Good day, ladies and gentlemen. Welcome to the Stitch Fix First Quarter 2018 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to David Pearce, Head of Investor Relations..

Thank you for joining us on the call today to discuss the results for our first quarter of fiscal 2018. Joining me on today’s call are Katrina Lake, Founder and CEO of Stitch Fix; Paul Yee, our CFO; and Mike Smith, our COO.

We have posted a complete Q1 financial results and our Shareholder Letter on the Investor Relations section of our Web site, investors.stitchfix.com. A link to the webcast of today’s conference call can also be found on our site.

We would also like to remind everyone that we will be making forward-looking statements on this call, which involve a number of risks and uncertainties. Actual results could materially differ from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance.

Please take a look at our filings with the SEC for discussion of the factors that could cause the results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law.

Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR Web site. These non-GAAP measures are not intended to be a substitute for GAAP results.

Finally, this call in its entirety is being webcast to our Investor Relations Web site. A replay of this call will also be available on our IR Web site shortly. I'd now like to turn the call over to Katrina..

Thanks, David. And thanks to all of you for joining us on the call today. We're excited to report our first quarterly result as a public company. First, we'd like to thank our employees, our vendors and our clients for your support throughout our recent IPO. Also, we are thankful for our new and perspective investors we look forward to working together.

I'll start off by providing highlights from our shareholder letter, currently posted on our Web site. Then before we get into results for the quarter, as this is our first earnings call, I wanted to take some time to share first Stitch Fix story, how the model work and our strategies for growth.

After that, I'll hand it over to Mike and Paul to talk a bit more about our business and our financials. First, some Q1 financial highlights. We grew our active client base 30% year-over-year to 2.4 billion active clients.

We drove 25% top-line growth, reaching $295.6 million in net revenue and we delivered $13.5 million in GAAP net income and $11.8 million in adjusted EBITDA. Paul will provide more color on our quarterly financial performance later in this call, but first, a few minutes to share the Stitch Fix story and how our model works.

I founded Stitch Fix in 2011 because I wanted to work at the apparel retailer of the future. I love the apparel industry, it's huge, it consists of consumers making meaningful and thoughtful purchase decisions.

And yet, it's an industry that's largely untouched by technologies and relative to many other categories, people are buying far less apparel online today than you'd expect. Looking at the world through the lens of how are people going to buy cloths decades from now, I didn't see a solution out there.

In today's world of convenience, I didn't see the solution is being better stores. But existing e-commerce didn't seem like the future of retail either.

Using keywords to search through millions of products to try to find the right jeans for your body or the right dress for your figure and then enormously difficult problem that e-commerce is not well suited to address.

I saw solution as personalization, is getting to clients, getting to know products and providing individualized recommendations as being the future and that's why Stitch Fix exists. This is a consumer centric client first model that leverages technology and data science to help millions of clients discover and buy what they love in a totally new way.

For those of you who are new to Stitch Fix, I'll take a minute to walk you through how the model works.

To sign that client spot and online style profile sharing with us their preferences; their likes, their dislikes, the price point they're looking for, as well as personal information helping our stylists to get to know each and every one of clients individually. Clients schedule a date to receive their shipment, which we call a fix.

Clients can schedule on demand or choose to do an automatic shipment on a preferred order of frequency. We charge $20 styling fee, which for the vast majority of our clients who buy at least one thing in their fix serves as credit towards their purchase. Clients then assign to one of our 3,400 stylists using a patented matching algorithm.

Stylist then use our proprietary technology and algorithms to help them to select items for each client and personalize and humanize the fix through the [node] and styling suggestions, which accompany the items. Clients try on items in the comfort of their homes, buy what they love send out what they don’t in the prepaid return bags.

Clients provide rich feedback, letting us know what worked, what didn’t, and why with help our stylist understand how to serve them better and create the foundation for a long term relationship.

Based on each clients’ feedback and behaviors, we have a good sense of how we serve clients, enabling us to personalized not only their fixes but also the ways in which Stitch Fix engages with them overtime. Behind the scenes what delivered these personalized experiences is our powerful combination of data science and human judgment.

Our philosophy is that leveraging the best of both worlds, allowing machines and algorithms to do what they do best and combining those capabilities with what humans are best at deliver better client experiences and a more scalable business that either element could deliver alone.

For example, I felt it with myself -- and I recently styled a teenage client. While I trusted and done accurate the algorithm recommendations for leggings with the high likelihood of success, there is a logo that the algorithm had a lower expected success rate for.

But in interpreting the clients -- Instagram, that he had shared with us I could see that this was very likely to be something that she was going to love, even more likely than what the algorithm might have predicted. Being able to pair of those the algorithms recommendations with human judgment allows us to make more nuance recommendations.

Not only is this approach is how we combine data science and human valuable, but the data itself is valuable and unique to our model of retail. The vast majority of our client data is provided directly and explicitly by the clients. This means that the data is high signal really actionable data.

On average, each client is providing with us over 85 meaningful data points through the style profile and 85% of shipments have resulted in direct client feedback. Our client are motivated to provide us with relevant personal data, both in an initial sign up and overtime as they use our service, because doing so helps us to serve them better.

Pairing this client data was a deep understanding of our merchandise, means that we can garner insights as to why things are working or not working to understand why products are working disproportionately better or worse with different [segments] of our clients and importantly why.

Our great scale enables us to have these insights quickly and act on them to drive our business. These insights come to light in our business through recommendations to our stylists.

Our team of over 3,400 stylist combined algorithmic recommendations with their judgment in human connection to deliver a one-to-one personalized experience that is scalable, efficient and effective.

We believe that our capabilities around personalization and the scale at which we deliver it is a sustainable competitive advantage, which is a great segway to our growth strategy. We believe there is a lot of potential in our business for the future. We bucket this opportunity into three primary ways in which we plan to drive sustainable growth.

First, we plan to continue expanding our relationships with existing clients and share wallet that we address, by developing new and flexible ways for our clients engage with Stitch Fix, broadening and improving our selection and advancing our personalization capabilities and our connection with our clients.

Second, we have significant opportunities to acquire new clients through efficiently leveraging our performance marketing capabilities to attract new clients in existing categories and increasing our brand awareness amongst the millions and millions of potential clients who are currently totally unaware of our service.

Third, we plan to continue growing our addressable market. In fiscal 2017, we launched Men's and Plus. In Q1 of fiscal 2018, we launched Premium Brands, but there is still significant opportunity to expand into new categories, product types and geographies.

Our existing infrastructure and data science platform for personalization allows us to extend quickly and efficiently into new markets and categories. We have a lot to look forward to in the quarters to come. Now, I'll turn it over to Mike who will walk you through business highlights for the quarter and discuss how we are driving growth..

Thanks, Katrina. As Katrina referenced, I'd like to take a few minutes to talk about our core women's business, as well as to discuss the success we’ve had leveraging our platform of personalization into new categories. In Q1 fiscal '18, we saw continued growth in our core Women's business year-over-year.

Behind the scenes in Women's, we've added both style and aesthetic variation in addition to some of the price point extensions that I'll talk about, which helped us better serve our core Women's client.

Relative to last quarter, the fact that we have greater variation has enabled us to better serve our core Women's clients, which is evidenced by the fact that these clients are providing more positive feedback on their items, particularly as it relates to style and the fit.

One of the benefits of reaching greater scale is the ability to build an assortment that better meets the many needs of our clients. As recently as two years ago, we would have needed to place small unit orders of premium product.

Today, we’re at such a scale that it makes sense for us to build an assortment on both the lower and higher price points to better serve the needs of our core Women's client. As a result, over the last year we've expanded our assortment in both lower price points and Premium Brands as enhancements to our core Women's business.

In August of 2017, we successfully introduced Premium Brands in both our Women’s and Men’s businesses to cater to clients seeking apparel from brands that they know and love in the $100 to $600 price range. We've added more than 100 brands to our platform, including brands like Alice & Olivia, Helmut Lang, Kate Spade, Rebecca Minkoff, and Theory.

We've also seen these clients are providing more positive feedback on the quality of their items. Over the past quarter, we've continued to expand our lower price point inventory selection, which has served as an important strategy in helping our clients find what they love.

We believe that clients seeking lower price point merchandize, for example $20 to $50 per item, represents a large opportunity for growth and a demographic that we can serve well and profitably. Given the success, we plan to increase lower price point sales as a percentage of overall sales over the course of this fiscal year.

We've been pleased to see continued success in our core Women's business and that our investments in the category are paying off and helping us serve our female clients better.

Now, I'd like to move our new categories, Men's and Plus-size, both which are taking -- are capabilities of personalization and extending them to new audiences and assortments.

These are both brand new businesses that we launched in fiscal 2017 and present a significant opportunity to expand to our total adjustable market and are laying the foundation for long term drivers of growth in our business.

We recently celebrated the one year anniversary of our Men's business, which launched in September of 2016 and roughly doubled our adjustable client base in the U.S.

Despite the challenge of building a brand new business with a brand new customer base, within six months, we were very pleased to see the men’s business reaching parity with women’s in the average number of items purchase for fix. In addition, we continue to see strong active client growth quarter-over-quarter.

We also continue to see improvements in men’s clients’ [satisfaction] year-over-year. We launched our plus size category in February of 2017 to address a historically under-serve market. Even prior to our launch, we had over 75,000 women on a wait-list for the offering, and we’ve been very pleased with the demand for this business.

We’ve partnered with established plus brands and other brands that used our launch as an opportunity to enter the plus market. Our broad assortment has resulted in more positive feedback from clients regarding the fit and style of the items they receive in their fixes.

In summary, we’re excited about the growth we’ve delivered but also the meaningful improvements that we’ve driven in helping to serve our clients better overtime in both our core women’s business, as well as our new categories.

The ability to take this business of personalization and extend it into new categories is an important testament to the strength and sustainability of our business model. I will now turn the call over to Paul, who will walk you through our financial performance and outlook in more detail..

Thanks, Mike. I’m pleased to discuss our results with you today for the first time as a public company. I’ll start by sharing perspectives on how we manage the business. And then go to more detail on our first quarter performance and our outlook for the second quarter and full year.

In six short years, Stitch Fix has grown to an impressive scale, reaching nearly $1 billion in revenue and over 2 million active clients; all after raising just $42 million in capital. Four key principals have guided us to this point and we’ll continue to do so as we create shareholder value in the future.

First, we firmly believe that enabling a great client experience is the path to positive business results. Second, we’ve run our business with a long-term mindset and confidently invest for growth. Third, remain focus on balancing this growth with profitability.

And finally, we have leveraged the ample data we have on hand and apply ROI framework to decisions we make. Our first quarter of 2018 results reflect these principals in action. We deliver another quarter of sustainable profitable growth and continue to make the right investments for the long-term.

As Katrina shared, Q1 net revenue grew 25% year-over-year to $295.6 million. We saw a growth across the business, driven by newer category such as Men’s and Plus, as well as by our core women’s business. Active clients grew to 2.4 million, an increase of 30% year-over-year.

Gross margin was 43.7% compared to 46.6% in Q1 of last year, a year-over-year decline of 290 basis points was expected given our launch into men’s and plus. While, these categories are currently dilutive, we expect our gross margins to improve overtime with scale. Overall, we’re pleased with our gross margin for the quarter.

Higher than expected gross margin was a primary reason why our Q1 adjusted EBITDA of $11.8 million was slightly above the past range we shared in the [S1]. There are two drivers of this margin upside. First, our quarterly inventory reserve adjustment was positively impacted by more favorable clearance trends we’ve been over the past year.

The second driver was timing related. Clearance activity in Q1 was lower than expected. But this activity is simply shifting to Q2. Looking at expenses, we continue to make strategic investments to best position ourselves for future growth. Consistent with recent quarters we’re investing in marketing to drive client growth.

Advertising expense in the quarter was $28.2 million or 9.5% of net revenue, up from $15.3 million or 6.5% of net revenue in Q1 of FY17. Other SG&A or SG&A in advertising was [31.8%] of net revenue compared to 28.9% in Q1 of FY17. This percent increase reflects investments in headcount year-over-year, particularly in engineering and data science.

We expect to expand these teams at future quarters as we believe increasing our technology capabilities will strengthen and bring flexibilities to our platform.

Meanwhile, we're seeing efficiencies with our variable labor cost with our styling and warehouse teams, Q1 labor costs were 50 basis points lower as a percent of net revenue year-over-year, driving this improvement with enhanced styling, training and tools and in our warehouses the introduction of automation and process improvements.

Q1 net income was $13.5 million compared to $13.2 million in Q1 of FY17. Excluding the impact of the revaluation of our stock warrant liability, which existed in those this year's and last year's results, non-GAAP income was $4.4 million in Q1 of this year compared to $14.7 million in Q1 of last year.

Adjusted EBITDA was $11.8 million in the quarter or 4% of net revenue. This compares to $28 million or 11.9% of net revenue in Q1 of fiscal '17.

This compression in our adjusted EBITDA margin reflects our strategic decision to invest in marketing to reach new clients, our expansion in the men's plus and premium brands and technology headcount to improve our ability to serve all clients. We ended the first quarter with $140 million in cash in restricted cash.

The closing of our IPO added an additional $131 million of cash to our balance sheet, and will be reflected in our Q2 cash position. Moving on to our outlook. We will provide our view on net revenue and adjusted EBITDA for both the current quarter and current year.

For the fiscal second quarter, we expect net revenue in the range of $287 million to $294 million, representing growth of 21% to 24% year-over-year. We expect adjusted EBITDA in the range of $11.5 million to $15.5 million or margin of 4% to 5.3%. As noted our Shareholder Letter, the second quarter is our holiday quarter.

Unlike most retailers, we’re not overly dependent on holidays and don't have a challenge of volatile demand during this quarter, which we believe is reflective of our clients' focus on buying gifts for others. We view this [lack] of seasonality as a positive, it make staffing and planning easier.

And in terms of advertising, we don't have pressure spend as other retailers do to grab consumers' attention. Therefore, looking at our guidance for adjusted EBITDA, we expect our advertising as a percent of net revenue to be lower in Q2 than it was in Q1. This is a seasonal pattern as last year.

Partially offsetting this lower advertising spend will be gross margin; we expect to be lower this quarter than it was in Q1. I already mentioned the timing shift that clears between quarters.

In addition to Q2, we expect to have slightly higher shipping and packaging costs due to the strength in sales of our seasonal offerings like sweaters and winter coats, which are heavier and larger in size. For the full fiscal year, we expect net revenue in the range of $1.17 billion to $1.22 billion, representing growth of 20% to 25% year-over-year.

We expect adjusted EBITDA in the range of $40 million to $60 million or margin of 3.4% to 4.9%. Our outlook reflects our strategy to grow at sustainable, responsible pace and take a thoughtful approach toward investments.

Over the long term, our goal is to achieve adjusted EBITDA margins in the 11% to 13% range, driven by higher gross margins and leverage on our fixed SG&A costs. We believe investments we’re making today help us toward this path. We’re pleased with the results we achieved in our first quarter. We’re still in a very early stages of our growth.

We’re excited about our future and look forward to reporting on our progress in the quarters to come. Thank you for your attention. We’re now ready for questions.

Operator?.

Thank you [Operator Instructions]. We’ll hear first from Lindsay Druckerman with Goldman Sachs..

I guess I just wanted to start with a question on active users. This quarter relative to the fourth quarter, you added something like 200,000 net users, which is one of the strongest quarterly quarter-over-quarter net adds that we’ve seen in sometime.

Can you talk about, first of all, what you attribute the momentum to? And second, how we should think about this as a pace? Is it considerable that as we look at the second quarter and the back half of the year that you will be able to sustain that kind of a run rate? Or what are some of the variables that might cause net-adds to accelerate or decelerate from this run rate?.

I'll start with this question and then Paul maybe can fill in if I miss anything. Yes, this is a great quarter for us. On the marketing side, we saw -- on the customer acquisition side, we saw efficiencies that were in line with what we expected and in some channels actually, we’re better than what we expected.

And so we actually pulled forward some marketing spend to take advantage of some of those efficiencies that we saw and some of those positive efficiency that we saw. And so that definitely was part of what drove this very successful quarter on the customer ad side.

In terms of overall momentum, I guess what I would say is I think you, you should take this as indicative of what we’re capable of doing. And in terms of what you should expect in the next quarter and the quarters to come, I think the full year guidance that we’re sharing is probably going to be the best guide for you of what our expectations are.

The second quarter is the quarter that we typically lay-off a little bit on the marketing side. Right now is a time when probably you can see it in your inbox today. This is a time when people are screaming for consumer’s attention and so this is a time that’s very competitive and very expensive on the marketing side.

And so very deliberately lay off a little bit in this quarter and that’s definitely something that you’ll see and you should expect, I think, in the next quarter. But I do think that this was a good quarter for us on the marketing side and can be a good signal for you in terms of what the team is capable of doing..

And I would just add to Kat’s comments, we feel confident based in Q1, of our ability to even marginally to drive clients and our abilities of overall with what we’re doing to retain clients. In terms of the guidance for net revenue, I would just think of active client count is driving that.

We think we have, both new businesses with men's and plus on new clients as well as opportunities to bring in even more to our core women’s business. So we do expect our overall net revenue to be [driven] by continued growth in net new clients..

And just a follow-up with two parts, on the gross margin side.

Can you address -- and maybe you covered this in your clearance comment, but how were mark downs in the quarter year-over-year? And secondly, can you quantify the benefits gross margin in this quarter from the timing shift of clearance versus maybe also quantify the detriments of the second quarter from that timing shift?.

Why don’t I take the first part and then Paul, have you take the part about the benefits and the timing. On gross margin markdown, is not a big part of our business. So when we've tested this concept quite a bit as you can imagine there's a lot of people with retail backgrounds.

And the reality in our model is that if we have a dress for example that it's not working, a dress that doesn't fit at $98 also doesn't fit at $68, and we're better off spending some of this dress at full price that they’re going to love rather than marking it down. And so markdowns in general are not a big driver.

One of the things we saw, we had a warmer fall, I would say. And so we sold through -- we were selling through that summer product later this year than we normally do. And so we were selling through at most of kind of full price shorts and tank tops through September and weeks that you wouldn’t normally see that.

And so we saw probably some benefits from that that is reflected in seasonality and gross margin. And then maybe Paul you can talk about the timing shift..

Yes. As Katrina noted, we did have lower markdowns or rather we -- clearance is probably the term we’d use, we cleared less inventory in Q1 because of the success of our ability to sell more summer items. We think that's [logic] timing.

And I would say from a magnitude standpoint, roughly a third of our upsize in gross margin versus what we expected is shifting into Q2. So hope that [indiscernible] [gives you] the size of that down. But really from a first half standpoint, we expect clearance to be in line with what we had planned for the quarter and for the two quarters..

Our next question will come from Douglas Anmuth with JPMorgan..

First you guys talked a lot about just the progress that you're making on both the high end and the low end in terms of Women's with Premium Brands and also lower price points, and it seems like you will push harder on each of those going forward.

Can you just talk a little bit about how we should think about the trade-off there in terms of average order value? And then second -- just hoping you could just maybe qualitatively help us with anything around trends you're seeing in keep rate, average unit retail, order frequency any of those metrics? Thanks..

First, on progress we’ve lower and higher price points, I think one is the benefits that we have is the scale that we're at now is that we can really in a fine tuned way be able to understand what the price preferences of our customers are and make sure that we’re matching against those.

And so two years ago, we weren’t at a scale where it made sense for us to do much on the higher or the lower end, and now we're at a place where we can invest more there. And we've been really excited to see that be successful.

And so what we share and what the data point that we share on that front is that we’re seeing higher ratings of us being able to get people's fit and style better. Those are really good indicators for us is just to help our ability to serve clients well and seeing on those improvements come to life.

In terms of I guess how you can expect those fits well, like our -- the lower price point offset each other obviously, I think the Premium Brands that we’re doing a lot of that product is at significantly higher price point than we've been historically, but from a volume perspective, there is a greater opportunity in the $20 to $50 price range.

And that’s the price range that we are seeing more-and-more demand for, it's a price point that we could serve very profitably and effectively. And so there is probably going to be greater investment in that lower price point than in the Premium one.

And so I think net-net, while they do cancel each other out a bit, the lower price point will probably have a more dominant effect. How that will, I guess how you could think about that affecting your inputs, I think, we’re able to serve that client very well.

And so from client satisfaction from how many units are people keeping in fixes perspective that client’s performing very well. Obviously though, because the price point is lower, there’ll be some downward pressure that we’ll see on [indiscernible] [AOB] in that segment, but we’re very happy that we’re able to serve that client as well.

I guess qualitatively in terms of trends that we’re seeing, qualitatively, we’re seeing improvements in our ability to serve our clients better across our business really; we see it in the core business; we’re seeing in men’s; we’re seeing in plus size; all of that is very positive.

Overall, with men’s, the men’s market is about two-thirds the size of the women’s market overall; men’s spend less than women do. Their wallet opportunity is smaller than that of woman. Data will also tell you that’s true about plus size.

I think we’re still undecided on if plus size will look exactly like a regular size customer in terms of wallet share opportunity or not but I think the market would tell you the plus size opportunity is also less.

And so both of those affects in the aggregate in our business as plus size as men’s in particular is growing means that you’ll see frequency a little bit lower in those segments in terms of average order volume, I mean, that’s either not metrics that we’re sharing, but directionally, I think the lower price point for example will be a little bit different there, it depend a lot on segmentation.

But overall, I think we’ve been very pleased with, in particular being able to see our success in serving clients well, that’s really the primary metric that we’re focused on and making sure that people are finding things they love in their fixes and we’re seeing that improve..

Our next question comes from Ross Sandler with Barclays..

I have two questions. First on marketing, you mentioned in the letter that you’ve yet to assign your data science capabilities to marketing. So I guess, what opportunity do you see in driving up efficiency and reducing [indiscernible], when you do that.

And what’s the timing or what’s the thinking around timing on when that might happen given that you’re already seeing improvements that you mentioned? And then your second question is on extras. You recently started testing adding more items in the box above the five threshold that you guys started with a few years ago.

Can you just talk about the opportunity around extras and driving higher keep rate or higher overall unit economics with the opportunity there? Thank you..

Thanks Ross. On marketing, there is a significant -- we think about data science as being pervasive in our business and we apply data science very deeply in merchandising and in styling. And in marketing, I think, we’re in early days. We use a lot of data science.

And on the analysis side of understanding after we have spent marketing dollars what happened and how to quantify it and how to generate ROI. And so we, I would say that today, we’re using data science to think about how to think about our results rather than actually delivering results.

And so I think the next frontier is really for us to be using data science more in the way that we're bidding for clients. There, we could be using data science more in, for example, if we had a client today who was going to generate thousands of dollars of LPV but that would be a client that we would pay $500 to acquire.

That's a client that we don't have the capability today to say that even though this is a client that's expensive to acquire, we actually probably should acquire them because they look to be a good client overtime.

And so that very personalized capability is being able to look at individual clients that we're acquiring and then have a perspective on what the LTV would be on that individual client as a capability that we don't have today. That for example, I think could be much more advanced capability that we could develop.

So in terms of timing, this isn't going to be a silver bullet. There is not going to be an on and off switch, it's kind of before and after. But I think what I can say is that we're already devoting increasing data science resources. Today's performance marketing is working really closely with Eric who runs our data science already.

And I think we'll see more and more of those capabilities and some of the specific timing of when that would have a dramatic impact, I don't think we have a commitment on that yet but I think we're already excited and optimistic about what we're seeing so far. On your question around extras, we don't have any specifics this year on that.

So this is extras as the idea that today and at Stitch Fix there’re five items and there is a lot of product categories today such as bras or socks or underpants that people would like to buy that you can easily buy through the existing experience; and so this is a concept that we know that there is interest for; we've done a little bit of testing in it in the last year; and we're optimistic about it as being a really good lever to be able to help our clients find more of what they're loving and certainly to have a positive opportunity to have a positive impact on the unit economics.

But today, we don't have any specific timing on it but we definitely think it's a great opportunity..

We'll go to Mark Mahaney with RBC..

Thank you. Three questions please. One could you talk about the impact on your brand awareness or the brand campaigns you've been running since the beginning of the year.

Secondly, could you talk about the impact of the lower price points on customer retention and acquisition? I asked that since some of the survey work we had done showed that that was one of the biggest pain issues or reasons that people were not shopping as much, we're not shopping with Stitch Fix.

Did you find that you've already seen an impact on customer retention because of the lower price points? And then third, could you please just comment on customer acquisition cost trends that you're seeing now. Are they relatively stable? Is there way to get at it slicing out the big -- the brand advertising spend? Thank you very much..

The first one on the impact of brand awareness. So what we had shared we've done three ways on TV advertising, each way has been more effective than the last, which is the something that we've been really pleased with.

And we were able through those campaigns to drive awareness from, correct me if I'm wrong, Paul, but I think it in the 20s to driving it to being in the 40s on the women’s inside. Men’s, we think men's is de minimis. We actually aren’t even measuring that today.

Men's, we just in the last month or two I think, just started doing TV that was targeted towards men on men’s channel with a Stitch Fix commercial that more prominently featured the male role in that. And that’s actually been effective also. So we’re excited to use that to drive the men's business also.

And so I think what we’ve seen is we’ve seen a positive impact on brand awareness through the broad based TV campaigns that we’ve been doing but we’re also seeing is there still a lot of opportunity and still many people who are completely unaware of the service.

Your question on the lower price point and the impact on retention and acquisition, that’s interesting that your survey work show that.

The feedbacks that we get from clients also show that there was a big opportunity to better serve clients who are looking for a service like Stitch Fix, but wanting more of this accessible price point of that $20 to $50 range. And so that’s been an opportunity that we’ve been aware of.

And really in the last year, year and half or so, we have early focused on how can we build out a better assortment there, how can we make sure that we’re serving that client well.

We did a very -- we did a longitudinal 80 tasks with a lower price point assortment and we did in that test find that we were able to drive better attention that we were able to drive better -- that we had better client satisfaction in that test, and that really served to us as the signal that this was a great opportunity for us to continue to build out this assortment.

And we’re part through the way there, I would say today, but still with some room to improve.

On the acquisition side, I think what we’re finding and it’s interesting segway from the TV side, in channels like TV where you’re not doing as much personalization or targeting, there are clients who are looking for that $20 to $50 price point that are going to naturally want -- to try the service that we’re going to be acquiring anyway.

And so as we’re doing more of that broad based advertising, it's even more important that we really have the full range of assortment to be able to serve the needs of clients and that’s a less targeted way that we’re acquiring clients. And so that lower price point is more important as we’re diversifying that marketing mix.

In terms of customer acquisition and kind of the trends that we’re seeing, I mean, that’s not a figure that we share specifically. But I think what we can share is that we’re -- I'll say that customer acquisition is stable and that we’ve seen pockets of opportunity.

And so in Q1, there a couple of channels where we actually saw those channels performing more efficiently than what we expect in those channels. And so we were able to pull some dollars forward.

But overall, that number has been pretty stable for us and we have a lot of confidence that there’s still a lot of fire power and potential as we think about long term growth..

We’ll continue on to Erinn Murphy with Piper Jaffray..

A couple of questions from me, I guess, first just longer term on your gross margin.

I'm curious on how big or over what time do you expect your newer category, whether it's men’s or Premium, how big do you think the scale and to what you’re fully optimizing all five of those [indiscernible] -- so that those businesses could potentially be at a gross margin level closer to the women’s?.

I'll start and then I'll have Mike share some thoughts on distribution strategy. Right now, as we [technical difficulty], our men's and plus businesses are in early stages, and that has a dilutive impact on our gross margins.

The drivers are threefold; one is there’re smaller merchandise size, which affects their initial mark up; two our distribution footprints little bit more few in numbers, so the shipping costs are higher; and three, there’s associated inventory cost as we really build our client base for those new businesses.

But we do expect as this business grow to get improvements from margins. And I think one way to look at this is if you look at the history of Stitch Fix our gross margins improved 9 points from 2014 to 2016. And that was just the women's business, and that’s reflective of the benefit of the scale that we saw on that business over time.

So we feel confident that as we grow these businesses, we get clients what they want and we'll be able to see benefits on all those fronts. And then I'll turn it over to Mike..

I mean we’re in again two distribution centers today with men’s and we won't be explicit about sort of the timing of when we feel like we’ll get to scale, because we're not breaking out the categories at the business level. But I could say like in the next 12 months, we certainly expect to get to another one.

And then I'd probably say in the next two years is where we'll feel like the business is at scale, where it's evenly distributed and you wouldn't expect shipping to be a driver or dilutive in Men's business is it relates to gross margin..

Just staying on gross margin, you guys did call out 70 basis points of shrink as an impact in Q1.

How does that look over the last 12 months? And maybe talk about some of the initiatives you're working on internally to have that level come down?.

So, I'll start out. So yes shrink has increased over the past year and that's reflected in the MD&A we shared in our shareholder letter. I think there’s two buckets of shrink; one is client shrink and the other is carrier shrink.

I would say there is definitely opportunities on both fronts; we're tackling from a cash flow standpoint and strategic standpoint. On the carrier side, it's just simply on just staying half a bit [indiscernible] process for our customer service team to put in claims. So I think it's for me very easy win to kind of get that money back into our pockets.

On the client side, there’s probably two things going on; one is we probably haven't been as robust in making sure we are charging for items that have been [indiscernible] cards that have been declined. So we have engineering work going on to just get the process in place to make sure we are charging enough time to get the money.

I think more strategically kind of tying back to Katrina's point, as we are reaching new clients, we probably can use intelligence to find into still clients who we think are the right fit for us. And I think right now as regarding the funnel, we're reaching out to clients we see an opportunity for us to distill who would be the best fit for us.

And I think we’re doing that more strategically investing in system intelligence to make sure we're reaching the right clients over the long term..

And just last question, Paul, I think you’re on the hot seat, one more for you. Inventory, what was that up year-on-year? I didn't see Q1 of last year in the letter to the shareholders. I am just curious on your dollar rate, what was that up and how should you expect inventory growth to trend versus sales guidance that you gave for the year? Thanks..

So inventory grew 65% year-over-year. And really what that reflects is our investment in our new categories. On our core women's business inventory, we actually grew in line with sales but as you think about our new categories, we really want to make sure we have the right inventory in place to make sure this client is upfront.

And I’d also think about our broadening of the assortments. When you think about the anecdote of Katrina’s sharing in her remarks about being able to have that Tommy Hilfiger jacket for that teenage client, that’s what we believe is the right thing to do to provide personalized products for our clients over time.

So I do think over the next year, you will see inventory growth outpace sales. We think it's the right investment for this business.

But certainly rest assured, we're using all the various tactics from using data science to drive our inventory buys, and helping our merchandizing teams really manage their inventory over time to help us offset that investment. But again bigger picture, we want to make sure we have the right inventory for our clients..

We’ll hear from Scott Devitt with Stifel..

First is, as you’re taking more of the marketing process in-house in the past year, I’d be interested in understanding what you’re learning as you manage more of the process.

And how much visibility do you have in terms of future acquisition cost to be able to plan the business with high conviction around those costs? And then secondly, on exclusive brands, I think that number was roughly 20% of revenue in ’17. How should we think about exclusives or private labels as a percentage of the business long-term? Thank you..

On marketing process, bringing those channels in house is -- there is financial benefits and there is also just on benefits to the business in the long-term. And I think as we brought channels in house, there have been some channels where we actually were able to gain efficiency right off of that bringing them in-house.

And then the bigger thing is actually the learnings is being able to generate those learnings and as we think about things like algorithm capabilities those are all, really only possible when we have those channels and those learnings in-house. And so there is a lot of benefit there.

In terms of visibility into future acquisition cost, I think right now we have a lot of confidence of where we are and being able to have -- I think one of the reasons having a diverse set of channels that are effective is important is just because, firstly it reduces any liability around being too dependent on one channel.

And so you hear a lot of buzz -- I don’t know if Google changes the algorithm or Facebook changes the algorithm, and of course those impact us also. But to be able to feel like we have a diverse set of channels means that we won’t feel like we’re over-dependant on one channel. And it also means that we have many channel for fire power.

And so that to be able to find efficient ways to have TV work for men’s and to be able to have a variety of social channels that are working, all that is just important as we think about putting more and more dollars to work and being able to put more and more dollars to work in an efficient way, and having avenues for that.

So in terms of visibility in future, I would say that today, I think we’ve been very pleased to see that cost be pretty stable and in some case be more efficient and a channel-by-channel basis than where we expect. And I think what that does to us I that there’s still a lot of scale ahead of us and that there’s still a lot of opportunity ahead of us.

And so I think we’re pretty confident in our marketing capabilities right now and our ability to use marketing to continue to drive growth. On exclusive brands -- so yes we shared in [S1] was that exclusive brands represented about 20% of our revenue.

There are couple of places in our business like behind -- like on a category-by-category basis, there is actually like in differences in how much we rely on exclusive brands. And so for example in shoes, there is a lot of great branded partners. And so we do 0% exclusive brand and shoes.

And actually two of the categories that are important, which are men’s and plus size and important because they’re growing and outpace and will represent a larger proportion of our business overtime, those are two businesses where we didn’t find that there was as strong of a vendor base as we did it in the core women’s business when we started.

And so even off of that we have a higher reliance on exclusive brands in both men’s and plus size.

And so overtime more it's just a function of our business evolving and having a more diverse customer base, we’ll expect that we’ll do a little bit more in exclusive brands but it’s not -- there is not an overwhelming strategy to drive more of that, it’s really more that we see men’s and plus size are growing and that those are businesses where we’ve been able to use exclusive brands really successfully to satisfy our clients well.

And so we'll expect some modest growth there..

Thank you. Our final question will come from Ralph Schackart with William Blair..

Just in terms of men's client satisfaction, I think in the letter you talked about it being up year-over-year.

Could you walk through what were some of the main drivers of this and how do you further drive men’s satisfaction rates? And then the follow up to that is how with the men’s satisfaction rates that you're seeing today compare to core women's at a similar stage.

And how much of the previous learnings within core women's, either from the algorithms or data have you been able to leverage in terms of driving the men's satisfaction? Thank you..

I think, my one answer is just is that men’s -- where we are in the men’s business now one year in is so, so-far above where we were at women’s one year and are even actually women’s at the volume scale that it is right now. Men's is far far outperforming on every metric.

I'm going to have Mike probably explain a little bit of the why and how we were able to do that?.

I mean, you touched on some of them. Maybe, one it starts with the learnings that we had from the women's business early on.

And this power of a platform of personalization is real; you get so many learnings from sort of the algorithms; you get real leverage from the existing infrastructure that we’ve built; and it really comes down to quite simply like product matching with the client base and understanding our clients really well.

And so; one, we -- and Katrina referenced sort of exclusive brands being a little bit more prevalent in men's, because we didn't see it s in the vendor base. We've actually done a really nice job of developing our exclusive brand business in men's and that certainly helps a lot too.

So we're excited about what we’ve seen in the men's and client satisfaction. We think there is still, just like the rest of the business room, to improve and get better but so far it got there like Katrina said, faster than we had almost expected and it's been very positive in the business..

I think, in particular, I’ve been very impressed with what the team has done around fit and price point.

I think those are two areas that the team focused on really early and fit in particular we find is very, very important for driving men's customer satisfaction and to be able to iterate really quickly on fit walks and reacts really quickly to things that we are hearing from clients was in the first three-four months of launch, and bring that back into the assortment and improve the product.

I think that had a significant impact. And really investing and seeing where people are launching assortment in certain price points and really focusing on that. I think those are two areas in particular that I see the team be really successful on..

One quick add to that is we are able to help other even market brands by noticing fit trends in extra-extra large, as an example, where we think point of measurements on every piece of clothing and we can see what's working and what's not working and we end up sharing that back to our market brands to help them make better products.

So [indiscernible] those are big better product for us and for the ecosystem, but we want them to be a long-term partner of us and that's where you see the data science rally influence our relationship with our market brands..

Thank you. I'd like to turn the conference back over to Katrina Lake for any additional or closing remarks..

Thanks again for joining us today. We look forward to seeing analyst and investors at conference in the months to come and we'll keep you updated with our quarterly calls and press releases. Have a wonderful holiday break everybody..

Thank you, ladies and gentlemen. Again, that does conclude today's conference, thank you all again for your participation. You may now disconnect..