Stitch Fix (SFIX) Q3 2023 Earnings Call Transcript

Stitch Fix (SFIX -1.73%)
Q3 2023 Earnings Call
Jun 06, 2023, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by. Welcome to the third quarter fiscal year 2023 Stitch Fix earnings conference call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Hayden Blair.

Hayden Blair -- Senior Director, Investor Relations and Treasury

Good afternoon and thank you for joining us today to discuss the results for Stitch Fix's third quarter of fiscal year 2023. Joining me on the call today are Katrina Lake, interim CEO of Stitch Fix; and David Aufderhaar, CFO. We have posted complete third quarter 2023 financial results in a press release on the quarterly results 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 involves 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 results to differ, in particular, our press release issued and filed today, as well as the risk factors sections of our annual report on Form 10-K for our fiscal year 2022 previously filed with the SEC and the quarterly report on Form 10-Q for our third quarter of fiscal year 2023, which we expect to be filed tomorrow.

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 press release on our investor relations 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 investor relations website, and a replay of this call will be available on that website shortly. With that, I will turn the call over to Kat. Please go ahead.

Katrina Lake -- Interim Chief Executive Officer

Thanks, Hayden. Five months ago, I came back as interim CEO, motivated by the opportunity ahead and with a clear understanding of the need to reposition and refocus the company to set ourselves up for success. Today, amid a challenging macroeconomic climate, preserving profitability and cash flow remain top priorities. Generally, we are focusing on the near term, protecting the balance sheet, actively managing our inventory levels while improving composition and managing the global impacts of tightening credit standards on vendors and manufacturers.

But we are also mindful of the long-term opportunity ahead and by no means standing still. We understand that focusing on our clients is key to success, and we continue to invest in personalization and AI to maximize our long-term potential. We also completed a strategic review of our business operations in Q3 with a critical eye on operational efficiency and effectiveness while maintaining profitability and cash flow over a longer time frame as we focus on driving future growth. This was a robust review of our operations and processes across the company to identify areas that enhance the client experience and drive improved business results.

One aspect of this review was a full analysis of our network strategy. As we have refocused on our core fixed business, we believe our inventory would be better optimized across a smaller network of warehouses in the U.S. Understanding this, we have developed a three-node strategy that will allow us to more optimally serve the entire country and simultaneously showcase the greatest breadth and depth of inventory to our clients and stylists. This consolidated network will allow us to deliver a better client experience, with access to more inventory for a given fix, while, at the same time, allowing us to operate with lower, more cash-efficient inventory levels.

Because of this, we intend to close two additional fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. As we have a lease already expiring in Bethlehem, we are choosing not to renew that. Our analysis has also shown that our remaining three fulfillment centers in Atlanta, Indianapolis, and Phoenix will remain optimal, even with a larger client base in the future as we could expand capacity within these locations in the short term and the long term. We will undertake a phased approach with the closures to maintain our current high levels of client service.

We expect to begin the Bethlehem wind-down in Q1, and we will move on to Dallas later in the year. We expect to achieve approximately $15 million in annualized cost savings once the three-node strategy is completed. I want to thank all of our associates and team at the Busy and the Dizzy. We are immensely grateful for your hard work and commitment to our clients.

Thank you. Additionally, the continued realities of economic conditions in both the U.S. and the U.K. have led us to reexamine our geographic footprint.

And this morning, we informed our employees in the U.K. that we are exploring exiting the U.K. market in FY '24. In FY '23, the U.K.

will represent approximately 50 million in annual revenue and negative 15 million of adjusted EBITDA. Though we believe Stitch Fix is a service that will ultimately find success across many geographies, including the U.K. and Western Europe, today, we are not confident in a path to profitability in the near term in that market, especially as we prepare for potentially extended periods of complicated macroeconomic conditions in both the U.S. and U.K.

There are also numerous investments we have made in our core client experience that we have not replicated in our client experience in the U.K. Going forward, we would prefer to be investing in our core experience and continue to build it as a more modern, globally capable platform, with the ability to scale in many geographies instead of managing multiple tech stacks country by country. We are proud of the U.K. team and what they have accomplished to date.

Consistent with U.K. law, we will enter into a consultation period with U.K. employees regarding potentially exiting the U.K. market prior to making any final decision.

While there are a number of moving parts to these operational changes, we know they are the right decisions to make. This review has helped paint a more realistic view of what it will take to change the course of our trajectory, and we have more clarity around the opportunities ahead. We are retooled and refocused on the right metrics that will navigate us through a wide range of macroeconomic scenarios in the short term, and we are setting ourselves up to be in a healthier position for the eventual growth to come. In the meantime, we are committed to continuing to build on our competitive advantages and to further the leadership we have in the space of personalization.

We continue to invest in our core client experience, leveraging AI and data science to enable our human stylists, leveraging the advantages of each to further our leadership in personalization and style. For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engines and, more recently, automatically generated product descriptions. We have also developed and implemented more advanced proprietary tools such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market. A new area we have enhanced our AI capabilities in is our inventory buying.

We have historically utilized a number of tools to make data-informed decisions with our inventory purchases. Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize math scores at the client level to drive company-level buying actions. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and AOV over time.

This back-end personalization will also allow us to more effectively tailor the depth and timing of our buying decisions, so it will allow us to buy the right inventory in the right amounts at the right time. Early testing of this approach compared against our existing buying tools has shown a 10% lift in keep rate and AOV. And by the end of Q1, we expect 20% of all POs created to be algorithmically informed. We will continue to scale adoption throughout the year, and we are excited about the capabilities.

It remains a clear example of how we continue to lean into data science and AI to further our differentiators and drive long-term success. Ultimately, we are continuing to build a business that is truly differentiated, and we want to lean into these areas of differentiation by investing in capabilities that will both improve the customer experience and prioritize profitability in the short term. I'm excited about the work we have done, understanding the work that we have to do, and continue to believe we are taking the necessary steps to set the stage for healthy growth in the future. With that, I'll turn it over to David for a deeper dive on the financials.

David Aufderhaar -- Incoming Chief Financial Officer

Thank you, Kat, and hello to everyone on the call. Fiscal Q3 results exceeded expectations. Revenue came in at the high end of our guidance range at $395 million, down 20% year over year and 4% sequentially. Consistent with some of our retail peers, we saw strength during February and March but did see increased macroeconomic headwinds in April.

Net active clients in the quarter declined 11% year over year and 3% sequentially to approximately 3.5 million. While our overall average order value is holding relatively steady year over year similar to Q1 and Q2, our analysis shows that all client cohorts are spending less than in prior years, and we expect this trend to continue in Q4. Q3 gross margins expanded 150 basis points quarter over quarter to 42.5% due to improved inventory composition and less promotional activity in the quarter. We continue to expect gross margins to be around 42% for the fiscal year and are actively focused on improving gross margins, with opportunities to improve product margin, transportation efficiency, and inventory efficiency over time.

The network strategy initiative that Kat highlighted in her comments is a good example of that focus. Net inventory ended the quarter at $152 million, down 5% quarter over quarter and down 29% year over year. We do expect overall inventory levels to decline in Q4 as we continue to manage inventory closer to demand and revise our assortment strategy to better align with our core experience. And this alignment may take several quarters to optimize.

Advertising was 7% of revenue in Q3. While we continue to see customer acquisition costs declining year over year, we did see an increase quarter over quarter due to seasonality in our growth marketing channels and an increased focus on driving brand awareness. This was partially offset by strong reengagements in the quarter, which were up 34% sequentially and 24% year over year. We expect to maintain similar levels of advertising spend in Q4.

Q3 adjusted EBITDA came in ahead of our outlook at $10.1 million due to the continued realization of cost savings in FY '23 and tight ongoing cost controls. And finally, we once again generated positive cash flow this quarter, delivering $21.9 million of free cash flow in Q3. We continue to feel good about our strong balance sheet and ended the quarter with over $240 million in cash, cash equivalents, and highly rated securities, and no bank debt. Moving on to the outlook.

For Q4, we expect revenues to be between $365 million and $375 million, reflecting a relatively similar trajectory to what we saw in April. We expect adjusted EBITDA for the quarter to be between $0 million and $10 million, largely reflecting the impact of our implemented cost structure initiatives on a sequentially lower top line. Going forward, we will continue to focus on profitability in the short term while maximizing our long-term potential. As a reminder, we have already completed $135 million of cost-savings initiatives in FY '23, and the proposed initiatives that Kat discussed earlier would drive an additional $50 million in annualized expense savings.

We are mindful that we've been profitable at different revenue levels in the past, and we are making the tough decisions now to endure a wide range of possible macroeconomic scenarios. Over time, we expect the investments in improving our client experience, along with the increased leverage in our P&L, will enable us to establish a healthy base on which to grow. With that, I'll turn the call over to the operator for Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from Youssef Squali with Truist Securities. You may proceed.

Youssef Squali -- Truist Securities -- Analyst

Yes. Hi, guys. Thank you for taking the questions. I have a couple of [Inaudible] Maybe just a high-level question.

Kat, you touched a little bit on this in your prepared remarks. As you look at the long-term opportunity, you're obviously making a lot of changes, refocusing on core fixed business, pulling out of the U.K. How should we be thinking about just the way you think about the addressable market as we look at the number of addressable customers? I think you're now 3.4, 3.5 now realistically with this new strategy. Maybe just talk to us a little bit how were you kind of size up the market? And then in terms of just the -- as you look at AI, and this also something you touched upon, can you just remind us of basically what are kind of low-hanging fruits ahead of you that you're -- you believe you're -- you'll be able to realize maybe on the search side, on the curation side? And over time, how do you think AI will ultimately impact the business? So, those are two questions.

Thank you.

Katrina Lake -- Interim Chief Executive Officer

Yeah. Great. Thank you for the great questions, Youssef. I mean, firstly, on the long-term opportunity, I mean, I feel super excited and optimistic.

I think a lot of the strategy right now is focusing on the core, on our differentiators, on the things that we know that we do best, which is really this human-in-the-loop styling of being able to combine the best in the world algorithms in combination with human stylists to be able to deliver an experience that's really differentiated. And so, to be able to kind of spend this time where we're stabilizing the business but still continuing to push forward in the areas that we really believe that we have long-term competitive differentiation, that's kind of high level how we're thinking about the business right now, and we're really excited. And in terms of the addressable market, I think we continue to feel really optimistic about that. I think as we think about some of the capabilities that we're really pushing on, which really are at the kind of intersection of AI.

And so, it's a good kind of link of questions that you asked. Like one of the things that I love about our experience is that we have generative AI that's really in more of a visual format. And so, the outfits that we have in our app, those are actually taking into account your preferences, what we know about you, and then in combination with what we know that you own in your closet. And to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix, that's a really good example of, I think, a capability that is, firstly, really aligned with our capabilities around data and personalization and really unique to us.

And then I think it's also really compelling because I really think that pushes us as we think about what that addressable market is. I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able to have, is to have access to advice on a daily basis around what to wear and how to wear it. And so, as we're thinking about the ways in which we are innovating and the ways that we're investing, in particular, in AI, I think a lot of that actually is with an eye toward how do we make sure that we're pushing the addressable market, making sure that we're serving our clients that we serve well today, but also really thinking about like are these features and capabilities value add to a broader universe of clients. And so, I think we feel really excited about those capabilities, and we're excited about the plan that we have to be able to continue to invest in those.

Youssef Squali -- Truist Securities -- Analyst

OK. Great. Thank you, Kat.

Operator

Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. You may proceed.

Simeon Siegel -- BMO Capital Markets -- Analyst

Thanks. Hey, everyone. I hope you're all doing well. Can you quantify any of the U.K.

impact on the P&L maybe last year? Just give us context. How many active clients are there, maybe revenues, EBIT pressures, however you want to help us understand to contextualize that. And then maybe also share what you'd think P&L impacts might be from closing the two distribution centers? Thank you.

Katrina Lake -- Interim Chief Executive Officer

Yeah. I'll have David share more color there.

David Aufderhaar -- Incoming Chief Financial Officer

Yeah, Simeon. Thanks. A couple of things. First, on the U.K., just a reminder that this is still a proposal, and so there's no decision that's been made.

But just size and shape, I think Kat called out that, you know, in this year, it's around $50 million in revenue and about negative $15 million in EBITDA. So, if you just do the simple math of flow-through, that means there's about $35 million in SG&A expense in the U.K. as well. And so, that's sort of the high-level P&L for the U.K.

And then on -- the second question was the distribution centers. With this, it would be about an annualized savings of $10 million to $15 million. It's more of a timing question of we want to make sure that as we do this, we do this in a very client-right way so that we aren't impacting the client. And that's why we're phasing the closings.

And so, savings in FY '24 would obviously be smaller than that.

Simeon Siegel -- BMO Capital Markets -- Analyst

Great. Thanks. And then, Kat, any color on just anything you're seeing trade-down-wise, just thinking about the broader promotional environment out there?

Katrina Lake -- Interim Chief Executive Officer

Yeah. It's a great question, Simeon. I mean, honestly, we've talked about it a lot internally, and we have a wide range of price points. We have items that are in the 20s, all the way up to over $100.

And so, we have a pretty wide range of kind of inventory price points, and it's an area of our business that we definitely have kept our eye on as we've kind of seen a little bit of macroeconomic softness. You know, so far, I think customer acquisition is probably the thing that's been more hard in a macroeconomic climate. We've actually, so far, I think, seen more strength in terms of people spending in AOV than one might expect. But I think our strategy, really, is to be able to have that broad range of price points to be able to serve -- to meet the customer where they are.

And so, we feel very prepared to be able to do that. But candidly, I don't know that we've seen -- I don't know that our data reflects like a huge amount of trade down, but it's definitely something we're keeping an eye on.

Simeon Siegel -- BMO Capital Markets -- Analyst

Great. Thanks a lot, guys. Best of luck for the rest of the year. Hope you have a nice summer.

Katrina Lake -- Interim Chief Executive Officer

Thank you. You, too.

David Aufderhaar -- Incoming Chief Financial Officer

Thank you. You, too.

Operator

Thank you. [Operator instructions] Our next question comes from David Bellinger with ROTH MKM. You may proceed.

David Bellinger -- ROTH MKM -- Analyst

Hi. Thanks for the question. First one, on the inventories and the greater depth available that was mentioned in the release, can you quantify the improved access to inventory for your stylists and just any way to frame up how much that's improved Q2 to Q3 and how much further work needs to be done in order to open up inventory access more fully to the stylist base.

Katrina Lake -- Interim Chief Executive Officer

Thanks, David. If I can -- can I clarify, are you speaking to the part where we talk about kind of the network or -- I just want to make sure that I'm understanding the specific question.

David Bellinger -- ROTH MKM -- Analyst

Yeah. That's correct.

Katrina Lake -- Interim Chief Executive Officer

Yeah. So, that's -- so as we -- you know, one of the things as we kind of really took a fresh look at our business is that as we think about a styling-first model and really kind of channeling clients through a funnel where we are collecting the right preferences so that we really personalize for them, like that model depends on having co-located inventory. And so, historically, we've had five and even six warehouses at different points. And when we have that many warehouses, we're spreading the inventory across a broader network, which means that there's going to be times when we have pockets of good inventory and pockets of more challenging inventory.

And so, if you think especially in use cases where like somebody is coming in with -- to a stylist with a very specific request, if we don't have kind of that density of inventory and the breadth and depth, it makes it potentially harder for a stylist to be able to meet that specific need of the client. And so, consolidating that warehouse into three nodes is something that really helps as we think about our future ability to be able to meet specific requests of clients and for our stylists to be able to have availability in all of the breadth and depth of inventory that we buy to and that we have in our system. And so, it really -- we see this as, you know, something that I think can help us to be able to achieve more of our goals as we think about being able to meet our stylists' needs and ultimately our clients' needs. Does that make sense?

David Bellinger -- ROTH MKM -- Analyst

No. That's perfect. It's very helpful. And as my follow-up, could you talk a bit more about some of the April trends, anything specific you can point to that stood out as you exited the quarter? And then can you clarify, too, on the Q4 guidance, is that consistent with the deceleration you saw later in the period? Anything you can comment on in regard to quarter-to-date revenue growth just would help us in our models.

Katrina Lake -- Interim Chief Executive Officer

Yup. David, do you want to take that?

David Aufderhaar -- Incoming Chief Financial Officer

Yeah, David. For April, it wasn't -- to Kat's point, it wasn't anything around AOV or pricing that tended to hold steady. It was more of we saw some macro headwinds around sort of volume that was coming through. And it was pretty consistent with what we had heard from some of our peers as well where we were -- we saw strength in February and March, and then it sort of tailed off in April.

And that is included in our guide for Q4 as well.

David Bellinger -- ROTH MKM -- Analyst

Understood. Thank you very much.

Operator

Thank you. Our next question comes from Trevor Young with Barclays. You may proceed.

Trevor Young -- Barclays -- Analyst

Great. Thanks. The first one, just on the reduced DC footprint. As that plays out into next year, should we contemplate some further thinning of your inventory on balance sheet? I'm just trying to get a sense.

Should that continue to come in a little bit or are we now kind of level set on inventory, and as you contemplate having more breadth and depth, as you were talking about, Katrina, that we're kind of at the right levels here? And then, David, just a housekeeping one, just that commentary on advertising, maintaining similar levels of spend in 4Q. Did you mean that as a percentage of revenue or in absolute dollars?

Katrina Lake -- Interim Chief Executive Officer

Thanks, Trevor. David, do you want to take both of those actually?

David Aufderhaar -- Incoming Chief Financial Officer

Sure. And I'll answer the second one first because that's a really quick one. Advertising, it's a percentage of revenue. So, we do expect that to be similar to the 7% of revenue we saw this quarter.

And so then, on the inventory, I mean, I think there's two things to think about there. One is actually the work that we're doing right now with the teams that are really focusing on composition and focusing on the core experience. And I think we touched on this last quarter is that helps us really focus the inventory, and the teams have done a great job chasing into Q4 to get really relevant inventory for our clients. And so, because of that, we do expect inventory to go down in Q4.

And then with regard to the closures, certainly, that could be an added impact or benefit. You know, we want to make sure first that, you know, we have the right inventory, to Kat's point, around density and making sure that stylists have everything available. But absolutely, as you concentrate in less warehouses, there is the ability to do that with less inventory. And so, we would expect inventory turns to go up over time.

Trevor Young -- Barclays -- Analyst

Great. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Tom Nikic with Wedbush Securities. You may proceed.

Tom Nikic -- Wedbush Securities -- Analyst

Hey. Good afternoon. Thanks for taking my question. So, I know you've done a lot of work to rightsize the cost structure of the business, but I think, ultimately, at some point, the top line needs to inflect and some of the customer attrition needs to ease up and the customer count needs to start rising again.

Like how do we think about potential bottoming of the customer base? I mean, like do we kind of think like next year, the customer count starts rising again? Is there more normalization that needs to happen? And how do you go about driving a reacceleration of the top line and the customer count? Thanks.

Katrina Lake -- Interim Chief Executive Officer

Thanks for the question, Tom. Yeah. I mean, look, like we totally understand that, and like that is our focus, right? Like we're really focused on cash flow, on profitability, and ultimately thinking about growth over the longer term. And, you know, we're -- to this day, like we were really thinking about like on the marketing side, we're being efficient.

Like we really want to spend to the right levels where -- based on where things are right now, based on where the macro is right now, and we want to be able to be prepared for a range of macroeconomic outcomes. I think we see some good pockets of data here and there. And then, as we mentioned, April was a little bit tougher, right? And so, like we just need to be able to be prepared for whatever that means. And this business has been profitable.

This business has great economics. And we've been profitable at much lower levels of revenue. And so, I think we're trying to make sure that we are focused on stabilizing the business, making sure that we're absolutely doing the right things now to be investing in our core, to be investing in our platform so that we can be prepared for that growth. You know, we're not prepared at this time to be able to tell you when we think that inflection is going to be, but I really believe we're doing all the right things to set ourselves up for that.

Tom Nikic -- Wedbush Securities -- Analyst

Great. Thanks, guys. Appreciate the color.

Operator

Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed.

Dana Telsey -- Telsey Advisory Group -- Analyst

Hi. Good afternoon, everyone. Kat, as you think about what categories worked, what are you seeing in categories? Is there a category realignment that you expect to manage the business on given the reduction in distribution center space that you expect Stitch Fix to be known for? And what you're seeing in terms of some of the -- some of this on the subscription model? And lastly, how are keep rates, and what are you seeing in the path toward enhancing the customer experience? How is that moving along relative to your plans? Thank you.

Katrina Lake -- Interim Chief Executive Officer

Yeah. Great questions. And I think the first one on the assortment, I mean, we're seeing -- like on the men's side, we're seeing short sleeve woven work, we're seeing across the board. I think we're seeing more occasion and dressy.

In the women's business, dresses have been a place where we've been historically underpenetrated, and we've seen a lot of success in dresses. We've seen success in fitted dresses and more of the work dresses, definitely, in events. You know, I think you're probably hearing that across the board. But I think people are excited to be out and be doing things, and we're certainly seeing that in our business.

And the consolidation of the warehouses really does allow us to be able to hit more of that variety. And so, I would say that historically, like we've -- our business is probably more over-indexed in places like tops, and it's maybe even harder to serve some of the categories that are less represented in our inventory, partly because it's -- I think the -- it's easier. I think, going forward, we believe it will be easier to be able to have kind of even underrepresented categories available for our stylists to be putting in fixes more often with the consolidation of warehouses. And so, we really do believe that the consolidation of the warehouses will help us to be able to achieve for our clients greater -- and our stylists greater kind of access to a variety.

And that could potentially help us to be able to address more parts of the client's wardrobe and more parts of kind of wallet share in those categories. In terms of -- like what we're excited about in terms of keep rates and enhancing the customer experience, you know, as David mentioned and I said earlier, it's interesting, like we really haven't seen AOV be problematic, I would say, even though we feel like we're seeing macro in some other ways. But I think AOV is a place where we're actually seeing some holding, which is great. And longer term, we talked about kind of some of the ways that we're using algorithms in our buying, and I'm just like really, really excited about that.

I think there's -- what we're doing now is we're using algorithms not just to kind of give insights to our buying team, but actually to buy product. And that's starting -- we're starting to see some of the products that we've bought that way kind of hit our warehouses, and we're really excited about kind of the potential of that product. And I think scaling that capability is something that we're really excited about that I think really can play a large part in enhancing the customer experience and, longer term, definitely impacting things like keep rate.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Ashley Helgans with Jefferies. You may proceed.

Ashley Helgans -- Jefferies -- Analyst

Hi. Thanks for taking our questions. First, just any color on the declines in active clients. And then I know, in the past, you've talked about targeting marketing to reactivate clients.

Any update on how that's progressing? Thanks so much.

David Aufderhaar -- Incoming Chief Financial Officer

Yeah. Thanks for the question. On active clients, we were down 97,000 quarter over quarter. That's around 3%.

And we did see higher gross adds this quarter compared to Q2, and that was sort of a function of both increased acquisition spend. But also, I think to your point, the call out is we also saw strong reengagement. Reengagement went up 34% quarter over quarter and 24% year over year. And so, I think we're definitely leaning in on the reengagement side from a marketing standpoint.

You know, with that, we do continue to expect active clients to be negative in Q4, and that's because we're still sort of lapping this high dormancy. If -- just as a reminder, we spent last year in Q3 and Q4 over $50 million each quarter on marketing, and a good portion of that was focused on this Freestyle-first client acquisition and pulling back on that. That sort of -- that's still a headwind that we're working through from an active client standpoint.

Ashley Helgans -- Jefferies -- Analyst

Great. Thanks so much.

Operator

Thank you. Our next question comes from Ed Yruma with Piper Sandler. You may proceed.

Ed Yruma -- Piper Sandler -- Analyst

Hey, guys. Thanks for taking the question. I guess, first, a housekeeping question. I know stock-based comp is down pretty significantly year over year but less so on a trailing nine-month basis.

I guess, is this kind of the trend we should think about going forward? And then, Kat, just like a bigger-picture question. I know it's kind of been asked about when could you bend the curve on client growth. But maybe ask differently, do you think you need a more supportive macro to kind of bring the business back to growth, or do you think you have the levers and tools today that even if macro remains tough, that you could try to drive that client growth in the medium term? Thank you.

Katrina Lake -- Interim Chief Executive Officer

Thanks, Ed. I will take the second question and then maybe -- and, David, you can come back to SBC. I mean, it's a great question, Ed. I mean, we know that we have a macro effect on our business.

Like there's no question. That being said, I think it's hard for us to quantify. And frankly, I think it's kind of a waste of time to really spend too much time quantifying it because I do think -- you know, I don't know that I can answer your question exactly. Like is it enough to inflect without macro? Like I don't know if I can answer that exactly.

But I do think there are real opportunities. And I think, right now, we're working on our kind of strategic plan for the next fiscal year. And I'm really excited, I think, where we do have very clearly identified opportunities for us to deliver a better experience, to have a more -- for a more compelling value proposition for a broad range of people. And so, I think regardless of the macro, there are definitely things that we can be doing to positively impact our business and positively impact our clients.

And so, we're really focused there. And as I said, like I think we just really want to be prepared for a wide range of whatever macro is going to hand us over the next 12 to 24 months. And so, we want to make sure we're focused on the right things that are going to be the right things regardless of macro, and we want to be able to be prepared to take advantage when macro turns our way. And so, I can't answer it exactly, but like we definitely believe we can make forward progress, even -- and we'll keep an eye on what happened -- what's happening with macro.

David Aufderhaar -- Incoming Chief Financial Officer

And then, Ed, on the SBC side, you know, this quarter, we definitely came down from last quarter. I think it's around 12% down from last quarter. And it's around 28% down year over year. And so, the level that we're at right now is probably the right level if you think about it from a near-term perspective.

And just like the rest of our fixed cost structure, it's something that we'll want to leverage going forward.

Ed Yruma -- Piper Sandler -- Analyst

Thanks so much.

Operator

Thank you. Our next question comes from Lauren Schenk with Morgan Stanley. You may proceed.

Lauren Schenk -- Morgan Stanley -- Analyst

Great. Thanks. I just wanted to dig a little deeper into your comments about investing more around AI, just sort of any incremental color you can share there. And then just bigger picture, how are you thinking about sort of AI as a competitive threat, whether that be personal assistants, etc.

over the coming months and years frankly? Thanks.

Katrina Lake -- Interim Chief Executive Officer

Yeah. Thanks, Lauren. I mean, we could probably spend an entire hour on this, so maybe I'll just share a few highlights. But I think we -- like it's -- like I hear what you're saying of like it is -- like it's -- in a lot of ways, it's positive that like AI has been part of our story since the very beginning.

We've been using data science and machine learning since day one to power our business. And I think there's some real competitive differentiation that we've developed over our 10-plus years of leading in that space that are benefiting us today. And at the same time, you know, obviously, a lot of people are really interested in this space right now and looking at things that we've done. And so, I think we plan to kind of have the best of both worlds.

And so, I was with our technology team the other day, and we have an AI road map, which is part of what's kind of being kind of sliced into our strategic plan for next year. And that's a combination of, I think, there are opportunities where we can take advantage of off-the-shelf advancements in AI that have happened where there are capabilities that, you know, five, 10 years ago would have required us to build a 5% or 7% or 10% team to develop a capability that's now off the shelf. That's something that we can bring into our business and deliver as value to our clients. And then there are other places where we need to push and we need to continue our advantage.

And one of the real things about AI is that like your capabilities around AI are only as good as the data that you're training on. And the data that we have is really proprietary. It's been developed over 10 years. It's really, really predictive.

And so, there's a lot of opportunities for us where there's off-the-shelf things that are -- that we can do that are surfaced, but the real valuable things are where -- how can we take advantage of this one-to-one connection that we have with our clients and the incredible amount of data that we have to be able to push the envelope. And I think what we talked about in inventory buying is a really great example of that. We are now actually using like that kind of individual-level data about our clients to be able to buy in aggregate and to be able to do that in a much more compelling way than we have historically. And so, we mentioned we've -- we're just starting to have buys that have been generated by that tool that are hitting our warehouses and that our stylists are having access to now.

And it's super early days. And so, we A/B tested it. We know that there's a benefit that we saw in the A/B tests. We're starting to gradually integrate that into our buying processes.

But that's the place where we're really excited, where this is actually algorithmic buying that we are starting to roll out that, I think, is going to be able to deliver better experiences to our clients and stylists and ultimately better numbers to our bottom line. And so, that's something that really only we can do because of the depth of data that we have, because of the connection we have with our client, because we have individualized data about every single client and their preferences that they're sharing with us that allows us to then be able to buy in a way that, I think, would be very, very challenging for any other retailer to do.

Lauren Schenk -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from Aneesha Sherman with Bernstein. You may proceed.

Aneesha Sherman -- AllianceBernstein -- Analyst

Great. Thank you. So, there's been a lot of kind of ups and downs in the last few years, but if you go back to -- if we just rewind back to pre-COVID levels in about February 2020, so right before COVID, you had about 3.5 million active customers, kind of where you are now. And so, you've sort of anniversary all of the ups and downs and come full circle.

But in many ways, it's a stronger business now. You have higher awareness levels. You have better customer data, better algo, broader assortment. So, why are those same 3.5 million customers generating lower total revenues? Like what's different about their behavior? Is it -- are they buying lower-priced items or the keep rate is different? Can you help us contextualize like what is different, you know, versus where you were back then pre-COVID?

Katrina Lake -- Interim Chief Executive Officer

You know, it's hard without knowing exactly the specific data points that you're pointing to, but I would say like, at a high level, like some of what we are anniversary-ing is some of clients that were brought in in our Freestyle-first experience, and those clients did not generate the same level of engagement and revenue delivery that historically our clients did. And so, I think -- my guess is kind of that's probably what you're looking at. And like going forward, now, we are bringing people into an experience where they're sharing with us their style preferences, what they're looking for, what they like, what they don't like. And during some of those Freestyle-first days, we weren't gathering that kind of information about clients.

And so, that made it hard for us to retain and engage them in the way that we've historically done that. And so, my guess is that's probably the reason. And the good news is that we're largely getting back to where -- certainly getting back to where we were, and I would say even pushing forward past that. I think we're now at a place where we -- the algorithmic buying, as an example, is -- that's a step change.

That is a paradigm shift. That is an improvement from the way that we were doing things in 2019. And as we look forward, I think there are other opportunities for us to be able to deliver more value and a more compelling client experience in a similar way to be able to return back to that business where we are bringing people in who are engaged, who are excited, who are looking at this long-term relationship. And that's a lot of what we talk -- that's a lot of what's actually happening when we talk about kind of focusing on our core.

Aneesha Sherman -- AllianceBernstein -- Analyst

OK. That's really helpful.

David Aufderhaar -- Incoming Chief Financial Officer

And I think one other callout that -- sorry, I was just going to add that one other callout is just client tenure. It's the same amount of clients, but there's definitely a different mix from a client perspective. And so, you know, clients tend to be more active earlier in that life cycle until it stabilizes. And so, that's another one of the factors.

Aneesha Sherman -- AllianceBernstein -- Analyst

OK. Those are really helpful colors. So, then I -- just to follow up on that, to your comment, David, earlier on that all cohorts are spending less and you're not seeing differentiation by cohort. If AOV isn't declining and ghost -- gross adds are up, I assume that means that churn is what's gone up and that's what's driving the volume declines.

Is that accurate?

David Aufderhaar -- Incoming Chief Financial Officer

That is. Yes.

Aneesha Sherman -- AllianceBernstein -- Analyst

OK. And then does that suggest you're seeing no differences in churn between those older cohorts and the newer cohorts? Or actually -- are you actually seeing some differences in behavior and churn levels between those kind of fixed -- Freestyle-first people you've brought on in the last couple of years versus your original clients from several years ago?

David Aufderhaar -- Incoming Chief Financial Officer

No. I mean, I think a big part of it is what Kat was alluding to, is losing those Freestyle-first clients. But certainly, it's a little bit of both.

Aneesha Sherman -- AllianceBernstein -- Analyst

So, you're seeing higher churn for your newer cohorts than for your older cohorts.

David Aufderhaar -- Incoming Chief Financial Officer

For -- not necessarily the newer cohorts. It's more specifically those Freestyle-first clients that we were bringing in. Those are certainly some of our newer clients, but they're a specific cohort. And for that cohort, we're definitely seeing higher churn rates.

And that's one of the reasons we've pulled back on that and we're focusing more on the core. You know --

Aneesha Sherman -- AllianceBernstein -- Analyst

That's super helpful. Thank you.

David Aufderhaar -- Incoming Chief Financial Officer

Overall, macro -- yeah, macro still pressures sort of all of them in the same way, though.

Aneesha Sherman -- AllianceBernstein -- Analyst

Thank you.

David Aufderhaar -- Incoming Chief Financial Officer

Yup.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Hayden Blair -- Senior Director, Investor Relations and Treasury

Katrina Lake -- Interim Chief Executive Officer

David Aufderhaar -- Incoming Chief Financial Officer

Youssef Squali -- Truist Securities -- Analyst

Simeon Siegel -- BMO Capital Markets -- Analyst

David Bellinger -- ROTH MKM -- Analyst

Trevor Young -- Barclays -- Analyst

Tom Nikic -- Wedbush Securities -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

Ashley Helgans -- Jefferies -- Analyst

Ed Yruma -- Piper Sandler -- Analyst

Lauren Schenk -- Morgan Stanley -- Analyst

Aneesha Sherman -- AllianceBernstein -- Analyst

More SFIX analysis

All earnings call transcripts