Good day and thank you for standing by. Welcome to the second quarter fiscal year 2023 Stitch Fix Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. 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. Good afternoon, and thank you for joining us today to discuss the results for Stitch Fix's second quarter of fiscal year 2023. Joining me on the call today are Katrina Lake, Interim CEO of Stitch Fix, and Dan Jedda, CFO. Also joining us on today's call is David Aufderhaar. We have posted complete second 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 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 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 second 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. This call in its entirety is being webcast on our Investor Relations website, and a replay of this call will be available on the website shortly. With that, I will turn the call over to Katrina. Thanks, Hayden. 12 years ago, I was inspired by a very simple human problem: to help people look and feel their best. Now, as I find myself back as Interim CEO, this simple mission feels more resonant than ever. I'm proud of the ways that we've made our mission a reality, but also motivated by the opportunity ahead. We're still in the early days of transforming the industry of apparel, I feel optimistic that Stitch Fix can continue to lead the way in personalization and achieve greater impact in the years to come. While many companies may be starting to define an AI strategy, our company was built on data science from day one. We have built technology and systems that leverage the best elements of human stylists combined with machine learning, and the billions of proprietary data points that we have around client and product interactions are rich, meaningful datasets that predict outcomes and help us to understand what clients need. At the same time, I realize we haven't met recent expectations. Striving towards an ambitious vision has resulted in a loss of focus. We must, now more than ever, deliver on the client experience, bring focus in our marketing efforts, and drive results for our shareholders. We have clarity on our path long term and short term. Long term, I continue to have great conviction that the market opportunity for a more personalized way to buy apparel is large and growing, and that we have a significant advantage rooted in our decade of experience in leveraging data to deliver personalization at scale. Shorter term, we also have clarity. We need to get back to a position of execution and profitability. We have a history of achieving both in the past. I'm confident we will get there again. There were two major events in fiscal second quarter intended to help reposition and refocus the company to set ourselves up to optimize for liquidity and profitability in the short term and maximize our long-term growth potential. First, we restructured our operating model and made the difficult decisions to reduce our headcount by 20% of salaried positions and to shutter operations in our Salt Lake City warehouse. Late last year, we began analyzing the team and determined to restructure the organization in an effort to create a leaner operating model. This also allows us an opportunity to reorganize and refocus to more nimbly execute. These decisions are never easy, but we know it was the right decision to achieve our goals of liquidity and profitability and for the overall health of the business. Second, we are conducting a search for a permanent CEO. The board and I realize that the macroeconomic environment, competitive landscape, and even our own business has changed meaningfully over the past few years, and we are excited to find the right leader for the present and future of Stitch Fix. I am encouraged by the process thus far and am confident that we can find an inspiring person to lead the Stitch Fix team and help reestablish the track record of results we were once known for. In addition, we shared in our press release this afternoon that Dan Jedda will be stepping down as CFO to pursue a new opportunity. The board and I want to thank Dan for his service to Stitch Fix and wish him well for the future. David Aufderhaar, our SVP of Finance, will succeed him as CFO. David joined us four years ago with an eye towards CFO succession. In working together these many years, I have been impressed and inspired by his depth of partnership with the functional leaders at Stitch Fix, his deep commitment to and understanding of our business and our team. He's a thoughtful and trusted leader, and I'm excited for him to step into the CFO role. Now on to the financials in the quarter. Fiscal second quarter revenue came in at $412.1 million, which was at the lower end of the provided range. Despite this, we delivered adjusted EBITDA of $3.8 million, which was at the high end of our guidance range due to effective cost controls and our corporate restructuring. Dan will dive more into the financials later on, before handing it over, I want to touch on topics in marketing and our product that demonstrate how the company is rallying around bringing focus and clarity to better deliver results for our clients and shareholders. Consistent with the broader company, our marketing strategy aims to preserve liquidity and achieve profitability while simultaneously attracting long-term customers to fuel a return to growth. This will be the case as we continue to refine our traditional paid channels as well as diversify into under-penetrated channels we have yet to scale. We are also continuing to lean into client retention and re-engagement strategies in an effort to continue to increase engagement and optimize our CPAs. It's worth highlighting that our CPAs were down over 40% from a year ago, which shows despite a significant reduction in overall budget, we are gaining traction in more effectively deploying our marketing dollars. Overall, we know these are the right things to focus on, and when combined with our efforts to maximize the client experience and improve retention, should maximize ROI in the short term and set the stage for a return to growth. Moving on to the client experience. A complicated macroeconomic environment and tighter client wallets make it more critical than ever to reexamine and bring focus to our client experience. The ambitious vision we embraced for the past many months has resulted in a client experience that is less focused on our core areas of differentiation, and we believe that there is opportunity to drive long-term value by being really deliberate and targeted about the role of features and functionalities in the Stitch Fix ecosystem. As an example, we've recently refined our point of view on Fix Preview. At the highest level, Fix Preview has demonstrated a positive impact on AOV, digging into the data, we see a more nuanced story. There absolutely are clients who significantly benefit from Fix Preview, but there are also clients for whom showing a preview actually increases cancellations. Acting on this data, we found an opportunity to drive better outcomes and LTV by experimenting with eliminating the preview for some clients, allowing those clients to enjoy the surprise and delight that we know those clients value while allowing other clients to benefit from the agency of Fix Preview. I share this example of letting data drive our decisions and providing more intention and focus in the client experience. I anticipate there are many similar opportunities as we dig into the data and the experience, and we believe these strategies will drive LTV, enabling us to optimize cash flow and profitability in the short term while positioning ourselves for an eventual return to growth. Before I turn it over to Dan, I want to thank the entire team at Stitch Fix. We talk internally about celebrating Stitch Fix grit as one of our core operating tenets, and I've been inspired by the grit I've experienced day in and day out from the team these past few months. I continue to be inspired by the passion I see to deliver value for our clients and our business and to make our company a fantastic place to work. Our continued focus and data-driven decision-making are paving the way for a bright future for Stitch Fix. I believe we are on the right track to get there, and I look forward to continuing the journey with you all. With that, I'll turn it over to Dan. Thank you, Katrina, and hello to everyone on the call. Before jumping in, I want to thank Katrina and the Stitch Fix board for this opportunity and congratulate David on his new role. David and I have enjoyed a positive and productive working relationship during my tenure, and I am confident he is the right person to lead the team. David and I will be working together over the next several weeks to ensure an orderly transition. On to our Q2 results. Q2 net revenue declined 20% year-over-year to $412.1 million due to lower net active clients and higher promotional activity in the quarter. Net active clients in the quarter declined 11% year-over-year to approximately 3.6 million. As Katrina mentioned earlier, we have continued to diversify our marketing channels while ensuring we realize positive near-term ROI on advertising spend. Total advertising spend in the quarter was 5% of net revenue and down 46% year-over-year. We like the trends we are seeing in overall CPAs. Even with the lower spend in advertising, we did see positive year-over-year in gross client adds in men's in Q2. While women's and kids' growth adds were down year-over-year, our rates are improving in both lines of business. We do continue to see elevated levels of inactive clients and continue to focus on improving this with the right client experience. We expect advertising to be 6%-7% of net revenue for the rest of the year, We'll continue to be opportunistic if we experience the right ROI and lean in where appropriate. Revenue per active client declined 6% year-over-year to $516. While our overall average order value is holding relatively steady year-over-year, similar to Q1, our analysis continues to show that all client cohorts are spending less than in prior years. We expect this trend to continue through the rest of FY2023. Q2 gross margin came in at 41%, down 400 basis points year-over-year, driven primarily by lower product margins due to increased promotional activity and higher product cost. Total transportation costs were also up year-over-year due to increased carrier rates. Sequentially, gross margin was down approximately 100 basis points from Q1, due mostly to increased promotional activity. We expect gross margins to be around 42% for the remainder of the fiscal year and are actively focused on improving gross margins as we see opportunities to improve product margin, transportation efficiency, and inventory efficiency over time. Q2 adjusted EBITDA came in at $3.8 million, reflecting our ongoing cost control efforts, including a reduction in force and the closure of our Salt Lake City warehouse. The adjusted EBITDA excludes $34.7 million of restructuring and one-time costs. Net inventory ended the quarter at $159 million, down 28% quarter-over-quarter and down 13% year-over-year. Free Cash Flow for the quarter was positive $15.4 million, our first quarter of positive Free Cash Flow since Q1 of FY2022, and we ended the quarter with $224 million in cash equivalents, and highly rated securities. In summary on our cost structure, with the execution of our restructuring actions and our reduced advertising levels, we have now executed against all the actions needed to realize $135 million of cost reduction targets for FY2023. We shipped our last Fix from the Salt Lake City distribution center at the end of January, and we have distributed the inventory across the remaining fulfillment centers in our network. We will begin to see cost savings from the closure in Q4. Our goal remains to achieve positive adjusted EBITDA and Free Cash Flow in the short term while continuing to position ourselves for profitable growth in the future. We believe we are well on our way to achieving these goals. On to our outlook. For the remainder of the fiscal year, we expect to continue to face a challenge and highly promotional operating environment. With that said, we are leaning into our areas of differentiation and focusing on managing the things within our control. We will continue to responsibly manage our cost structure with the goal of staying adjusted EBITDA and Free Cash Flow positive for the remainder of the year. For our fiscal Q3, we anticipate revenue to be between $385 million and $395 million. We expect adjusted EBITDA for the quarter to be between -$5 million and +$5 million, largely reflecting increased seasonal advertising spend as we continue into the spring/summer season where our CPAs are generally more efficient. For the full year 2023, we now expect revenue to be between $1.625 billion and $1.645 billion. We expect adjusted EBITDA for the year to be between breakeven to +$10 million. Going forward, we remain relentlessly focused on liquidity and profitability. The improvements we have made in our cost structure will allow us to invest in growth as we continue to focus on improving our client experience. Over time, we expect the improved client experience will enable us to grow our net active clients, revenue, and Free Cash Flow. With that, I'll turn the call over to the operator for Q&A. Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Youssef Squali with Truist. You may proceed. Great. Thank you very much. Hi, guys. A couple questions. Good to hear from you, Katrina, again. The first question may be for Katrina. Can you just speak at a high level about how you see, I mean, you talked earlier about, you on the one hand, you've had a lot of focus, on the other you have clarity on the path forward. One, maybe can you just expand a little more about what, you know, pinpoint the two or three areas where you felt the Stitch Fix had lost its focus, and then maybe, you know, kind of what gives you the confidence that you are back on the path that should ultimately get you to growth. Maybe can you double click a little bit on your EBITDA margin guide of -5% to +5%, and just help us about how you get there. Obviously, I think you said gross margin should be around 42%. Which really only leaves, you know, advertising and sales and marketing and G&A as the other component. Maybe just provide a little more color on where you see those for the second half of the year. That would be very helpful. Thank you both. Great. Thanks, Youssef. It's good to be back. I'll answer your first question, and then I will have Dan weigh in on the second around EBITDA margin. On kind of the focus and clarity, I think there's, you know, there's innumerable examples that I could bring. I think, you know, just at a very high level, as we thought about expanding the business in a very ambitious way, we took a marketing approach that probably tried to bring people in through a variety of different customer segments. You know, very notably, we spent marketing dollars trying to bring people into a Freestyle first experience as an example. That's a place where, you know, not only did we find that that marketing of Freestyle first wasn't as effective as what we had done historically in Fixes, but it also actually made it harder for us to be able to be acquiring people into the Fix channel. That's I think one example of how that comes to life. Another one is around inventory. You know, we definitely built up an inventory in anticipation of a Freestyle customer that, you know, was a different set of inventory than Fixes and also more unknown. It was a customer we hadn't served before. It was a channel we hadn't served before. You know, there was more risk in the inventory. Going forward, we can use our 10+ years of historical data to really be able to buy with confidence on the inventory side. That's another good example of focus. The customer experience as well. I mentioned, you know, us looking at Preview as an example. I think there are still other places where we can really kind of clean up the customer experience so that we're really maximizing value for the client and value for the shareholder at the same time. In terms of confidence back to growth, I think, you know, there's a lot of places where, you know, I think all of those places are areas where, you know, on the inventory front, I think we can feel confident looking at what we're doing going ahead from now. On the marketing front, you know, I think we have near term results that show that things are working. When Dan referenced that we saw customer acquisition costs down by 40% compared to last year. To me, that's, you know, that's a great example of how focus is, you know, kind of creating value in the business today. I think we feel really confident that it's creating value in the business long term. Dan, you wanna talk about EBITDA? Yeah. Hi, Youssef. On the EBITDA guide, the -5% to +5%, again, I think we've provided obviously revenue and gross, and gross margin, and we also provided that 6%-7% advertising number. For Q3, you know, we're gonna be on the higher end of that 6%-7% simply because as we enter our spring/ summer season, it's a very efficient quarter for us. We talked, Katrina talked about it, and we're very focused on the efficiencies within our marketing channel. We just feel as we exited Q2 and go into Q3, we like what we're seeing. Think of the Q3 as the higher end of that 6%-7%. That leaves us, of course, with SG&A excluding advertising on a run rate basis, after our restructuring, that gets you to that -$5 million to $5 million. Of course, if we're not seeing the efficiencies, we won't spend the advertising dollars. We feel pretty good about the guidance and of course, the level of spend that we're now targeting for advertising. Just to be clear, that $34 million that I think you mentioned in one time restructuring costs and other, that hit the SG&A expense line of $187 million in Q2? It did. Okay. All right. That makes sense now. Thank you very much. Thank you. Our next question comes from Simeon Siegel with BMO Capital Markets. You may proceed. Hi, this is Garrett Klingshirn on for Simeon. Thanks for taking our question today. Just noticing in the press release, you guys notice, going back to more of a stylist focused approach. Is that kind of a de-emphasis, maybe a little bit from kind of Freestyle? Katrina, you just mentioned, getting inventories right from within the Freestyle versus the Fix business, understanding how those are different. I'm just curious how you guys are thinking about that business going forward and how you're planning, kind of, how to work around some of the challenges maybe you've had there. Yeah. Thanks, Garrett. It's a good question. You know, I think there's no question that Freestyle adds value in ways that Fixes didn't. I think the most clear way that we think about that is in looking at the assortment data. I mean, we've shared in calls historically that we're seeing a different assortment being bought in Freestyle than Fixes. We're seeing more outerwear, shoes, accessories. You know, that says to us that this is helping to fill a different need for our clients. That being said, as I mentioned in the last question, I think, you know, using Freestyle as a customer acquisition vehicle as an example, that was less effective. You know, what we're really trying to do is to say, where are our areas of differentiation? Personalization, styling are really at the core of that, especially if you think about our kind of competitive positioning relative to others. Those are spaces that we really uniquely own. As we think about what is the customer experience that best delivers against personalization, against styling, I think Freestyle can be a component of that. We're probably thinking of it more as one ecosystem that has a more clear customer journey, rather than thinking of it as kind of separate business units. Great. Appreciate that. Just as a quick follow-up, I'm just, you know, looking at the 42% guidance for gross margins for the remainder of the year, Dan, your comments on how, you know, the difference from 1Q to 2Q is about 100 basis points of markdown pressure. Are you guys seeing kind of a return to markdown levels where you were, you know, going back a few quarters? I'm just curious how you're planning about markdown pressure for kind of the back half of the year and kind of what you're seeing more broadly within your customers and their ability and their willingness to shop on kind of more of a full price level compared to kind of a discounted one. Yeah, you know, We've talked about this in the past and thanks for the question. The way we've approached markdown is really focused on where we think we have excess or the wrong inventory and using our Freestyle channel to move that inventory. We've seen success in that as opposed to the option of selling it out to a third party liquidator. We've seen success in that, and we will continue to utilize that. Although as you can see from our inventory levels now, we've come down considerably, and we feel we've right-sized our inventory. We feel very good about the inventory position that we're in now in terms of total dollars. We still have some buckets to work through. We are using the Freestyle channel for that. In the Fix channel, we are not discounting a lot. We simply aren't doing that. Clients love with the styling service that we give them. We have not seen the need to discount in the Fix business, and we don't anticipate doing that going forward. Great. Thank you for that. Thank you. Our next question comes from Mark Altschwager with Baird. You may proceed. Hi, this is Amy Teske on for Mark. Thanks for taking our question. On the inventory point, you know, as you've worked down inventory and pulled back on your receipts, what is your level of comfort that you now have the right type of inventory? How do you think about the composition of your inventory between casual and dressy styles and product categories? Thank you. Yeah, I'll take that one. That's a great question, Amy, and thanks for asking it. First of all, you know, we had talked about inventory in our Q4, again in our Q1 results, and how we had a lot of inventory, and we simply needed to work it down. We've done that. A lot of that, of course, was getting rid of excess inventory and/or the wrong styles, or brands of inventory. We're in a much better position now, as I mentioned. We still have a little bit of work to do on the inventory that is gonna be short term, and that's included in our guidance going forward. We feel really good about the brands that we're targeting and with a, with a big focus on our on our exclusive brands, which are trending very well for us. In fact, I'll just share that we did notice in January where we were soft on some of our exclusive brands on, you know, our customers told us they wanted that. We quickly pivoted and where we were short on inventory, we chased back into it. That's a great sign for us that our customers love our exclusive and Stitch Fix only brands that we're selling. We're gonna continue to focus on that in the very near term as we get into spring/summer and then as we get back into fall/winter a year from now. Thank you. Our next question comes from Edward Yruma with Piper Sandler. You may proceed. Hey, thanks very much for taking my question and welcome back, Kat. I guess just a bigger picture question. You guys are really known for personalization. You've talked about this a lot today. Can you talk about competitive gap? Do you think that your competitors have gotten better since, you know, the inception of your business? Maybe, Kat, if you have any observations of things that have changed adversely since you left and have come back that you're looking to rectify quickly, we'd appreciate that. Thank you. Thank you, Ed. I think I got your question here. In terms of just more of the competitive gap, you know, honestly, I feel really strong about our capabilities and, you know, we've been able to be in this business for 10+ years with a history of profitability, with a history of being able to deliver cash flows and, you know, there's not a lot in the competitive set that are able to claim the same thing. You know, the focus that we've had around data science, the focus that we've had around personalization, I strongly believe that we continue to lead on that front. And I feel, you know, just as good if not better about that coming back into the role. In terms of things that, I think your question was more of just like what has adversely changed. I think I spoke to it on the call, but I really do think it's focus. You know, I do think hindsight is 20/20, and I think we had some really ambitious visions that we were chasing after. With kind of chasing an ambitious, big vision came a kind of reduction of focus on what I would consider our core differentiators, which are really around personalization and the styling. You know, I think a lot of what we've been talking about internally is just how can we make sure that everything that we are doing with our valuable resources and time are really focusing, again, delivering that for our clients and ultimately our shareholders, of being able to deliver an experience that feels personalized, for all of our clients and making sure that everything that we invest in achieves that goal. Thank you. Thanks, Ed. Thank you. Our next question comes from Trevor Young with Barclays. You may proceed. Great. Thanks. First one, Katrina, just on the testing of discontinuing the Fix Preview. Are you getting any sort of signal that keep rates are eroding in those circumstances? More, you know, broadly big picture, do you feel like the cost base is in a good place now, to set the stage for recovery in some, you know, future quarter after we go through kind of the reset on c ore Fixes here? Is there some work to be done and maybe even some reinvestment to be done on the tech side to get that into a better place? Just any thoughts on that would be appreciated. Great. Thanks. Thanks for the question, Trevor. I'll take the first one and have Dan talk more about the cost basis. On Fix Preview, I mean, one way to really think about it is to try to maximize the ROI and LTV of a given cohort. As we do some segmentation, we can see at a high level that overall we saw AOV go up with the ability to have access to Fix Preview. Once you dig in, there's going to be some cohorts where we see people more likely to cancel when they see a Fix Preview. What we're really trying to optimize for are those LTVs. I think, you know, what we're able to do is to fine-tune, I guess, a little bit more at a more personalized level of where we're gonna be deploying Fix Preview to be able to maintain that benefit that you mentioned to keep rate in AOV for the populations for whom we know that that will occur. While at the same time reducing cancellations and making sure that we are retaining and engaging clients best in all of our cohorts by eliminating Fix Preview from those who we don't think will benefit from it. I would say also, you know, from a customer survey perspective, like one of the things that we hear is that one of the real benefits of Stitch Fix is surprise and delight. To be able to, you know, for some clients, you know, you can think of it as a lack of agency, but you can also think of it as actually, allowing people to have that surprise and delight. You know, somebody said to me, which I love this quote, of like, "As an adult, you just don't get a whole lot of good surprises in your life." Stitch Fix can be one of those. We know there are clients who really value that, and actually being able to continue and maintain that for those clients is valuable and LTV positive for those clients. Oh, Dan, you wanna answer the question on the cost basis? On the total cost, when you look at where we ended Q2 and adjusted for restructuring, you know, we're back to fiscal 2019 SG&A, excluding SBC, and we feel very good about that g oing forward. There's still more efficiencies to have. In my prepared remarks, you heard us talk about gross margin and the opportunities that we see there. There's also this further opportunity on our footprint to better monetize that as we reduce our corporate office space. We have variable efficiency projects that are ongoing. Yes, I feel the cost structure is in a very good place, and I think there's tremendous opportunity to improve it going forward. We're in a good place from a cost standpoint and a liquidity standpoint. Great. Thank you both, and best of luck, Dan. Thank you. Thank you. Our next question comes from David Bellinger with Roth MKM. You may proceed. Hey, everyone. Thanks for the question. On the cost per acquisition being down 40% in a quarter, how much of that is internally driven through some type of channel mix shift and the ROI where that's getting better versus some of, call it the external factors at play within the broader apparel category? Yeah. Thanks for the question, David. I can start and might benefit from some of Dan's weighing in here. I think honestly, a lot of that is really more from a perspective of focus. If you think about where we were last year, we were doing more Freestyle first marketing. We were driving people to an immediate purchase experience instead of driving people into a styling experience through Fixes. Just very simply put, that Freestyle first marketing was not as efficient as our core Fix experience. I think just you know, to be able to have the marketing messages be more clear around the benefits of personalization and styling, and to be really focused on driving people through one channel of conversion, has been driving that efficiency. You know, we definitely are always looking at diversifying our channels, we have our tried and true channels that we know perform, and those have performed well as you've kind of heard in the numbers. At the same time, we're always experimenting to make sure that we're getting, you know, all the emerging channels and to make sure that we're kind of exercising that muscle of acquiring and converting clients, in, you know, in all the new places that we see our clients kind of spending time. I don't know, Dan, if you have anything to add to that. Yeah. First of all, I 100% agree with what Katrina said, I think I would simply add that, you know, part of the experiences where we really hardened the funnel really helped with conversion of traffic and therefore the efficiency of the marketing spend, in addition to just being very focused on the next dollar spent within the channels and is that an efficient spend. You know, I think the marketing team has done a tremendously good job of diversifying the channels, but then focusing on the efficiency and making sure we're bringing in the right clients, which we feel very good about, and I think we've talked about that in the earlier remarks. Great. Thanks for that. Just one other follow-up. I think you mentioned some type of chasing inventory. It sounds like you're more comfortable with the assortment. What's the next step if we think bigger picture here in getting your core customer back and spending again? Is there some type of refresh needed on top of that on the inventory side, or is there more of a, you know, technology connectivity issue you need with your core customer to get them back again? Yeah, I mean, I can take that. I think to be clear, like we're seeing the customer perform in a pretty healthy way. I mean, we're seeing our AOVs be pretty consistent. On the inventory side, you know, it's of course been gradual over the last few months of kind of evolving into the inventory mix that we want, but we feel really good about where we are on the inventory perspective. That being said, like, there's definitely opportunity. I think, you know, we see Dan mentioned we're seeing some cohort weakness. There's no question there's some macro headwind, but I'm not willing to accept that it's all macro. I think there are still opportunities for us to improve the customer journey, for us to improve the ways that we're serving our clients so that they can have the best possible experience that then leads to LTV, it leads to shareholder value. You know, I definitely still think that there's a lot of opportunity. You know, as we kind of dig in and look at, you know, how are Fixes doing, how are people feeling in their actual transactions, we're actually seeing goodness there. I think, you know, it's on us now to be able to deliver more goodness to the rest of the customer experience. Great. Thank you. Thank you. Our next question comes from Ike Boruchow with Wells Fargo. You may proceed. Hi, everyone. This is Jesse Sobelson on for Ike. It looks like taking down inventory was a major source of cash this quarter. On the liquidity front, I'm just curious how much cash do you guys need to run the business, and what should investors expect regarding cash flow generation throughout the rest of the year? Yeah. Thanks for the question. Yes, we did have a source of cash come from our inventory position, which we implied was gonna happen last quarter as we brought our inventory down. On the go forward, how much cash do we need to run the position? From a liquidity standpoint, you know, we're in a very good position. We have $223 million of cash equivalents, and we have a credit facility which we don't plan to use. Going forward, as we guided to a positive H2 adjusted EBITDA, we talked about EBITDA as a great proxy for cash flow for us, simply because we do not have a lot of CapEx, and we do not anticipate a lot of CapEx spend over the next several quarters. We feel that both our EBITDA and cash flow are trending positive for H2. You know, we'll give more guidance on FY2024 at a later date. Overall, we feel very good about the liquidity position that we're in and the cash flow that we've generated in both Q2 and for H2 as we go forward. Great. Thank you. Thank you. Our next question comes from Blake Anderson with Jefferies. You may proceed. Hi. Thanks for taking our question. I wanted to revisit the Freestyle topic and how the tone has seemed to maybe change a little bit on that. This is more of a philosophical one, but should we expect any strategic changes to that business before a new CEO is announced? Just wondering, Katrina, how much influence we could have on that business in the short term. Thank you. Yeah, thanks, Blake, for the question. You know, I mean, we're always evolving the experience. At a very high level, like I really don't see a big foundational shift in the strategy. I think the strategy of focusing on personalization, of focusing on styling, and focusing on the areas that we know are valuable areas of differentiation for our client, you know, I think, it's hard to imagine that we would deviate from that. That being said, like, we are always doing experiments. We're always doing A/B tests to better understand what can we be doing differently or better in order to optimize that client journey, to drive LTV, to drive value for our clients, to drive, you know, profitability and, long-term growth. You know, we're always making changes. Hopefully what I could say is, like, you can probably expect to see some small changes in terms of the way that the customer journey evolves over time. You know, I honestly, I wouldn't see them as like fundamental big changes. I think we know that Freestyle adds value. We know which ways in which it adds value. R eally, it's about how do we make sure to tailor and target the right customer experience so that clients are getting the most value out of their experience with Stitch Fix, and thus we are getting the most value out of clients that we acquire. That's helpful. Thank you. Maybe I missed it, but did you talk about, kind of trends by month throughout the quarter and any commentary you guys can provide on the quarter to date, especially how the budget shopper is holding up? Thanks so much. Yeah, I can take that. We did not provide trends by quarter for our Q2. I will say that, you know, February has largely been as expected for us. We are again, the guidance that we gave, of course, takes into account five weeks of February. We're not seeing anything that is out of the ordinary where we've seen a change in trajectory to the negative. We continue to see our keep rates trending positively. You know, there might be some frequency with the cohorts analysis that we talked about for Q2 to see that trend continue. We haven't looked at that yet for Q3, but we will. No real trend update beyond what we've provided for the guidance for Q3 and the commentary we gave on Q2. Great. Thank you. Best of luck. Thank you. Thank you. Our next question comes from Tom Nikic with Wedbush Securities. You may proceed. Hey, thanks for taking my question. Dan, quick one for you. Sorry if I missed this. Did you actually say what the marketing expense was in Q2, as either in dollars or as a percentage of revenue? We did, 5%. Got it. Okay. Thanks. Kat, welcome back to the CEO role in, you know, in an interim basis. When we think about the permanent CEO role or the successor, wh at are you looking for? Like, what skill sets are you looking for? You know, optimally, what attributes would your ideal candidate have for the permanent CEO seat? Thanks. Yeah. Thanks, Tom. Yeah, we've kicked off a search. We've engaged with a search firm, and we've been having conversations with candidates, quite a few conversations with candidates. You know, overall, I feel excited and optimistic about kind of the quality of people that we're meeting. You know, at the highest level, like, or very simply, like, I really do think it's having a history of delivering results, of executing a business that... Our business is fairly complex, you know, I think somebody who's had experience in a business that has similar complexity to ours and have a kind of history of delivering results is, of course, first and foremost important. You know, we have a large company that has a lot of people in different types of roles. That leadership and someone who has a natural leadership and somebody who's gonna be able to be successful in leading a diverse organization is really important. You know, at the highest level, I think those are two things that we're really looking for. You know, as we've kind of talked and as we've had a lot of conversations, we've had a lot of candidates who have firsthand experience with Stitch Fix, who know the business well and feel really connected to the business and the customer. You know, I think, you know, we're excited about the people we're meeting, you know, we're optimistic. Sounds good. Thanks, Kat. Best of luck in the CEO search and with the business the rest of the fiscal year. Thank you. Thank you. Our next question comes from Kunal Madhukar with UBS. You may proceed. Hi. Thanks for taking the question. O ne more housekeeping and then, one more, longer term. On the housekeeping side, can you help us understand, the LTM active clients has been down, has been declining for the past five quarters now. How should we kind of think of the trend for LTM active clients, you know, going forward? Katrina, you talked about the eventual return to growth, and you also talked about having a lot more visibility on the business. Can you help us understand, in your mind, how you're thinking of growth, going into 2024 and maybe into 2025? When are we going to get to growth? You know, part of the reason is in fiscal 4Q of this year, that is going to be a 14-week period, rather than a 13. You know, the guide does not inspire a lot of confidence. Thank you. I'll take the RPAC question. You know, RPAC is a trailing metric. It's a trailing 12-month metric on actives. There is a lot of math that goes into the mix of RPAC. I know your models take into account RPAC, but I think the best way we can say that is, while we are seeing some cohort degradation in terms of spend, which will impact RPAC, mix is a bigger impact of RPAC, mix of the tenure of our clients. We've mentioned in the past that our older clients spend less, our newer clients spend more as their closets get filled up. We'll continue to talk about RPAC from an actuals basis, but we're not guiding to future RPAC. That being said, I think it's safe to say that, you know, where we might see some cohort degradation on spend and some mix, we're not expecting big reductions in RPAC, you know, on a go-forward basis. We will probably see some of that because of the spend in cohort on a year-over-year, but we don't think it's going to be material. Our clients do continue to spend with us. They do continue to stay with us. The newer clients that we're bringing in, as we look at them, are cash flow positive clients that we talked about the near term ROI. All that will have the effect eventually of stabilizing that RPAC and ultimately bringing it up. That's gonna happen over time. Thank you. Sorry. I think we wanna get to the second- Yeah. Is there a part... The part two is more around like how am I thinking about the eventual return to growth. Is that... Okay. You know, I mean, Dan mentioned, I totally agree with everything that Dan mentioned. I would just add also that, you know, in our business, so much of our business is serving clients that are returning, and that's a great part of our business. We generate a lot of revenue from our existing customer base, and so a ll the things that we are able to do to be able to make that client more valuable, all of the ways in which we can reengage that client, all the ways in which we can offer those clients reasons to come back also add. You know, we're always thinking about new clients. We're also thinking about how do we make sure that our existing base is healthy. You know, I think we've seen some positive signals that we've been excited about and feel really confident that we're doing the right things and the things we need to be doing right now. Thank you. Our next question comes from Janet Joseph-Kloppenberg with JJK Research Associates. You may proceed. Hi, Katrina. Hi, Dan. I just wanted to follow up on that question is, it seems to me that, please correct me where I'm wrong, that spending will shift to a higher degree of investing in Fix and low degree in Freestyle, and that should drive up your active customer participation and your sales. I think that's what you're saying, that you'll use Freestyle as this, to some extent, as a liquidation channel for Fix, but that your investment spending will go back towards the personalization Fix business and that should help to improve the EBITDA performance of the company as well. Does it mean that maybe the advertising rates can stay, you know, below 7%, 8% as we go forward? You know, is that something that needs to be tested and refined? Thank you. Sure. I think I can answer at a high level, and then Dan can kind of weigh in on more of the specifics. I mean, I think at a high level, the way to think about it is that we are really focusing the business around personalization and styling. Yes, Fix is a very big part of that, and having a more focused messaging from a marketing perspective helps us to drive marketing efficiency. Having a more focused point of view around who the client is. I think one of the challenges with trying to acquire Freestyle first clients was that, you know, we were definitely deviating from our historical client and trying to kind of, you know, trying to have many different messages and to actually have an assortment that backs that. Simplifying on the inventory side also delivers efficiency. You know, Freestyle definitely still has a role to play in order to be able to help our client to fill in their closet, to be able to engage in between Fixes. We definitely are going to continue to have to be thinking about how does Freestyle add value to that client experience. You know, I would say that the investing is more around thinking more holistically around what is the Stitch Fix ecosystem, and how do all these pieces fill in together in order to drive the best LTV and experience for our clients. Also, you know, of course, delivering results for our shareholders. Maybe Dan, you wanna talk a little bit about the marketing side? On the marketing side, again, you know, Katrina mentioned we're not marketing a Freestyle first experience, which we had done in the past. That along with a lot of the product, the client experience improvements we have made, it just has allowed us to focus on that Fix first client in a very efficient way. While the advertising drop year-over-year seems large, when you look at the clients that we're bringing in, we're seeing very efficient spend. That was the point when we talked about men's actually being up on a gross adds basis and women's and kids improving, while still down year-over-year, improving from current trends. That's with that 46% reduction in marketing and advertising. We do anticipate to stay on this trend of lower advertising spend, focusing on the right client, the Fix first client, and then having Freestyle be a very important incremental opportunity once the client is in the door and engaged in the Fix business. It still is a material part of our business and will continue to be. Freestyle, that is. Thank you both so much. Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. You may proceed. Hi. Good afternoon, everyone. Kat, welcome back for the interim period. As you think about the near term and the long term, on the near term, how are you thinking about the core customer, what they're spending on pricing, how you're thinking of brands, and how do you think about the differentiation between the Freestyle and the Fix in terms of whether it's AUR or captivating the customer? On the long term, obviously, new processes, it sounds like, are being put in place right now. What do you see as the most incremental driver to return to growth under the hood in terms of operations or logistics or processes? Thank you. Thanks, Dana. Let's see. On the first part, as we think about, like, kind of what are we seeing on the customer side, we actually are seeing AOV hold pretty strong. We're seeing AURs hold pretty strong. You know, I think in terms of what the customer is looking for, I think what's really differentiated about our channel relative to others, it's not necessarily price. It's not necessarily, you know, kind of finding the brand that you love. It is actually around fit. It's about fit, it's about style, it's about finding things that you love, and in some cases, finding things that you love that are surprising to you. That's something that really only our channel can deliver on. You know, that's kind of how we're thinking about who the core customer is. You know, the good news is, I think there's a lot of that core customer. You know, there's some data that we had that, you know, like, well, most men and, you know, even half of women, would characterize themselves as, you know, not loving to shop. There's not a lot of other retailers that are focusing on that customer. You know, Stitch Fix is one that really makes shopping, more tenable. It makes it easier. It, helps people to look their best without spending a lot of effort to do it. Those are really differentiating qualities in our customer that we can build the right assortment to be able to deliver on. In terms of what's most influential under the hood, I mean, that's a good question. I mean, really for me, I think the broad umbrella of it really is focus, and it really is around focusing those marketing messages, focusing that conversion funnel, focusing on the inventory side. I think just really being able to focus on the things that we already know that we are able to deliver on, that we have a business that's 10-plus years old, that has a history of profitability, delivering on this business. To be able to focus back on the things that we know and know that we can deliver is kind of the core thesis. I would say, you know, rather than having one big thing, it's probably a lot of little things like the ones that I mentioned around marketing and inventory. I shouldn't call them little things. They're really meaningful, and I think, you know, you could see that in the marketing numbers that we shared. You know, I, I feel optimistic by kind of what we've been able to see as we dig into the business and, you know, excited to be able to deliver more in the quarters to come. Thank you. Thank you. Our next question comes from Mark Mahaney with Evercore ISI. You may proceed. Okay. Thanks. Two questions, please. Katrina, you talked about marketing diversification into newer channels that have yet to scale. Can you provide a little color on what those newer channels could be? Secondly, I was wondering if I could just get you to comment on sort of macro trends. I realize there's a lot of other factors going at play here. You've got year-over-year revenue declines, pretty consistent in Q1, Q2, Q3, and Q4. My sense is that maybe overall macro trends are soft but kind of consistently soft or kind of riding along at the bottom. Can you just comment on whether you think macro trends in the consumer demand trends are at the margin further softening, stabilizing, or possibly recovering? I know there's a lot of other factors going on, but I wonder if you would just address that question. Thank you. Great. Thanks, Mark. First on marketing diversification, I think, you know, it's probably some of the obvious, but, you know, we've done some experimenting with TikTok that I think has some promise. We've done some experimenting in YouTube and trying to think about how does YouTube fit into kind of our overall conversion funnel. Actually return to organic is definitely a big place too. I think, you know, we've seen being able to use influencers, both I think well-known influencers, but also more of what you would call like micro-influencers, be effective. That's definitely been a part of the history of Stitch Fix is, you know, some of the very early years of growth of Stitch Fix were driven by that, by that kind of, at the time, was more bloggers, but more of those micro-influencer categories. You know, that's another place that we're making sure we rebuild the muscle in. In terms of macro, I mean, I wish I had a crystal ball and that I could tell you what's happening. From, you know, what's happening in our business, you know, we see AUR and AOV actually, you know, be pretty stable. You know, I think the places where we would expect to see macro headwinds would be, would be probably around more conversion and customer acquisition. You know, we've seen some success there as we shared in this last quarter, but I think that's a place that, you know, you could anticipate, you know, that there could be some headwinds. I think, and the other place is probably around just, you know, longer term, like Fix frequency or purchase frequency. You know, I think Dan shared that we've seen some softer cohorts and, you know, I think we do believe that some of that is macro, but, you know, as I said, I'm not willing to accept that it's all macro. I do think that there are things that we can be doing better to be able to deliver on a better client experience that delivers more LTV. You know, I don't know, Dan, if you have any pontification to add, but, you know, I wish I could give you a solid answer on what to expect. I don't have anything to add. I completely agree with all that. Specifically, you know, on some of the macro, we talked about how we like the trends we were seeing on gross adds on the improvement. I think that's a positive. We are still seeing some elevated inactives, and that's something that we're very focused on fixing with improvements in the client experience. We do believe a lot of that of course is macro related. Okay. Thanks, Katrina. Thanks, Dan. Thanks, Mark. Thank you. Our next question comes from Aneesha Sherman with Bernstein. You may proceed. Yeah. Thank you for taking my question. Continuing on the theme of the macro and the consumer demand behavior trend, last quarter, you talked about the consumer being more judicious with their spending and frequency declines. It sounds like you've seen that again. Is the mix shift or higher demand for own brands over national brands, do you think that is part of it? Are you seeing the consumer sort of trade down a little bit to lower price points rather than the national brands? If so, how does that or does that change your national brand strategy that you've been talking about for the last few quarters on, you know, increasing your mix of national brands? Can you also talk about how that impacts gross margins? Because I understand that your own brands are more profitable. Does that change your margin mix kind of looking into next year? Thanks. Great, that's a great question, Aneesha. I'll answer the first part, and I know Dan is chomping at the bit to answer the gross margin part. Yeah, I mean, I don't know if I would say that it's necessarily mix shift that's driven by macro, but I would say, like, historically, it's very interesting in our channel. Historically, national brands do not perform very well in Fixes. I do think, you know, Fixes are a place where you're, you know, the apparel is kind of the most stripped down version of itself, and people are really looking at those Fixes to say, is this my style? Does this fit me well? Brand is like a very tertiary, you know, kind of consideration beyond those. Historically, we've actually not seen national brands perform very well in Fixes. A lot of the intention around bringing national brands into the portfolio recently has been to support a better Freestyle experience. You know, I think candidly, like, those brands haven't performed as well, in the Freestyle experience, although better than in the Fix experience. We, you know, I think longer term, the national brands will probably be a smaller part of our portfolio going forward as the way that they work historically with Fixes. I would actually really position that as a positive of being really a testament to our personalization. At the end of the day, like, even if it's not a brand that somebody recognizes, if, you know, if you're delivering jeans that fit someone's gonna buy them. Dan can speak more to that on the gross margin side. Yeah. Just to follow on to your second point on that question, what Kat is saying, this idea that we're gonna be focused more on our exclusive brands, and be tighter with national brands having less of that will, of course, we think it's the right client experience. Also what that does is of course lead to higher margins simply because the private label and exclusive brands have higher product margins. When I mentioned earlier in the call that we see opportunity in gross margin, the first comment I made was in product margins. That is a big driver of product margins. As we get tighter with that, we do expect margins to positively impact margins. We do have some national brands that we're still inventory that we're still working through, although it's not a huge number, and we'll get through that, and we feel very good of the impact. Our focus will be on product margins. It will also have the impact of making inventory more efficient, which is a huge positive to cash flow. We feel good about that strategy and how it'll impact financials. Thank you. Our next question comes from Noah Zatzkin with KeyBanc Capital Markets. You may proceed. Hi. Thanks for taking my question. Kind of along the lines of the macro questions, maybe I'll ask it slightly differently. With Stitch Fix traditionally being, you know, a full price business, how would you kind of frame or how do you kind of think about parsing out the impact of the broader promotional environment in apparel and what that's had on Stitch Fix over the last couple quarters? With others in the space talking about inventory beginning to be right-sized or at least having line of sight to more right-sized inventory positions, you know, how are you thinking about potential upside in the model, should the promotional environment begin to normalize over the next couple quarters? Thanks. Thanks, Noah. Yeah, it's a good question. I mean, it's, you know, Stitch Fix has been, I would say, kind of oddly resilient to promotional periods. You know, I think we see some marginal impact, but not really as much as you'd expect. You know, what we see is like in the Fixed experience, like, you know, first of all, I don't think people are coming to Stitch Fix in order to find a deal. That's not the primary intention. Of course, we need to do right price all the time. There's no question about that. I would say that, like, people aren't coming to our channel in order to get a deal. What that means is people are actually coming to our channel because they want clothes that fit them, because they want to refresh their wardrobe, because they want things that are their style. As a result, I would say that, you know, we see like our AOV and our AURs have kind of held pretty strong. I would say that we see maybe less of what you would expect in terms of like the highly promotional environment right now. You know, I would say my hypothesis is that it probably impacts conversion more, where, you know, that there are probably gonna be fewer people that as they're looking at, you know, their budgets and as they're looking at where are they gonna spend, fewer dollars that they might have in a bank account that like, you know, refreshing a wardrobe might not be as high a priority as it might have been 10 months ago. You know, I would say our hypothesis is that, you know, our existing clients that are in the ecosystem, you know, are relatively stable. Like, you know, I think there probably is a headwind a little bit on the customer acquisition side that hopefully as things let up and as we see things turn up the other way, that will alleviate and make things easier for us. You know, I would say that it's a little bit of a unique proposition within Stitch Fix. That's not a perfect analogy to the promotional environment that you see outside of our ecosystem. I'll take the second part of that question, which I believe was a question on inventory, and I hope I'm answering, I hope I'm interpreting that correctly. From a standpoint of where we see inventory going forward, related to the macro and what we're seeing in our focus on our exclusive brands is we do expect our inventory to be more efficient. You know, when you look at the way we report turns externally, we've been as high as 6 turns in the past. While that was pre-Freestyle, we do believe that we are going to see improved efficiency in the back half of this year simply because we've taken our inventory down as we ended Q2, and we do not expect significant changes for it to increase. It may ebb and flow a little bit quarter- to- quarter, but we feel very good about the inventory efficiency, and we expect on a net inventory basis to be back above 4 in H2. Thank you. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.