time.

Operator

We'll hear next from Cory Carpenter with J.P. Morgan.

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

Thanks for the question. I had two. Just maybe kind of want to go back to your comments around January. You mentioned a few times one of your strongest Januaries on record.

So just hoping you could maybe expand a bit more on what's worked so well that month. Perhaps are you starting to see a pickup in demand as the economy started to reopen? And then secondly, just on advertising, I'm curious how you're thinking about the right level of ad spend in the second half of your fiscal year, just especially in the context of the extended cycle times and in direct buy pushing back? Thank you.

Elizabeth Spaulding -- President

Yes. I can start with January and touch on advertising, and Dan can add on. Yes. I mean we saw an incredibly strong January, part of that was just a very, very strong first Fix demand.

I think we had mentioned we had pulled back on some of our ad spend in December just given the elevated CPAs we're seeing, and then we really saw demand coming really rushing back and CPAs coming down in January, and we took advantage of that and had an incredibly strong first Fix sign-ups. And then on top of that, we just saw tremendous momentum with direct buy, both our daily active users, conversion rates and just the same kind of momentum we have been seeing really preholiday. And so those two things layered together. It just gave us a very, very strong January.

And as we think about advertising for the balance of the year, we'll continue to be dynamic in how we're inaudible into that. And I think Dan can touch maybe a little bit on that further.

Dan Jedda -- Chief Financial Officer

Yes. Just to reiterate what Elizabeth said, not surprising, CPAs increased dramatically in December, and we didn't like the rates that we're seeing on customer acquisition. So we did pull back. We knew they would get better in January, and they did.

And we ramped up our advertising. And so going into Q3, we like what we're seeing. We're going to continue to spend. Q3 will likely be higher than Q2.

Our customer acquisition is strong. Our new client strength is strong, and advertising is a big reason why. So we will continue to spend as long as it stays within our analytics and how we look at our lifetime value of our customer. And so with that, you can expect spend back to more normalized rates in Q3 and most likely in the Q4.

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

Thank you.

Operator

From Piper Sandler, we'll hear from Erinn Murphy.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks. Good afternoon. A couple for me.

I guess, first, if you kind of open up the platform to direct buy to new customers in the fourth quarter, can you just talk about how you expect that potentially cannibalizing the existing Fix business or at least what you're seeing today with the added offering to those that already use the Fix business?

Elizabeth Spaulding -- President

Yes. Erinn, this is Elizabeth. I can touch on that. I mean, I think overall, we think there's just a bigger addressable market out there by having a wire platform for our customers, whether they want to shop, whether they want to be styled or participate in both of those models.

And so both similar to the incrementality that we've observed with active Fix clients as they participate in both and seeing that is actually an additive experience. I think we're thinking about it similarly as we bring new consumers onto the platform. Over time, as well, there are parts of driving traffic to our site that we'll be able to participate in, in the quarters to come, probably not immediately, just given the build-out of the infrastructure and the way site indexing works, but to be able to eventually participate in search engine optimization. And so between consumers having more ways to win with us as well as driving more traffic to Stitch Fix by opening up our product catalog and having more ways to interact, we feel like it's just the right thing to do to be able to offer a more diverse experience.

Erinn Murphy -- Piper Sandler -- Analyst

OK. Thank you. And then just my second question is on, I guess, Dan, for you. Can you just share what's contemplated in your third quarter guidance between active customers and revenue per customer?

Dan Jedda -- Chief Financial Officer

Well, our revenue per customer, as we mentioned, is at $467, which is flat to Q1, and that is a function of just the newer client of cohort of customers spending very early on in their cycle times. As those clients spend more, we do expect that to increase and get to more normalized levels going forward. I think that was the answer to your question on a revenue per active clients. And then we're not going to say anything on Q3 guidance with respect to active clients.

We're not giving that as part of guidance.

Erinn Murphy -- Piper Sandler -- Analyst

OK. Thank you.

Operator

We'll hear next from Paul Trussell with Deutsche Bank.

Paul Trussell -- Deutsche Bank -- Analyst

Good afternoon. With the Fix Preview, how much higher where the keep rates for those that utilize that feature? And any other color you can provide on, like, client retention and average order value? Also, on the live styling, certainly, that's quite interesting concept. Maybe just speak a little bit more about what you expect from that and the level of investment you're going to make into that capability.

Elizabeth Spaulding -- President

Yes. Thank you, Paul. Great question. So on Fix Preview, I shared a little bit on the call, and overall, we've just seen expansion really in the majority of the metrics that we look at for our customers.

On AOV and keep rate, in particular, we saw about a 10% lift across both of those, and we've seen that continue. We started that pilot in the U.K. back in August, scaled it to 50% sooner after and then recently scaled it to 100%, and we're feeling good about the continued strength of that experience. And we're still at a pretty modest level in the U.S., but we are scaling it to 100% we foresee by the end of the fiscal year.

And so we feel really great about it being a service that makes clients even happier, driving retention and driving those higher average order values and a place that we could imagine experimenting with even further over time. One interesting anecdote is that if previewed an accessory and somebody keeps it in their cart, they almost always keep it. So also to certain item types, we think will be an exciting add on to that feature. And then with live styling, we're a little bit earlier on that than we are with Fix Preview.

We're still incubating it, but we're seeing a lot of the same patterns and trends around just the response to things like order value and so forth and really just a lot of richness and other things clients are wanting to share with us, like, hey, let me show you this thing. I love in my closet. Can you prime something to go with it? And just different elements that we are envisioning how that might create almost experience off-shoots from it. But I would say we don't plan to scale that immediately.

We're still in sort of the incubation and testing mode to figure out what is the best way to scale that and what other kind of services might it imply that our clients are looking for. So we're really excited by the feedback we've gotten so far, both from our clients and, frankly, from our stylists as well who are loving participating in the program. So we'll share more in the quarters to come. I think we've got our plate full between direct buy and Fix Preview right now, but we'll keep incubating that for something that'll follow on probably in FY '22.

Paul Trussell -- Deutsche Bank -- Analyst

That's helpful. And just a quick follow-up. As we think about the cycle time delays, I mean, you spoke to the revenue impact. Just can you talk a little bit more around what impact is having to the overall P&L, both what you saw in Q2 and how you think about it in Q3? And also, with the Q3 guidance, you outlined about these ongoing investments in advertising, operations and styling, to what extent is that weighing on the quarter?

Dan Jedda -- Chief Financial Officer

I can take that one. To your question on cycle time, we did talk about the revenue impact. What happens a lot of times is the processing time becomes lumpy as we get returns in large batches. And so there's some operational burden that cycle time does have on our fulfillment centers.

And so we're managing that closely. It hasn't been material. We've been able to work around that and implement new processes to better align on any sort of lumpiness that we get. And so from a cost structure standpoint, I would not assume that it's material to us just because we've been so proactive in how we manage that cycle time, especially on the returns processing.

And so it is more of a revenue recognition, including the potential to impact subsequent Fixes. And so from that standpoint, it's primarily more on the revenue side than it is on the cost side.

Operator

We'll hear next from Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Hey. Thanks everyone. Just two questions on direct buy. Is it possible to kind of break apart the P&L of both direct buy versus the subscription business? And talk about the gross margins between the two.

I'm just kind of curious as direct buy continues to ramp, will that be a drag on gross margin? Would it be neutral? Or just how should we think about that? And then I believe this was the last quarter before we start lapping the direct buy rollout. Can you comment on the other part of the business separately? And just what kind of growth rates you're seeing in the box business, if we took the direct buy component out of it?

Dan Jedda -- Chief Financial Officer

Thanks. I could take that. We don't break out the direct buy versus the Fix financials. There are a couple of areas I can point to.

Obviously, the Fix has a styling component, and direct buy does not. That being said, the margin structure is very positive for both. But again, we're not breaking out the different growth factors in direct buy right now and we don't really talk about the different economics of direct buy. I will reiterate what Elizabeth said that direct buy is additive to the Fix business for our Fix customers.

So we like what we're seeing there from an incrementality standpoint.

Elizabeth Spaulding -- President

Yes. Ike, maybe the one quick thing I would add just on the Fix side of things. Just what we've seen on our first Fix growth, in particular, is just incredibly strong trends with Women's as well as kids kind of outperforming. But to Dan's point, we don't really break out the growth rates of the two.

I think over time, we'll figure out if it makes sense to do so. I think we're seeing, as we mentioned on the call as well, just positive momentum of a greater portion of our client base participating. And as we expand the feature set and start to make it available right out of the gates to new clients, we would anticipate that growth to accelerate, but we'll be able to share more in the quarters ahead.

Operator

And from JJK Research Associates, we'll move to Janet Kloppenburg.

Janet Kloppenburg -- JJK Research Associates -- Analyst

Good evening everyone. Just a couple of questions from me. First on the expansion of the direct buy assortment. I was just wondering what you thought that might lead to in terms of residual products, markdown pressure, etc., generally something associated with expanding assortments and how we should think about that in terms of merchandise margin.

And then you have a lot of new pilots going on right now, including live styling, and then direct buy coming to the new customers, etc., and I think you're learning a lot along the way. You see the seasonality come in and maybe the managed business not being quite as strong as you thought, which I assume will pick up at some point soon. I'm just wondering how we should think about your view in terms of continuing to invest in these new projects, which are clearly driving new customers to sit Fix, but they're also putting pressure on your profitability because of the learnings and the investments that follow. So I was just wondering what are your priorities there and how we should think about future projects.

Dan Jedda -- Chief Financial Officer

Yes. Thank you Janet. Maybe I'll take the first one. Yes.

I'm going to take the first one of that. Thanks for the question, Janet. With respect to direct buy and increasing selection on inventory, as you bring in more inventory reserve rates and, potentially, the resulting markdown clearance is possible, but you have to counter that with the increase in clients, our ability to attract non-Fix-based clients, which is one of the reasons why we're going to launch this direct buy to non-Fix customers in the back half of the year. And so we're watching our inventory closely.

We are expanding selection. That's very intentional, especially as we launch new features like categories, which Elizabeth discussed earlier, having the right product mix to show the customer is very important in those areas. So we will continue to invest in inventory, and we're going to watch it closely. And we do expect inventory reserve rates to move along with inventory, but it's something that we're keeping a very close eye on.

Janet Kloppenburg -- JJK Research Associates -- Analyst

Great.

Elizabeth Spaulding -- President

Yes. And Janet, I can touch on your question on just sort of the innovation expansion that we've been focused on and some of the pilots that we mentioned on the call. And I think just in general, we see this as really our moment as consumers are shifting at unprecedented rates online. Katrina mentioned just this notion of the belief that 50% of apparel by 2025 will be online, and the market is going to start opening up here, and we're really gearing up for that.

And so we view our platform today, a lot of times on these calls, we've been talking about Fixes and direct buy. But really, the long-term vision is just the most personalized shopping experience in the world. And e-commerce has really been characterized for apparel by search, and we're entering into a new phase that will be characterized by browse and discovery. And so our styling model and experiences that hinge off of that, just a curated shopping feed, all of those are areas that we think we can become really the destination of choice and the primary shopping destination for our clients.

And so what we're excited about is that the things that we've been testing, we're proving that we can pretty quickly scale like Fix Preview. And even direct buy, we really only launched that to our active client base a year ago. It was February 2020. So I think what we're excited about is just the adoption that we're seeing of these new services together with just the overall market tailwind.

So we'll continue to be testing things. For sure, not everything will work, but we're very optimistic of seeing the adoption we've seen to date that we can continue the expansion of our model.

Janet Kloppenburg -- JJK Research Associates -- Analyst

OK. So the focus will be on expanding the services that you provide to the customer to continue to grow your group of active customers?

Elizabeth Spaulding -- President

Yes, that's right. And I think what we're seeing is we're participating in more and more of the share of wallet and purchase occasions, whether it's more inspiration-based or more purchase -- intent-based purchases, hence, the scaling of our categories experience.

Janet Kloppenburg -- JJK Research Associates -- Analyst

All right. Thanks a lot and best of luck. Thank you.

Operator

[Operator instructions] We'll hear next from Lauren Schenk with Morgan Stanley.

Lauren Schenk -- Morgan Stanley -- Analyst

Great. I just wanted to follow up on the longer cycle times. Just wondering if you can quantify sort of on a number of days perspective, how much of those have been extended? And then curious if you were seeing that in early to mid-December when you initially guided the quarter. I would have thought maybe over Cyber Monday, Black Friday that those delays would have been evident already.

So just a follow-up on when you start to see that real impact. And then presumably, this is just sort of a revenue recognition timing issue. So on a full year basis, ignoring sort of the quarterly variances, is the Lower 21 outlook really direct buy driven? And does that play out more in fewer number of active customers or lower spend for a customer?

Dan Jedda -- Chief Financial Officer

Thanks. Yes. I'll take the question. I can take that one.

Thank you for the question. We did see cycle times start to creep up in November and December. What surprised us a little bit is that they continue to stay high for January and into February. And so that is impacting us, as we mentioned, for Q2, and we have not seen them come down to preholiday levels.

And while we do expect them to come down throughout Q3, we do believe that in the back half, it will still impact us. To your point on the timing of it, it does impact subsequent Fixes potentially because most of our clients are on a scheduled subsequent fix. And so if it takes longer for a carrier to deliver or the client holds the Fix longer, it will impact subsequent Fixes. And so we're managing that and watching that very closely as well.

That all said, to your point on the back half, the timing of our direct buy is a reason for the lower guidance in the back half as we get that product to be right and launch it late in Q4 relative to what we were expecting earlier when we provided the guidance in last quarter.

Operator

And from Baird, we'll hear next from Mark Altschwager.

Mark Altschwager -- Baird -- Analyst

Good afternoon. Thanks for taking my question. I guess two questions related to inventory. First, I was hoping you could just talk a little bit more about how you're planning inventory receipts as you begin to cycle the COVID disruptions and we look toward additional stimulus because it sounds like direct buy picked up in January, not sure how much of that might have been impacted by stimulus.

But I guess I'm curious how responsive you can be should demand accelerate beyond your plans in the coming months, especially in the direct buy piece. And then bigger picture, just the new inventory models, really excited with the drop ship vendor-managed. Can you give us a better sense of what inning you're in there from an investment standpoint and just what level of additional capacity or technology infrastructure might be needed to scale this longer term?

Dan Jedda -- Chief Financial Officer

Thank you. I can take the first part of that question, and I'll let Elizabeth answer the second on the inventory models. To your point on our ability to bring on receipts, first of all, it's unclear in January what drove it, if it was stimulus checks or if stimulus checks coming up would drive demand. We did see very healthy January growth rates, and we were ready for that with inventory.

And we do have, of course, lead times for the receipt of our inventory. That said, we're very familiar with our lead times, and we do feel very well positioned to take advantage of any change in buying patterns, whether it's as economies open up and decide that we're going to go out more and go back to work or we continue on with the athleisurewear positive growth rates that we've seen to date. We feel we're in a good position for inventory. We are very good at chasing inventory where we need to.

But going forward, just given our inventory position, we feel like we're well positioned for the back half of the year should the open economies change the buying patterns. Elizabeth, do you want to take the second part of that?

Elizabeth Spaulding -- President

Yes. Hi Mark, great question. We're also very excited about kind of becoming a multi-inventory model business. And so as I mentioned, gearing up for being able to participate in drop ship, as well as vendor-managed inventory, we've been working on that for the last few quarters, and we'll continue to do so in the next few quarters to come with the intent of being able to use that as an opportunity to both widen our selection, but also create more flexibility in being able to scale up and scale down to meet demand patterns.

And so a lot of the work that's been involved has been putting the technology infrastructure in place for things like financial automation, as well as even enhanced forecasting tools to participate with our vendor community that we're very excited about given our data-driven algorithmic capabilities. And so we're essentially in beta mode right now on those offerings. And over the course of next few quarters, we'll be able to share more. But over time, really scale those as part of our inventory model, which, together with the consumer-facing part of our experience, we can create just a really phenomenal flywheel.

So we're excited to share more over the coming couple of quarters.

Mark Altschwager -- Baird -- Analyst

Thank you.

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

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

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

David Pearce -- Vice President of Investor Relations

Katrina Lake -- Founder and Chief Executive Officer

Elizabeth Spaulding -- President

Dan Jedda -- Chief Financial Officer

Ed Yruma -- KeyBanc Capital Markets -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Ross Sandler -- Barclays -- Analyst

Youssef Squali -- Truist Securities -- Analyst

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

Erinn Murphy -- Piper Sandler -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Ike Boruchow -- Wells Fargo Securities -- Analyst

Janet Kloppenburg -- JJK Research Associates -- Analyst

Lauren Schenk -- Morgan Stanley -- Analyst

Mark Altschwager -- Baird -- Analyst

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