Stitch Fix (SFIX) Q2 2022 Earnings Call Transcript

Stitch Fix (SFIX -3.04%)
Q2 2022 Earnings Call
Mar 08, 2022, 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 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tanny Shelburne. Please go ahead, ma'am.

Tanny Shelburne -- Investor Relations

Good afternoon, and thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2022. Joining me on today's call are Elizabeth Spaulding, CEO of Stitch Fix; and Dan Jedda, CFO. We have posted complete second quarter 2022 financial results in a press release 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 the results to differ.

In particular, our press release issued and filed today, as well as the risk factors section of our quarterly report on the Form 10-Q for our first quarter previously filed with the SEC and the quarterly report on the Form 10-Q for our second quarter, which we expect to be filed tomorrow. Also note the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law. During this call, we will discuss certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website, and a replay of this call will be available on the website shortly. I'd now like to turn the call over to Elizabeth.

Elizabeth Spaulding -- President

Thanks, Tanny. As we pass the midpoint of our fiscal year, we've delivered second quarter results as expected, though we acknowledge we are not yet where we want to be with new client acquisitions and conversion, which will weigh on our outlook. As you saw in our press release, we have provided guidance for the third quarter, as well as for the full year revenue. However, we have withdrawn our full year EBITDA guidance at this time, which Dan will discuss later.

Before I go into the details of our results, I want to level set on where we currently are in Stitch Fix's journey and why we continue to be confident in our long-term success despite recent and near-term challenges. We remain confident we are taking the right steps to become the global leader in personalized styling and shopping. We are continuing to improve onboarding and client conversion, evolve how we market, and enhance our overall client experience. We discussed on our call last quarter that our journey is not a linear one.

With that, let me turn to our Q2 results and the factors that influenced our performance. Top-line revenue grew 3% year over year to $517 million, along with gross margins of 45.1% and $10 million in adjusted EBITDA. RPAC reached a new record high of $549 in the second quarter and freestyle revenue grew at nearly 30% year over year. We ended the quarter serving approximately 4 million active clients, an increase of 4% from a year ago.

Active clients declined 4% quarter over quarter. There were two factors that largely impacted gross adds: first, conversion of new visitors for fix and freestyle is not where we want it to be; second, given changes in iOS 14 marketing channels that have historically been effective for us are presenting challenges in effectively targeting clients. I'll elaborate on each of these points further. However, as a result, we experienced lower gross client additions and also opted to pull back our marketing spend in the second quarter.

We invested 6.8% of net sales for the second quarter relative to 8.3% in the same period last year. Also, higher dormancies contributed to lower active clients for the quarter. As a reminder, we had higher dormancies in Q2 due to lapping of the high dollar referrals from last year, which we ended in Q3 of 2021. I want to touch on the point I mentioned earlier about conversion and provide some further insight.

In our efforts to launch and promote freestyle, we chose to direct visitors coming to stitchfix.com toward the freestyle experience. It is important to note that stitchfix.com is the primary landing page for customers interested in ordering a fix. Therefore, in leading clients to the freestyle experience first, we inadvertently created friction for those seeking a fix. In an effort to mitigate this friction, we are beginning to direct stitchfix.com traffic to a clear and easy fix onboarding path.

We expect this to boost new fix client conversion over time. This change in onboarding flow should not be taken as a change in our long-term vision for freestyle, which is to unlock a much larger TAM through daily shopping, styling, and inspiration. As we've shared in prior calls, we believe the TAM potential is two to three times larger than the fix business alone. We're still learning how best to onboard Freestyle First clients and recognize we have work to do on the freestyle experience.

We've learned that Freestyle First clients are coming primarily through product listing ads and other marketing channels that were not available to us prior to launching freestyle. We will continue to test, learn, and iterate on how best to use these new marketing channels. We also recognize that we have work to do to improve the freestyle client experience so we can convert more visitors to active clients and make freestyle the growth engine we expect it to be. We have already made changes to enable a better logged out experience, including the ability to add multiple items to a shopping bag and checkout while logged out.

We also understand that there are a number of basic but necessary features we need to add to Freestyle such as search functionality, which we plan to introduce in the coming quarters. Ultimately, we believe the efforts I've discussed both around fix and freestyle will help drive improved new client conversions, and we will be prepared to ramp marketing spend when we get the client experience right. The lower net client adds we have experienced in the first half of the year have impacted our revenue and are driving our revised outlook for the back half due to the compounding nature of fewer new clients buying. However, to reinforce my comments from the start of the call, we are confident in our long-term strategy, and we're seeing clear signals that we are taking the right steps for the future of the business.

We believe the combination of fix and freestyle demonstrates the potential of our future ecosystem as we observe behaviors of our existing and new clients. RPAC reached a record $549 in the second quarter, up 18% from a year ago, a result of higher average order values in our fix business, which are up 5% from the second quarter of fiscal 2021, as well as the incrementality provided by freestyle to our existing client base. Freestyle revenue grew 29% year over year, and penetration from our fix business is steadily improving with over 32% of our women's fix clients purchasing via freestyle today. Additionally, our recently acquired customer cohorts are engaging with us more holistically, spending over 25% more on average in fix and freestyle combined than clients acquired in the comparable month in 2021 and over 15% more on average than in 2020.

The 90-day RPAC, a measure of quarterly net revenue divided by clients that made one or more purchases within the same quarter is up 8% year over year. With the combination of fix and freestyle, we believe we are better able to meet the consumer needs of fit and discovery than search-based shopping. The return rates we see in freestyle, which continue to perform at less than half of e-commerce peers, underscore why we are confident in our direction. I will share some final thoughts with you after Dan goes through our results and our guidance in more detail.

Dan Jedda -- Chief Financial Officer

Thank you, Elizabeth, and hello to everyone on the call. Today, I'll walk you through our quarterly results, as well as share the inputs that build our outlook for Q3 and full year. In the second quarter, total net revenue of $517 million landed within the guidance range we laid out last quarter and represents 3% year-over-year growth. As Elizabeth noted earlier, revenue for the quarter was largely impacted by client conversion as we iterate on new acquisition and onboarding methods.

We also continue to learn and iterate on freestyle, which grew 29% year over year. Our women's business, inclusive of both fix and freestyle grew slightly, and our men's business was down as we continue to expand assortment with a focus on adding more nationally recognized brands. At the same time, we were pleased with the sustained momentum in our kids and U.K. businesses, where we saw 19% and 73% growth, respectively, on a year-over-year basis.

Net revenue per active client for the second quarter was $549, representing our third consecutive quarter of record RPAC. As a reminder, RPAC is based on net revenue over the last four fiscal quarters divided by ending number of active clients in the most recent quarter. When we take our newest subset of clients and assess the related 90-day RPC, that number continues to rise at a healthy pace, up 8% year over year. Additionally, subsequent checkouts per new client have increased nearly 20% since FY '20, giving us confidence that we are on the right path once clients enter our ecosystem.

We ended Q2 with approximately 4 million active clients. This was down $161,000 from the prior quarter as we continue to face challenges on optimizing the client experience and onboarding for new clients. Net actives were also impacted by iOS 14 privacy changes that limited our ability to target and measure advertising, as well as higher dormancies due to lapping the high dollar referral program for new customers in the first half of 2021. Q2 gross margin was 45.1%, representing growth of 214 basis points from a year ago, primarily driven by leverage in shipping costs due to higher average order values and improved product margins.

Gross margin declined 190 basis points quarter over quarter, driven primarily by higher inventory reserves. Q2 advertising was 6.8% of net revenue, a 149-basis-point decrease from the same quarter last year and a sequential decrease of 188 basis points from Q1. As mentioned previously, we continue to face challenges in new client conversion and therefore, pulled back on advertising in the second quarter to remain efficient with our spend. As I've stated several times before, we adjust this spend to ensure we are managing to our targeted return on ad spend.

As we work to improve onboarding and conversion, we will ramp our marketing as appropriate to optimize for long-term free cash flow. We'll also continue to test into new marketing channels and may increase spend in these channels based on our testing results. Other SG&A, excluding advertising, was 44.2% of net revenue in Q2, a 156-basis-point increase from the same period last year and a sequential increase of 560 basis points from Q1. The increase year over year and quarter over quarter was primarily due to increased headcount, including headcount in our product and tech organizations.

The increase versus Q1 was also impacted by lower net revenue quarter over quarter. Adjusted EBITDA in the second quarter was $10 million, largely reflecting the lower marketing spend during the quarter. Net inventory ended the quarter at $183 million, essentially flat quarter over quarter. While we continue to add selection throughout the quarter, we did experience delays in receipts primarily due to shipping delays in the global supply chain.

We are seeing four to five-week delays for a large portion of our product, but we do not believe this has had a material impact on our business given our current inventory levels and our mitigation efforts such as earlier bookings. Free cash flow year to date was $94 million, primarily due to favorable working capital. In early January, our Board of Directors authorized a $150 million share repurchase program. During the quarter, we repurchased $11 million worth of company stock against the $150 million authorization.

We ended the quarter with no debt and $349 million in cash, cash equivalents, and highly rated securities. For Q3, we expect net revenue in the range of $485 million to $500 million, representing a decline of 10% to 7% year over year. We expect adjusted EBITDA in the range of negative $30 million to negative $25 million or EBITDA margins of negative 6% to negative 5% of net revenue. This takes into account the lower new client adds for the first half of the year, resulting in continued weaker revenue due to a lower number of subsequent fixes in the second half of the year.

This guidance assumes that net active clients remained flat to slightly down quarter over quarter. Given softness of active clients in the first half and the uncertainty and the timing of improvements in conversion, we are lowering the prior full year revenue guidance we shared on our December 7, 2021 call. For the full fiscal year, we now expect revenue to be flat to slightly down year over year. This full year guidance assumes active clients are flat through the end of the year as we continue to learn and optimize for new client conversion.

We are actively evaluating our marketing spend as we manage these improvements to onboarding and conversion and therefore, are withdrawing full year EBITDA guidance at this time. We were very disappointed that we are not showing growth for the third quarter and full year. However, the positive unit economics on the freestyle business gives us confidence that the combined experience is the right path forward. When excluding marketing, the contribution profit of freestyle is 10 percentage points higher on a per order basis versus our very profitable fix orders.

Once we scale this business, we believe it will provide leverage in our overall margins. As we previously mentioned, we expect to increase marketing as our conversion improves and as we test into newer marketing channels. We'll also take a renewed focus on our cost structure with an emphasis on fixed and variable cost productivity. Our efforts will take time, and it's critical that we demonstrate execution over these next few quarters, which includes building an exceptional client experience that leads to increased new active clients and growing penetration in freestyle.

We look forward to updating you on our progress as we go through this transition.

Elizabeth Spaulding -- President

Thank you, Dan. Looking forward, while we know we have challenges ahead, we remain focused on continuing to expand and transform our offering and to drive awareness of Stitch Fix as the destination for personalized shopping, styling, and inspiration, leveraging our unique combination of data science and creative human judgment. As I noted earlier, the fix model gave us a 10-plus year advantage of bringing data science and creative human judgment together, allowing us to solve and address the most critical pain points for consumers in online shopping; the challenges of fit, discovery, and building relationships. On fit, we better meet the consumer needs of fit than search-based shopping, highlighted by our return rates in freestyle, which continue to perform at less than half of traditional apparel e-commerce.

On discovery, outfit inspiration is a meaningful differentiator for Stitch Fix. Therefore, we recently scaled our stylist-generated outfits to be a higher percentage of what clients can browse in freestyle. Since launch, stylists have created nearly 2.5 million outfits, which has resulted in a lift to overall sales. On building feedback-based relationships, a core part of what powers our ability to personalize selection are the moments of interaction and engagement that clients have with our stylists and broader Stitch Fix community.

Clients provide rich actionable feedback as they see the value in getting better fixes and freestyle experiences, showcased by the 9.5 billion Style Shuffle ratings to date, item-level feedback in fix preview, and community inspiration boards. By extending our model with freestyle, we aim to meet the on-demand expectations of today's consumer in a unique way, powered by personalization and styling capabilities, which is Stitch Fix's core. We continue to deeply believe in freestyle and appreciate everyone's patience as we evolve it to be the growth engine we expect. I believe we are well-positioned to execute against our vision, and we continue to take steps to further strengthen our team.

In addition to the recent appointment of our new CTO, Sachin Dhawan, we have made a number of other seasoned hires across our product, engineering and algo's teams. We will plan to share more detail on our progress and road map to improve the client experience in the coming quarters. With that, we are ready for your questions. operator, I will turn it over to you.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll take our first question from Youssef Squali with Truist.

Youssef Squali -- Truist Securities

Great. Thank you very much. Youssef Squali, Truist. So two questions for me, please.

One, just double clicking on the issue at hand, the onboarding and client conversion, client retention. Have you been able to kind of figure out exactly what the root cause is? Because we've talked about it on the last earnings call, it seems like the reasons have changed a little bit. I just want to make sure that we're still talking about the same issues. And then how are you guys -- I think, Elizabeth, you talked about some early tests to try to revert that trend that gives you confidence that onboarding and client conversion will improve over time, although it will take time.

So that's the first question. And second, maybe, Dan, on your withdrawing the EBITDA guidance. So I'm just trying to understand the logic for that since you are guiding to flat to slightly down revenue. What are the puts and takes that we have to take into account as we look at the bottom line for 2022?

Elizabeth Spaulding -- President

Thanks, Youssef. I can start on the first question on onboarding conversion, then I'll hand it to Dan for your second question. So as we mentioned, to some extent in the prior call and now I think we've continued to learn more is that we have really focused for stitchfix.com on redirecting that traffic to a Fix First onboarding flow. We believe that we created friction when we introduced freestyle to the landing page, given the intent of the majority of those clients coming to our site with for a fix.

We're learning a lot right now about what those expectations are. And so we have now -- honestly, we probably have realized in retrospect we could have moved faster, but we're where we want to be now and are now continuing to make progressive improvements in incremental testing. So we've reverted in many ways to make it easy to get directly to that fix. And then we're doing a bunch of other things right now in parallel to make it an even lower friction experience for our clients.

Things like testing newer and improved landing pages. Frustration that we had with clients even before we introduced freestyle, was having confidence that they were going to see merchandise and price points that they liked. So introducing testing on the landing page that gives a better sense of what Stitch Fix has to offer, as well as just making it, frankly, very, very simple and clear of what to expect once inside the experience. Another area that we see opportunity is testing incentives.

That's a pretty common thing with new customers coming into a new experience. And then what we mentioned on the prior call, and we continue to be working on is just more of a progressive onboarding experience that makes it really easy to get into fix's plus freestyle from the very beginning. We require quite a bit of information to personalize, and we think there are ways to progressively get that information over time. And then I think the other area in parallel that I mentioned on the call is that we are opening up these new marketing channels that we have yet to scale.

So clients that are landing and this logged out experience of a product listing ad, we believe these clients are very high intent freestyle. They're ready to buy something, and there are a lot of basic but necessary improvements that we're making to that experience as well. We've begun to already make some like ungating the shopping bags, but over time, ungating the exploration of product categories, giving access easily to engage with the stylist. And so it's really a combination of those things that we're working on now and believe we have a good sense of what needs to improve for consumers.

I'll let Dan answer the EBITDA question.

Dan Jedda -- Chief Financial Officer

Yes. Hi, Youssef, to the -- to your second question, one of the reasons why we're not giving that EBITDA guidance for Q4 now is we have a reasonably healthy budget plan for marketing in Q3, as we mentioned, as improvements -- as conversion improves, we'll spend more on marketing because it will be within the allowables that we have, and we're also testing new marketing channels. And so the way to think of Q3 is going to be similar to Q3 of last year and approaching that 10% marker that we have of advertising. And then we'll see how that performs in Q3 as we continue to look at the conversion and the efficiency of the marketing channels, and then we'll make decisions on Q4.

And while that has a direct correlation to actives, just the revenue is much more predictable because a lot of the revenue that we get when we get an active is in subsequent quarters and subsequent fixes. So that's the reason why we are waiting for Q4. It's really a function of the marketing that we have planned and how it performs in Q3.

Youssef Squali -- Truist Securities

OK, thank you.

Operator

Thank you. We'll take our next question from Mark Mahaney with ISI.

Mark Mahaney -- Evercore ISI -- Analyst

OK. Thanks. Let me try to start off with two questions. What's happening with retention rates? So I think one of the thoughts we had was that freestyle would help maybe boost retention of existing customers, more value prop, more use cases.

So what's happening with retention? And then secondly, on the iOS 14 challenges, like how confident are you that there's a work around? And this is kind of an industry -- this is obviously an industrywide issue? And are you -- do you think that you'll -- what's your thought about how to get back to where you were before? There were some very effective marketing campaigns run prior to that. That was based on personally identifiable information. That's just not available now. So how does that get solved? Or does it only get partially solved? And where do you think those solutions will come from? Thanks a lot.

Elizabeth Spaulding -- President

Yeah. Thanks, Mark. I can start on the retention, and then I'll hand it to Dan for the second one. Yes, we really like what we're seeing on retention rates.

I think both -- we mentioned in the call the higher average spending per client being up 25% year on year with our newer cohorts, participating in both fix's and freestyle. The other thing though that we're absolutely benefiting from the combination of, we believe, Fix Preview together with freestyle are higher retention rates. And we look at our seven-day auto ship churn, our clients sticking with us, on maintaining their programs with an auto ship, and then we also look at retention after the first fix. And we've actually seen very meaningful improvements on both of those, north of 20% year on year.

And so we feel very good that the improvements that we've made in our experience are driving higher client retention. We also feel very confident that we're acquiring very high-quality clients. Removing things like those high dollar credit referrals that we talked about in the past. So the combination of those, we think we have a very, very healthy client mix within our ecosystem and more to do with us, their product categories that are also driving that up where we know clients are spending on different product categories in freestyle.

On iOS 14, I think the one comment I'll make, and then I'll hand it to Dan. There's just, frankly, a ton of marketing channels that we have never participated in that are just very, very early that are now opening up for us, that are less impacted by the iOS privacy changes. But let me hand it to Dan to share more there.

Dan Jedda -- Chief Financial Officer

Yes, Mark, on that, we do suspect that the privacy impact will be continue to be impactful in the short term until other channels help us to find a way around that. That said, we are optimizing for different creatives and testing ways to continue in that channel. But I think Elizabeth touched on the more important point, is the additional channels that we have available to us. And some of that, mainly SEM-based channels, we find traffic to be very positive to the site.

Now again, conversion isn't where we want to be on the freestyle experience, but we have a lot of added features, a lot more selection coming, and a lot of optimizations that we're working on. Elizabeth shared some of those earlier on in the call that we feel will improve conversion in the near and medium term. And as we improve conversion, we will continue to spend more on those channels. So that is not a traffic issue.

It's really a client-facing issue that we're very focused on to improve conversion. So with the different marketing -- and that's just one channel. There are several others that we're experiencing on and there are several others that were to continue to improve, including our organic social and other channels that we think can be significant traffic drivers for potential active clients.

Mark Mahaney -- Evercore ISI -- Analyst

OK, Thanks, Dan. Thanks, Elizabeth.

Operator

Thank you. We'll take our next question from Ross Sandler with Barclays.

Ross Sandler -- Barclays -- Analyst

OK. Can I follow up on Mark's question on retention? So I think you said U.K. and Kids are growing nicely and freestyle is growing nicely. So just looking at the core women's fix business, can you talk about retention that -- what you're seeing there? And in the context of that, as you're building out freestyle and trying to revitalize the men's selection.

How do you feel about your selection and your inventory position in that core women's fix business? And then just remind us, Dan, the high-dollar referral program. I know that's creating a tough comp. When do we fully kind of lap through that? Is that -- when was that like kind of peaking last year? Any context on that would be helpful. Thanks a lot.

Elizabeth Spaulding -- President

Thanks, Ross. I can take the first one, which I think you're trying to get some insight to women's and men's and how that's performing. And we feel good about what we're seeing on retention. Obviously, women's being the largest part of our business, that drives a lot of those RPAC numbers.

And we continue to see really good things in terms of overall spend in new categories that are being driven by freestyle, like footwear, second layers, we started to introduce more sleepwear in the Q2 period and all of that, we feel really great about. The -- what we're seeing in terms of growth rate there is really a function of the new growth adds that are just lower than where we'd like them to be, given all the other part of the conversation here on both improving the client experience, making it easier to enter both through stitchfix.com and then our new landing experience, as well as the efficacy of marketing channels. So we feel good about the retention rates, those are improving. We feel good about average spend.

It's really about driving net new clients into the ecosystem, which is something -- is the first and foremost priority for the team. On the lapping of the high dollar incentive referrals, Dan, do you want to take that one on when we finish that lapping?

Dan Jedda -- Chief Financial Officer

Yeah, I will. We ended that program in late February. So we do have a month that we just finished up lapping. It wasn't as impactful as Q1 and Q2.

But we did have some of the high dollar flows. But we are through it now as we enter March and go forward. I also did want to just follow up on your question on the men's brands. I think that is an area -- and women's where we added some national recognized brands.

And specifically on the Men's because I mentioned it earlier on, we have added some very prominent brands that we're happy with, Nike, Vans, Levis, Champion, and UGGs were added. And we have more planned for the back half of the year. So we are moving forward with bringing more nationally recognized brands for the men's business.

Operator

Thank you. We'll move on to our next question from Simeon Siegel with BMO Capital Markets.

Simeon Siegel -- BMO Capital Markets -- Analyst

Thanks. Hey, good afternoon, everyone. It might be a mouthful, but the 90-day RPAC is a helpful metric. Thanks for giving that.

Do you want to give the actual dollar number that's there in addition to the growth rate? Do you plan on giving that metric going forward? And then do you have a similar 90-day type of active client growth metric? And then, Dan, just any color, I guess, the marketing conversation as you think about 3Q and full year. Any color on gross margin or non-marketing SG&A you can speak to? Thanks.

Dan Jedda -- Chief Financial Officer

Yeah. We are looking at different metrics on actives on the 90-day side. And what we're waiting on is just to understand the freestyle active and what that looks like. There might be mix impact there.

And so we're hesitant to give that number out until we actually see the trend on it, so we can explain it better. It's a great question and it's something we want to actually look at doing. So we just need a little bit more time as we look at the clients who come in directly to freestyle versus those who come in with fix and then engage in freestyle. And so there's some mix going on in there.

And so we want to make sure that we can explain that adequately. So stay tuned for that. And to your question on more insight into marketing, and I just wanted to clarify, I said earlier that on the marketing for Q3, it's going to be around that 10% mark of revenue, which is something that we generally have hit in the past, and that's where it is for Q3. And then to the point on margins.

We do expect margins to be in line with where we have them right now with some potential pressure in Q4 as again, just given the cost structure. We don't think it's going to be meaningful yet, although we are starting to see that. So we said last quarter that for the full year, we expect gross margins to that 45%, and we're still on that trend.

Simeon Siegel -- BMO Capital Markets -- Analyst

Great. Thank you. And then just maybe holistically, you mentioned the higher margins of freestyle, it's about as you scale that helps. Do you want to just talk through maybe why? So what makes freestyle margins higher?

Dan Jedda -- Chief Financial Officer

Yeah. It's a great question. And so there are different puts and takes on freestyle in the gross margin line. But the biggest impact is the relatively small styling component.

So when we do styling for freestyle, it scales across the whole freestyle experience. And so we do have stylists working actively on outfits and other features within freestyle, but it scales across the whole experience. And so we see a significant improvement in contribution profit. I think the other side of that is just the AOVs, the average order values that we see in freestyle are very strong and very healthy, and they're not -- as Elizabeth mentioned, our return rates are relatively low versus normal in the industry, and that helps AOV net of returns.

And so we have lower return shipping costs because of that. So those are the two primary factors that drive that improvement in contribution profit, which is excluding marketing that I referenced earlier in the call.

Simeon Siegel -- BMO Capital Markets -- Analyst

Great. Thanks a lot. Best of luck for the rest of you, guys.

Elizabeth Spaulding -- President

Thanks, Simeon.

Operator

We'll take our next question from Mark Altschwager with Baird.

Sarah Goldberg -- Baird -- Analyst

Hi, good afternoon. This is Sarah Goldberg on for Mark. We're hearing more brands and retailers call out strength and work in occasion-driven categories. Are you seeing the same? And is your inventory mix positioned to take advantage of a recovery in these categories?

Elizabeth Spaulding -- President

Yeah. Thanks, Sarah, for the question. I can answer that. We actually see a lot of fluctuation depending on the month and a lot of the benefit of the signal we get from clients, whether it's in our request notes, whether it's what they're engaging with in freestyle gives us quite a lot of ability to adapt.

So in Q2 versus Q1, we saw an uptick in casual for women's, both in fix and freestyle. We did see an uptick in social and occasion wear during Q2, in part because we increased our investments as a merchandise team to add more for the holiday season for our clients. And then on the workwear front, we did begin to see some increases there pre-January. But in the month of January, we actually saw a reduction relative to the growth we've seen at the beginning of the quarter.

And we often see that trend as we have seen spikes in COVID. And so with the omicron variant, we think that was a big driver of it. That might have been questioning a bit some of the return to work. And so we saw bigger gains in athleisure during that month.

So it's been a little bit up and down. I mean I think if we look over the arc of the last six-plus months, we have seen growth in those work and use occasions and more going out than we did a year ago, but we continue to see a lot of strength in athleisure and the comfortable categories that we believe will continue to be a big driver, especially with hybrid work. We feel really good about overall our merchandising mix and our ability to adapt and also just the higher quality of trend spotting that we have between client notes and a lot of the signal that we capture in the experience.

Sarah Goldberg -- Baird -- Analyst

Thank you.

Operator

Thank you. We'll take our next question from Tom Nikic with Wedbush Investment Bank.

Tom Nikic -- Wedbush Securities -- Analyst

Hi, everybody, thanks for taking my question. I want to follow up on the bit about the onboarding conflict and the kind of directing people to freestyle first on causing some friction for the fix -- I guess, the Fix First customers. This may sound a little silly, but I mean, given that freestyle just has a much bigger TAM opportunity than fix, as you kind of mentioned, and favorable order economics. You can maybe make the case that, that's not necessarily a bad thing, kind of having the onboarding, be more freestyle oriented and maybe you would have some friction in the near term, but as freestyle grew that would become kind of less and less of a hindrance.

I guess I'm kind of trying to think like why not sort of go maybe more aggressive toward freestyle or kind of all-in on freestyle and kind of let fix maybe sort of dwindle down over time? It seems like the prospects for freestyle and the economics of freestyle are much more favorable.

Elizabeth Spaulding -- President

Thanks, Tom, for the question. I think we absolutely believe in the growth potential for freestyle. And really what we think of as the ecosystem of freestyle plus fix, freestyle in many ways equals styling on demand. It takes the best parts of what Stitch Fix does that's so unique, which is removing all the noise for consumers and helping them just see the perfect item, just see things that demonstrate their preference in style and with the value-added touch of outfits and styling advice on how to wear things.

We all get dressed today, even though we might buy one item at a time, we want to know how we're going to actually wear it. And all of those things are demonstrating the results we really love to see in freestyle. That said, the ecosystem together is where we see tremendous value. Our best clients are participating in both in a very value-added way.

They love the advice and the guidance that they get to the fix experience. And we would imagine over time that duality plus more around inspiration and community being really a rich part of the overall experience. And so in terms of going after just freestyle, it's really the ecosystem that we see as valuable in meeting all of these purchaser needs for consumers. And we know that there are some consumers that really would love for us to do all the work for them.

They will probably be very fix-focused customers. And then there's a lot of consumers who love to shop. In fact, what we think is the highest value women's segment, a more fashion-forward segment who spends the most, really does enjoy shopping and sort of leaning forward. And that's what freestyle and that on-demand experience, we think, is giving us the ability to better capture that consumer segment, their share of wallet.

And so it's more of an and than an or in our minds and getting better and better and better at an exceptional customer experience, and allowing landing through high search-based intent channels that Dan mentioned. Those are still really nascent for us. For many e-commerce players, 80% to 90% of their traffic is coming from channels that we historically have not participated in at all, whether it's SEM, SEO, item-based advertising. We just haven't participated in those channels.

And while we're starting to see really healthy traffic from those, we still haven't scaled the marketing to do that. And so I think what we believe in terms of the core.com is let's make sure we're getting it right for fix's today. That's still where a lot of our core.com traffic is coming from. But over time, what we would imagine is converting those clients into a combination of fix plus freestyle right out of the gate and making it very easy for them to access personalized shopping immediately.

And we're not even really in the testing mode of that yet, but that's where we see the future. And to your point, fully unlocking the TAM, which we think is two to three times the fix business along.

Tom Nikic -- Wedbush Securities -- Analyst

That's helpful, thanks very much.

Operator

Thank you. I'll take our next question from Kunal Madhukar with UBS.

Kunal Madhukar -- UBS -- Analyst

Hi, thanks for letting me ask questions. A couple, if I could. One on the core fix side and the other one on freestyle. And so as you look at the core fix side, the way I kind of understood was this high dollar recurrent customers were like $75,000 to $100,000 in aggregate.

What you lost this quarter was like $161,000, which means that the gross adds would have come in much, much lower. Does that potentially point to like maybe a saturation out there in terms of you've already hit anyone that was ever interested in subscription, and so now like you are kind of looking at much lower gross add number in the future? That's on the core fix side. On the freestyle, as you look at like with the market kind of open, mobility opened up, omicron gone, you are facing a lot more competition from off-line, online omnichannel retailers, the whole work. So as we think of like freestyle economics going into the future, should we think of like a higher marketing intensity associated with freestyle just because the competition is so much higher? And then a quick follow-up to that would be, if you are going to institute a search-based experience for customers, then where is the styling algo and all the data that you're using to kind of present just the right thing for the right customer? How does that work with search, like if I'm telling you exactly what I want? Thank you.

Elizabeth Spaulding -- President

Thanks, Kunal. A lot of good questions there. Why don't I start and then Dan, feel free to chime in? I think your first question was around the health and acquisition of core fix given the lapping of referrals. And I think a lot of that's been answered in our prior questions around conversion and marketing spend.

Given the conversion funnel improvements that we need to continue to make together with reductions in marketing spend, that really is the driver versus I think us hitting a saturation point of fix's. We feel confident there's still headroom there to be able to bring clients into that business. Your second question around freestyle and how that will be impacted by stores opening back up, omnichannel. I think we believe that we are highly differentiated in our ability to address the biggest challenges that e-commerce faces and even, frankly, in-store try-on of apparel, which is fit, discovery, as well as human relationships.

If you think of it as a consumer even walking into a physical store, 98% of what you're seeing in that store is not relevant, and a lot of the frustrations that consumers have around finding items that fit them and finding things that are -- they're going to love and that match their style and push their boundaries, and that's what we do best. And so we believe firmly that consumers will continue to migrate and look for more convenience-based experiential ways of shopping, and that's what we believe we are uniquely suited in a category of wanting to deliver. On higher marketing, I think we're learning all these new channels, and that's still early days and remain to be seen kind of how that evolves. And then on your last point on search-based shopping, we want to do that as -- most consumers that their highest as per feature within freestyle, even for existing clients that love what freestyle is, they might be trying to find a particular brand.

They might be in the mood for a very particular item. And what we intend to do is launch an alpha version of that feature very soon, but over time, make it really unique to what Stitch Fix does best. We'll only be surfacing items that are in your size, but we'll also add features over time like showing it in an output-based laydown showing how you could wear it maybe with items that are already in your closet. And so we see a table fix version of the importance of search to just make the overall freestyle experience better.

But over time, we intend to further enhance the way we use search to be a uniquely Stitch Fix-based experience.

Dan Jedda -- Chief Financial Officer

Yes. I'll just add one comment in the middle question on the freestyle experience. Again, just to give a data point is in our outfits-based widget, which is highly personalized, we have nearly 40% of our purchases coming from that, which just shows you how different our freestyle experience is relative to others. And we're going to do more on that.

Elizabeth talked about a search bar or a search widget being differentiated. So I just wanted to throw that data point out there. It's very meaningful. It's something we're very happy to see that.

And there's so much more we can do with that just given our technology and our stylists.

Kunal Madhukar -- UBS -- Analyst

Thank you. And if you don't mind, one quick follow-up question on one of the things that we had kind of heard all through is that -- you have a list of like a humongous number of people that have been Stitch Fix customers in the past that you could target with freestyle. How good has the response been on that front? Thank you so much for answering all my questions.

Elizabeth Spaulding -- President

Yeah, that's a great question. We actually really like what we're seeing there. We think it's still nascent. But to your point, we have several million clients who have entered that dormancy stage that we think would love to come back to Stitch Fix.

So we always have kind of some always-on channels within our CRM to activate historic clients. And our historical activation was obviously a fix. We introduced freestyle as an activation channel a year ago, a little over a year ago plus once we had that available to all clients. What we've seen year on year for Q2 is that our reactivations are actually up over 10%, and the entirety of that increase is through freestyle.

So fix's were about flat in terms of reactivations, but freestyle was a whole new channel of being able to reactivate clients, which gives us a lot of optimism that, that is an exciting way to bring clients back in. And I think part of that is signing up the right way to reach and meet the attention of those clients. We largely do that via email today. And so as we continue to explore and get better at a lot of these new marketing channels we've been talking about, what are the ways to reignite excitement with those historic clients that maybe loved us before and might love us again, especially as we were expanding our ecosystem.

Kunal Madhukar -- UBS -- Analyst

Thank you. Really appreciate you answering all the questions.

Elizabeth Spaulding -- President

Thanks, Kunal.

Operator

Thank you. We'll take our next question from Cory Carpenter with J.P. Morgan.

Unknown speaker

This is Katie on for Cory. Thanks for taking the question. We noticed Stitch Fix ran its first-ever sale in January. Can you just discuss what if any lessons learned? Would you consider doing it again? And can you talk about your promotional strategy more broadly?

Elizabeth Spaulding -- President

Yeah. I'll let -- thanks, Katy. I'll let Dan take that one.

Dan Jedda -- Chief Financial Officer

Yeah. We did run a promotional event. We've also run a clearance event, as you probably saw, and I think we've said -- or I'll say that the clearance event is really just us looking at some inventory and clearing it out in a way that can benefit our clients, as well as just better for us financially. It was very small.

It was under 3% of our inventory that participated in it. And we viewed that as a test, and we thought it went very well. And so we'll potentially do more of that in the future, albeit at probably a programmatic way. And then we have run some different promotional events as well, some get x dollars of x orders.

And that also was very successful. Our clients do like that. And it's a way for us to engage in them, and we'll continue to run those programs as well. But again, on a programmatic basis in a thoughtful way.

Elizabeth Spaulding -- President

Yeah. And Katie, maybe the one thing I would add is, with opening up freestyle. I think there are more opportunities for us to play into consumer sentiment at different time periods. One thing that has always been a great value to our clients is our Buy Five discount with fix's.

And now with freestyle, there are moments like end of season or even special offers for clients within their own personalized stores. So we see a lot of opportunity to be both differentiating on these areas of fit, discovery, and relationships, as well as providing great value to our clients in ways that are opening up to us through freestyle that were harder to do via fix's.

Unknown speaker

Great, thanks.

Operator

Thank you. We'll take our next question from Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Hey, guys. Two questions. A quick one for Dan. Dan, just to -- I think you gave a lot of color, but can I just ask you explicitly, are you guys expecting the adjusted EBITDA margin in Q4 to be negative? I mean just further color would be helpful.

And then, Elizabeth, more higher level for you. I guess my question is, there are some issues in growth. You can see -- and it sounds like you guys are ready to kind of reramp up growth opex and marketing when you kind of figure some things out. I guess my question is, what does it -- what would it take for you to kind of take a bigger step back and maybe look to cut subs and focus more on a smaller sub base? I mean you guys had your biggest -- your largest operating margin when, I think you operated a little over 1 million active customers.

I'm not saying that's where you need to go. But what would it take for you to kind of reassess the customer base and try to run maybe a smaller but a more profitable business? I'm just kind of curious, your thoughts at a higher level there.

Elizabeth Spaulding -- President

Yeah. Why don't Dan start with the EBITDA and maybe he can give his initial thoughts on the second one and I can add on?

Dan Jedda -- Chief Financial Officer

Yeah. On the EBITDA, again, because as we acquire actives, it does take time for them to spend in our ecosystem. So one of the reasons why we didn't give guidance is because we want to understand what our marketing spend is in Q3 and how efficient is, as well as we continue to see progress in conversion. So I would expect EBITDA to be negative in Q4.

But again, we're not giving specific guidance at this time.

Elizabeth Spaulding -- President

And on your second question, I just want to make sure to clarify, Ike, what you're asking on the growth question. Is what you're asking, would we rather have fewer higher-quality customers? I wasn't quite sure what you were asking that second question.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Yeah. And it's a high-level question. It's just basically looking at the -- as your active customers have gone up, the margins have come down. And I'm looking over a multiyear period.

And then when we're talking about reaccelerating growth opex and trying to acquire new customers again. Again, it's more -- it's very high level, just to think about -- do you ever think about maybe this business would be more profitable, more successful, whatever the word is, if you focused on maybe a smaller subgroup of the active subs that are loyal and spend more and have a better margin and a lower CAC. Just trying to understand how you think about that and maybe what would cause you to think about that in lieu of growth?

Elizabeth Spaulding -- President

Got it. I think we feel really good about the kind of customers we've been acquiring. And actually, on a profitability basis, our customers are staying longer, spending more with us this year than last year or the year before. And so we're actually improving customer value by enhancing the experience with things like Fix Preview.

Other things we intend to do through the fix model and styling services, we think can add value there over time together with freestyle. So we think we're finding more ways to drive value with each client. We also really like what we see, onto Dan's point, the unit economics, both with fix's and even better with freestyle. And so part of the profitability question, I think is a marketing question and part of it is a fix cost structure.

And so Dan alluded to some improvements that we anticipate making on that side. But as we continue to scale the business, we believe that this can be a very profitable business over time. We are just still in the business model evolution, as well as the scaling phase. And then on the marketing front, our belief that in expanding into things like freestyle, participating in things like SEO, participating in a lot of other marketing channels like affiliate marketing, influencer marketing, I would argue that some of the channels that we have been reasonably relying on the past got more and more expensive over time.

And we are going to be participating in a much wider portfolio in the future. And even things like top of funnel that drives efficiency and lower funnel that really has been somewhat untapped for Stitch Fix. So I think we believe actually a bigger business presents more opportunity rather than narrowing the customer base. I don't know, Dan, if you wanted to add any.

Dan Jedda -- Chief Financial Officer

No, I think -- again, I just want to reiterate, I think the comment was made in terms of total margin. On -- again, on the contribution margin side, which excludes marketing, I do think that we have maintained and gotten slightly better. And as we mix out, we hope to get -- we expect to get even better soon. So the question, to Elizabeth's point is really about marketing.

And while the performance-based channels have seen -- we've seen some challenges in those, we do feel like there are many other channels that we know will generate new actives, whether it's in the fix, into fix plus freestyle, or in the freestyle. And hopefully, into fix and freestyle, I mean, that's really our goal here. So I think the margins that we have will provide leverage over time. I said that earlier on and we still believe that.

And on the fix cost side, we'll see improvements as we go forward and leverage as we turn the corner and start growing actives again.

Ike Boruchow -- Wells Fargo Securities -- Analyst

Guys, thank you.

Operator

Thank you. We'll take our next question from Roxanne Meyer with MKM Partners.

Roxanne Meyer -- MKM Partners -- Analyst

Good afternoon, thanks for taking my question. I actually have a few. My first question is on pricing. The industry obviously is in a more inflationary environment with many across the industry raising prices.

So I guess I was curious with your AOV up for fix's in the quarter, up 5%. How much was due to pricing that you took versus units? And what's your thoughts on pricing going forward?

Dan Jedda -- Chief Financial Officer

Yeah. I'll take that one, Roxanne. None of it was due to pricing. We have not significantly raised prices.

It was primarily due to keep rate within fix's. We're lapping the full cycle of our algorithm-generated previews, which has had a positive impact, plus the experience. Once you're in our ecosystem it's very positive. And then on the RPAC side, you have the mix of fix plus freestyle contributing favorably.

So it wasn't -- any of it wasn't on pricing. And going forward, we're continuing to look at the cost of our product and suspect like we may tweak pricing. I don't think it's going to be significant in terms of increases. We think we're pretty analytical and methodical about looking at our pricing, especially with our EV brand.

And then on our national brands, we're taking a hard look at pricing, and I do not expect that to go up, and in fact, could possibly come down just as we see what's going on in the marketplace.

Roxanne Meyer -- MKM Partners -- Analyst

OK. Great. And then just trying to reconcile your revised guidance for the full year. When you take into account your expectations for flat active customer growth, it assumes that your revenue per client falls sequentially in the next two quarters.

And that comes on the back of an 18% healthy increase this past quarter. So just trying to understand the dynamics and what's going on with your expectations for revenue per client?

Dan Jedda -- Chief Financial Officer

Yeah, I'll take that one. That's a good question. And part of that is just a function of the lower net adds in H1, that the newer clients just spend more relative to tenured-base clients. So it really is a mix impact.

A lot of -- when we look at a cohort impact, of course, as we mentioned, we see positive and year-over-year growth when we look at it, and we do it on a 30-day and 90-day cohort like-for-like basis. So that is positive, but we might see a drop. You're right on the revenue and actives guidance that we gave simply because we're mixing out to improve new actives. Now as we improved conversion and add actives, that will reverse itself as we go forward.

Roxanne Meyer -- MKM Partners -- Analyst

OK. Thanks. Thanks for that color. And then just last, trying to think about the average spend in freestyle for a fix customer versus a pure freestyle customer.

And then just wondering about how do you think about your ability so far to match client preferences as dictated by the questions that you had out there and your algorithm with the offering she's actually presented. And I guess that would manifest itself by that actives spend. Thanks a lot.

Elizabeth Spaulding -- President

Yeah, I can start on that, Roxanne and Dan can weigh in on it. I mean the majority of the clients in freestyle are still our Fix First versus clients, just given by nature of the fact that we very recently opened that up. We like what we're seeing with these early new cohorts, but it's admittedly small still. And so I think to Dan's point, there was an earlier question on this related to RPAC.

As we have more data and more longitudinal data, we'll feel more comfortable sharing what we're seeing. We have seen those freestyle customers coming back. We have seen them opting into fix's to some extent, but I think we have more data together to understand that. And then I think on your question of relevance, we actually feel really good on a cold start basis, to be able to show relevant style-based inventory.

It is a very new kind of shopping experience. We think of it as styling on demand. To Dan's point, 40% of the sales are through outfits. So some of these baseline features that make it easier for customers to have a reference point to other ways they shop or some of what we need to add.

And that's a lot of the work we have in front of us in addition to making it highly differentiated. I don't know, Dan, if you would add anything on average spend in freestyle. Anything else there?

Dan Jedda -- Chief Financial Officer

No, I do -- I think I completely agree with everything Elizabeth said. I will just add that when fix customers do engage in freestyle, we do see both their fix and their freestyle go up. And so that's just really back to the point of how the two really work in tandem together from an overall client experience standpoint. And Elizabeth is right, like we are gathering the data on freestyle for those who come in and whose first intent and first purchase is a freestyle only.

And eventually, we'll share data on that, but we just need to collectively have more time to gather what that looks like over time.

Roxanne Meyer -- MKM Partners -- Analyst

OK, thanks. That's helpful. Thank you so much.

Elizabeth Spaulding -- President

Thank you all for joining us today. We look forward to updating you on our progress next quarter.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Tanny Shelburne -- Investor Relations

Elizabeth Spaulding -- President

Dan Jedda -- Chief Financial Officer

Youssef Squali -- Truist Securities

Mark Mahaney -- Evercore ISI -- Analyst

Ross Sandler -- Barclays -- Analyst

Simeon Siegel -- BMO Capital Markets -- Analyst

Sarah Goldberg -- Baird -- Analyst

Tom Nikic -- Wedbush Securities -- Analyst

Kunal Madhukar -- UBS -- Analyst

Unknown speaker

Ike Boruchow -- Wells Fargo Securities -- Analyst

Roxanne Meyer -- MKM Partners -- Analyst

More SFIX analysis

All earnings call transcripts