Stitch Fix Inc

NASDAQ:SFIX

Earnings Call Analysis

Earnings Call Transcript 2024-Q4

[Operator]

Good afternoon, and thank you for standing by. Welcome to the Fourth Quarter Fiscal Year 2024 Stitch Fix Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to Hayden Blair.

[Hayden Blair, executive]

Good afternoon, and thank you for joining us today for the Stitch Fix Fourth Quarter Fiscal 2024 Earnings Call. With me on the call are Matt Baer, Chief Executive Officer; and David Aufderhaar, Chief Financial Officer. We have posted complete fourth quarter 2024 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 fiscal 2023 previously filed with the SEC and the annual report on Form 10-K for fiscal 2024, which we expect to be filed later this week.

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.

In the first quarter of fiscal 2024, we began to report our U.K. business as a discontinued operation. Accordingly, all metrics discussed on today's call represent our continuing operations. Finally, 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.

And now let me turn the call over to Matt.

[Matt Baer, executive]

Good afternoon. Thanks for joining us. I recently completed my first year as CEO at Stitch Fix, and I'm encouraged by the significant progress our team has made. I'm also pleased that in the fourth quarter, we delivered results at the high end of our guidance on both the top and bottom line. We continue to execute our transformation strategy. We are successfully strengthening the foundation of our business by embedding retail best practices, increasing the efficiency of our operations, and optimizing our organizational structure. We have also begun to reimagine how we engage with our clients from the assortment we offer to how we bring those styles to them.

Through these efforts, we delivered expanded gross margins in FY '24 and positive adjusted EBITDA for the last 7 quarters. We have $247 million of cash, cash equivalents and investments with no debt. Looking ahead, we expect to continue to drive improvements this fiscal year and we expect to return to revenue growth by the end of FY '26.

Since I joined Stitch Fix, we have been hard at work formalizing and executing our transformation strategy, which includes 3 distinct phases: a rationalization phase, a build phase, and a growth phase. Our rationalization phase, which took place over the past year was a period of critical assessment. It was during this phase that we began to strengthen the foundation of our business and ensure we had the right priorities in place to improve our financial position and enable us to operate as a more nimble and efficient organization. As part of this, we exited the U.K., closed 2 fulfillment centers, rightsized our corporate head count and continued our cost discipline management. These actions, among others, resulted in over $100 million of SG&A savings in FY '24.

Today, we are squarely in the build phase of our transformation strategy, which includes our foundational work as well as our efforts to reimagine the client experience. Of note, as we execute our transformation, we are continuing to invest in AI and data science, which have been core to our model since day 1.

Over the last several calls, we've shared a few examples of how we are strengthening our foundation. This includes how we've optimized our pricing architecture, made enhancements to our AI inventory buying tool, leverage our advanced algorithms to reduce underperforming shipments, streamlined our merchandise assortment and improved our CRM capabilities. We continue to advance these efforts among many others, across the business.

Now I am proud to share our progress on how we are reimagining our client experience. We recently announced the first in a series of changes we are making to bring to life a more modern and dynamic Stitch Fix. One of our key differentiators is how well we know our clients. Our success has always been tied to our ability to deliver a convenient and personalized experience that helps clients discover the styles they will love.

However, over the past several years, as the retail market and our clients' expectations evolve, we did not adapt our service and assortment quickly enough. We've spent the past year working to better understand our clients' evolving needs, and I'm excited about the changes we have made to better serve them today and into the future. First, we have created a more engaging visual and interactive way for clients to communicate their style, fit, and budget preferences when they begin their relationship with us.

To demonstrate to our clients that we get their style, we are presenting them with their StyleFile, a personalized snapshot that shares their individual style personality and the specific elements that contribute to it. Our proprietary AI models, which leverage the style and fit insights we have collected from more than 100 million fixes, enable us to present a StyleFile that reflects each client's unique preferences.

In our early testing, we saw a 5% uplift in conversion from clients who received a StyleFile. While first introduced to new clients when they sign up for the service, as of today, we are launching StyleFile to all existing men's and women's clients. We believe this will be a valuable tool that will drive meaningful engagement and demonstrate how we understand our clients' style preferences.

Second, we are increasing the visibility of our stylists so they can build deeper relationships with clients. One of the ways we are doing this is by creating stylist profiles which will showcase each stylist's unique expertise and work portfolio as well as their related interest.

As a first step, this quarter, we began presenting stylist photos to clients. These photos are also shared with clients on the recently launched digital style cards, which accompany each Fix and include outfit ideas and personalized notes stylists write to clients. When the note was written by a stylist with a photo, we saw a 12% increase in engagement. We plan to introduce additional opportunities to further deepen these relationships in the future.

Third, we are increasing the flexibility of our fixed model. This includes expanding beyond the traditional 5 items in a box. In response to client feedback, we are opening up the opportunity for clients to receive up to 8 items. This enhances our ability to better help our clients both explore current trends as well as update their wardrobes for major life events, like starting a new job, moving to a new city or body transformations.

When offering the ability for clients to receive more than 5 items, we are seeing positive results with revenue upwards of 50% greater when compared to our traditional Fix offering. We also recognize our customers' outfitting needs are constantly evolving, and have added additional flexibility by making it more seamless for our clients to adjust their Fix cadence. This change yielded an impressive 14% reduction in clients turning off recurring shipments.

Fourth. For any retail business to be successful, it must have the right brands, styles and price points. After the extensive work we completed during our rationalization phase to streamline our assortment and brand matrix in FY '24, we are now well positioned to bring considerable newness into our assortment.

We are adding thousands of new styles in Q1 and expect to triple the amount of newness as a percentage of our broader assortment by the end of this fiscal year. As part of this, we are beginning to launch 2 new private brands: Montgomery Post, which offers contemporary workwear to women; and The Commons, offering modern, sophisticated and trend-right styles in both our women's and men's business.

In addition, we are extending some of our most popular private brands, Market & Spruce, We Wander and 01.Algo to now offer styles for kids. We look forward to how these styles will help us better meet the trend needs of our current clients as well as successfully extend the Stitch Fix experience to new client segments.

We also recently introduced a refreshed brand identity, the first significant update to our brand in more than a decade. The new look and feel is bold. It is modern, and it is designed to help us further deepen connections with our clients. In addition, we continue to execute our marketing strategy, which includes targeting professional segments that value the convenience our service provides. As an example, we conducted a dedicated campaign targeting teachers during teacher appreciation week in Q4. The campaign yielded a new client conversion rate more than double our average.

And moving forward, as part of our broader marketing program, we will continue to target specific segments for which we know our service resonates. To support Stitch Fix during this transformative time, we also recently announced the addition of 2 highly accomplished retail leaders to our Board of Directors: Tim Baxter, who brings extensive experience in apparel, retail and merchandising; and Fiona Tan, who brings deep expertise in retail technology. I look forward to partnering with both of them.

Now as I've shared previously, transformations take time. And while there is still a lot to do, I'm confident in our strategy and encouraged by our initial results. We are taking a disciplined approach to change the trajectory of our business, which began with our rationalization phase, so we can now build and then look ahead to growth in FY '26.

Now I'll turn the call over to David to share our financial results and future outlook.

[David Aufderhaar, executive]

Thanks, Matt. Let's get into the results. Our Q4 and full year FY '24 results reinforce my belief that we've implemented the right strategy to get us back to sustainable, profitable growth in the future. This past year, we focused on rationalizing the cost structure of our business to deliver a strong foundation we can build on going into FY '25. In line with expectations, FY '24 net revenue was $1.34 billion, down 16% year-over-year. We ended the year with approximately 2,508,000 active clients, a decrease of 20% year-over-year. Despite the revenue decline, we continue to drive leverage in our business in FY '24.

Our merchandising teams focused on optimizing our inventory portfolio while our transportation teams diversified our carrier mix. This resulted in FY '24 gross margins of 44.3%, up 190 basis points year-over-year, our highest annual margin since FY '21. We also drove variable labor efficiency across our operations, styling, and customer service teams. This allowed us to actively manage our variable expenses, resulting in contribution margins above the high end of our historical range. We reduced our fixed labor costs, including stock-based compensation, by more than $65 million in FY '24. We reduced facility costs by consolidating our warehouse footprint and subleased excess space. And we reviewed each category of our fixed operating expenses to identify potential cost savings.

These actions allowed us to deliver adjusted EBITDA for the year of $29.3 million or a 2.2% margin, up 30 basis points compared to FY '23. We generated over $14.2 million in free cash flow in FY '24, and we ended the year with a strong balance sheet, including $247 million of cash, cash equivalents and investments with no debt. As Matt said, transformations take time, and we're encouraged with where we stand today. We are being methodical in our approach and investing in targeted areas of the business. We will continue to take this approach through FY '25 as we build towards sustainable, profitable growth.

Before I discuss Q4 results, I want to provide a quick reminder that Q4 FY '24 consisted of 14 weeks compared to our standard 13 weeks, which resulted in FY '24 being a 53-week year. Q4 net revenue was $319.6 million, down 12% year-over-year or down 18% year-over-year on a 52-week basis and down 1% quarter-over-quarter. Revenue per active client grew year-over-year for the second quarter in a row to $533, up 5% year-over-year and up 2% quarter-over-quarter.

Fixed AOV, which helped drive our PAC improvement for the quarter, was up year-over-year for the fourth quarter in a row, driven mostly by keep rate. Q4 gross margin came in at 44.6%, up 50 basis points year-over-year and down 90 basis points quarter-over-quarter. The quarter-over-quarter decrease was driven mainly by reduced merchandise margins related to summer promotional activity. Advertising was 9% of net revenue in Q4, up 210 basis points year-over-year and up 10 basis points quarter-over-quarter.

Q4 adjusted EBITDA was $9.5 million or approximately 3% margin, down 60 basis points year-over-year or up 90 basis points quarter-over-quarter. The quarter-over-quarter increase was due mainly to continued variable cost leverage in the P&L. We ended Q4 with net inventory of $97.9 million, down 25% year-over-year and down 14% quarter-over-quarter as we continued our efforts to align our inventory position with demand, and we generated $4.5 million of free cash flow in the quarter.

Turning to our outlook. For the full year FY '25, we expect total revenue to be between $1.11 billion and $1.16 billion. And we expect total adjusted EBITDA for the year to be between $14 million and $28 million. This guidance also assumes we will be free cash flow positive for the full year. Though similar to this year, we may see some variability between quarters due to the timing of working capital requirements related to our inventory purchases. For our first quarter of FY '25, we expect total revenue to be between $303 million and $310 million.

We expect Q1 adjusted EBITDA to be between $5 million and $9 million. We expect both Q1 and full year gross margin to be approximately 44% to 45%, and we expect advertising to be approximately 8% to 9% of revenue. Similar to prior years, we expect inventory balances to rise in Q1 due to the timing of receipts ahead of fall/winter, but expect our inventory turns to improve in Q2 remaining relatively stable through the rest of the year.

Taking a step back, I'm excited about the work we're doing to strengthen the foundation of our business and reimagine the client experience. We continue to see improvement in many of our key metrics, and we'll build on those trends in FY '25. We will do so by remaining focused on acquiring healthy clients, engaging our existing clients in dynamic ways and continuing to drive leverage and profitability. This provides us a path to a quarter-over-quarter increase in active clients during FY '26, which will contribute to a return to year-over-year revenue growth by the end of FY '26.

With that, I will turn it back over to Matt to close us out.

[Matt Baer, executive]

Thanks, David. Before we close, I want to reiterate that I'm encouraged by the progress we are making on our transformation strategy and remain energized by the bright future we see for this company. I also want to express my appreciation to the employees of Stitch Fix for their hard work and dedication throughout this period of transformation, change demands that we think and work differently. And I'm both proud of and impressed by everything the team has done to get us to where we are today. I look forward to further advancing our transformation strategy together and returning to sustainable, profitable growth in FY '26.

With that, I'll now turn the call over to the operator for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Youssef Squali of Truist.

[Youssef Squali, analyst]

Two questions, please. So returning to revenue growth by end of fiscal 2026 is quite a bit of time, later than I think when most of us expected you guys to do that. So can you maybe talk about the biggest gating factors there? Anything in the macro that's going on that you guys are taking into account? Or is it all company-specific dynamics? And does that comment also hold true for active clients as well, meaning that you do not expect active clients to turn positive until the end of 2026?

[Matt Baer, executive]

Youssef, it's Matt. I'll answer your question, and I'll speak to our path to revenue growth more generally as well as what we're thinking about in terms of the macro environment today. And hopefully, that will also provide some insights around how we think about active clients along this journey as well. And then David can share some additional details in terms of how we get back to that path to growth.

So I think, first, what I'd say is, just as a reminder, when I joined Stitch Fix over a year ago, we were in the middle of our Q4 of fiscal '23. And we just finished -- we're finishing that quarter down over 22% and then finished that fiscal year down over 21%. I'm proud of what we have accomplished since then. And I think the results that we've delivered in this most recent fiscal year, where we improved revenue trend by about 400 basis points and then ultimately also slowed the sequential decline in active clients. Now the guidance we just shared projects revenue improvement of almost another 400 basis points in fiscal '25 and also shows sequential improvement in revenue throughout the year.

And we'd expect our active client count to track pretty considerably to where we have revenue there. As I've stated before, and we'll continue to share, transformations take time. And the methodical approach we're taking to our transformation is producing these results. And we're confident that our strategy is the right one. We're confident that our strategy will enable us to return to that revenue growth by the end of fiscal '26. And that confidence is rooted in a few things. One is that our core value proposition, as we've discussed on prior calls, meets the customer need.

At Stitch Fix, we know more about our clients on day 1 than many retailers could aspire to know over the course of their relationship. This enables us to provide an incomparable service, a service that delivers to clients' home assortment that matches their style preference, aligns with their value orientation, and it's assortment that actually fits. Second is that the strategy that we have in place is producing results.

The results of our rationalization phase that we just spoke to, it's creating a healthy balance sheet, $247 million in cash, no debt and this gives us the financial runway that's required to continue to execute a disciplined transformation and to ensure that when we do return to growth, it's built on a strong foundation, and it's one that will allow us to be both profitable and sustainable in the long run.

As I stated in the opening remarks, now that we're squarely in the build phase, I'm encouraged by the results we're seeing from the recent launch of the first iteration of our reimagined experience and also the new brand identity. The client feedback has been extremely positive, and the improvements in business performance are significant. But this is also just the beginning, and we have an ambitious road map that will enable us to continue to enhance how we engage our clients. These enhancements will continue to roll out over the course of this year.

And I think important to note, too, as I shared in the prepared remarks, over the past several years, as the retail market and our clients' expectations evolve, we did not adapt our assortment quickly enough, and it's going to take time for us to address this. I'm extremely excited by the work that our merchandising team has done and to triple the amount of newness in our assortment by the end of this fiscal year is an impressive feat and that will help us better meet the needs of our clients and ultimately exceed their expectations. But again, it takes time to overhaul our assortment as well.

So in retail, the successful transformations can take several years. And I strongly believe that a judicious and disciplined transformation is one that will lead to profitable and sustainable growth in the future. I'm confident that we will return to that growth.

Specific to the macro environment, I think the manner in which we're thinking about that is one in which we're focused on what's within our controllables. In Apparel and Accessories, a discretionary category, I think there is some sensitivity to what's happening in the macro environment. And just like everyone else, we're working through that. That's contemplated in our guide, but I'm also confident in our ability to deliver for our clients throughout this period, and that's what our team is exclusively focused on.

[David Aufderhaar, executive]

And Youssef, I think it might help just to double-click a little bit into the guide, and I think that will answer some of the questions as well that you had.

So just to provide a little bit more color around that. First, I think Matt called this out. Like we continue to see improvements in many of the key metrics as we closed out the year. And we actually expect to build on that going into FY '25 and throughout FY '25.

Active clients is one of the things you asked for. I think, Matt, answered this. But just to be clear, like we do expect active clients to be down in FY '25. But we do expect to see a significant improvement in the client trajectory in FY '25. As you saw in Q4, we had our lowest sequential loss of active clients in all of FY '24, and we expect that momentum to continue into FY '25.

We saw strength in AOV and RPAC. We continue to see momentum in sort of the promotional work that we've been doing around freestyle volume. All of those things are creating momentum going into FY '24 because we expect that to continue as well in FY '25. And all of that's included in the revenue guide.

And I think Matt called out the sequentials, which is pretty important when you look at the year-over-year revenue guide of the midpoint of our guide assumes an improvement of almost around 400 basis points from a year-over-year perspective if you adjust for that 53rd week. And that's sort of the second year in a row that we're showing that type of improvement from a year-over-year standpoint.

It's also important to note that it also assumes improvement throughout the year. If you look at the midpoint of our Q1 guide versus the full year guide, it also assumes improvement throughout the year as well. And I think those are really important points that sort of move us towards that growth trajectory in FY '26.

And on the expense side, I think we have sort of that proven track record of identifying cost savings and really driving leverage in the P&L. I think Matt called it out in his earlier remarks that we removed over $100 million of SG&A spend from the P&L in FY '24. And some of the initiatives that drove that actually have sort of annualized savings that would go into FY '25 and drive additional savings there.

The other thing around SG&A spend that's really important to call out is part of that is variable labor leverage and our ops teams, our styling teams, our customer service teams, and we talked on sort of the earlier remarks around our historical ranges that we used to talk about between 25% and 30% was our contribution margin. And in Q4, we actually landed above that, and we actually expect that to continue in FY '25 as well.

And really, if you think about over the last few quarters, we've created that strong financial position, and that allows us to do what Matt was describing, which is really being methodical in our approach that as we return to growth, we're returning to long-term sustainable growth with healthy clients, and that's really what we're focused on. And we'll continue to build on that success throughout the year.

And that's what gives us the confidence to make that longer-term projection that we have of returning to revenue growth by the end of FY '26. And we also did call out that we also expect a quarter-over-quarter increase in active clients during FY '26 as well.

[Operator]

Our next question comes from the line of Simeon Siegel of BMO Capital Markets.

[Unknown Analyst]

This is [ Dan ] on for Simeon. Since you mentioned launching some new private brands and extending others, I was just curious where private brand mix is now versus maybe any type of target level that you want it today.

[Matt Baer, executive]

Dan, yes, I appreciate the question. As we've shared on prior calls, our private brands play a critical role for us, both in terms of how we serve our clients, but also in terms of the really strong financials and contribution profit that David just spoke to.

Our private brands make up roughly about 50% of our product mix today. IMU is about 5% to 10% higher than our market are national brands. And also impressively, have a higher keep rate as well, our clients continue to tell us, and both effectively vote for our private brands.

What we've been working to do within our private brand portfolio is to identify white spaces where we can continue to serve client needs or client need states that we currently aren't meeting or aren't meeting as well as we otherwise could with our private brand portfolio.

And we just mentioned the launch of 2 new private brands: Montgomery Post and The Commons. And I think both of them do exactly that. They help our private brand portfolio meet in terms of where we're at for business attire within our women's business. And also, a more elevated and modern assortment for our men's clients. And we're going to continue to identify opportunities there to either expand our current brands into additional white space or launch new private brands to capture it.

In terms of a long-term view of the ultimate makeup between private brands and national brands, we're going to continue to work towards what is most client right. We're going to continue to have an important mix of both national and market brands. it helps drive confidence in conversion during client onboarding. It also helps us serve certain client needs that wouldn't make sense for us from a scale perspective. But then it also is just something where a lot of our clients, national and market brands play an outsized role in terms of their purchasing decisions. But we've also had a lot of success with those private brands, and we'll continue to lean into those wherever possible.

[Unknown Analyst]

Got it. I appreciate the color. If I could on gross margin for the year, the 44% to 45% guide. I guess, if there's anything you could share in terms of the puts and takes assumed within that or what gets you to the higher or lower end.

[David Aufderhaar, executive]

Yes. Thanks for the question. The 44% to 45%, I think we've said on the last couple of quarters where we're really encouraged with the progress we've made over the last couple of years of really driving that gross margin up to those ranges. And really, the good thing about being at that range that gives us the opportunity to really make sure that we're being opportunistic within gross margins.

And this last quarter in Q4 was probably a great example of that. I think we guided to 45% to 46% for the quarter, but came in slightly below that. And that's because we saw an opportunity to really engage our clients in more dynamic ways around promotions and leaned into that a little bit for the quarter. And so that's probably one of the bigger puts and takes within gross margin. And I think the reason why we feel comfortable with that as well is because of what I just described around contribution margins that because we're driving increased leverage and contribution margins, that just gives us the room to be able to move within that range in gross margin when we see those opportunities.

[Operator]

Our next question comes from the line of Dana Telsey of Telsey Advisory Group.

[Dana Telsey, analyst]

As you think about the active clients and the reductions you've had, can you talk about who is the client today, what you're seeing change in that client base, and how you think about it going forward?

And given what you talked about with the promotional environment in the current quarter with the net revenue per active customer is kind of improving, how are you thinking about that going forward? And how does the private label help or hurt? How are you thinking of those dynamics?

[Matt Baer, executive]

Dana, I'll address the questions one by one, if I got them correctly. The first is around who our current client is that we're serving. The second is around the promotional environment. And then ultimately, the third then is how that's influencing our revenue per active client.

[Dana Telsey, analyst]

Correct.

[Matt Baer, executive]

Okay, excellent. If I go back to in terms of who our client is today, and I believe we've talked about this before, I'll start with just a high level of conviction that the service that we provide is one that can meet the needs of nearly all U.S. consumers from an apparel and accessories standpoint.

Where our focus is at the moment is the clients that we're serving well today. That client is one that really appreciates guidance and inspiration when it comes to outfitting. That is a client that struggles with finding the right styles, is a client that really puts an emphasis on convenience and comfort where it is critical for them over their challenge finding apparel that fits in other retail offerings. And one that also just values the personalized recommendations and what we're able to do with our human stylist to uniquely serve clients. The ease in terms of which our service gets product to a consumer's home is again is a critical competitive differentiator for us as well.

And the number of clients that we're serving is quite vast. The work that we've done though over the last year or 2 is to ensure that we make sure that when we go to market, we're as segmented as possible so that we can talk to the specific consumer segments and make it clear what that value proposition is.

What I mentioned earlier, in terms of what we did for teachers, which is one of the professions that we over-index with, is a great example of where we're building tailored messaging for that consumer segment and building out experiences or certain promotions in order to drive and deepen our engagement with them. And also bring new clients into the Stitch Fix environment. We're working across multiple different consumer segments, and we'll continue to lean into that going forward.

In terms of the promotional environment where we're in today, we feel really well positioned given the progress that we've made over the last year to strengthen the foundation of our business. Where we are today versus where we were a year ago, the capabilities of our marketing tech stack as well as our CRM capabilities are significantly improved. We have more tailored and personalized CRM. We've significantly improved our ability to send SMS and push notifications that are tailored to individual clients.

And we're also better equipped to make sure that the promotions that we are providing are the ones that are going to have the greatest impact at the individual client level so that we can ensure that we're judicious with our margin dollars and only providing those promotions when it's going to drive incrementality for us.

I also believe that a competitive advantage of ours that we've spoken to a few times already, is the really strong contribution profits that we're driving now north of 30%. That gives us the ability to profitably invest in promotions, again, to increase our wallet share and drive up revenue per active client over time. For revenue per active client to be up 5% for us is something that we're really encouraged by. We also believe it's something that we have significant opportunity to lean in even further going forward.

Our average client is spending over 1,500, upwards of $2,000 a year in apparel and accessories. And one of the most interesting things in all of the work that I've done to meet with and talk with our clients in person is so many of them are eager to spend more with us. And that's why it's so important when I speak to the flexibility in our Fix business model so that we can continue to meet more of their needs more frequently and capture more wallet share with them over time.

So a big part of our strategy going forward is to drive up that revenue per active client and to use promotions judiciously to drive increased engagement and to ensure that those promotions are ultimately ones that are yielding profitable lifetime value for us.

[David Aufderhaar, executive]

And Dana, one more data point on RPAC that I think we've talked about the last couple of quarters is our new client cohorts. And that is an area that -- we talked about 90-day RPC and 90-day LTV. And those are areas that we continue to see strength. And that's why we're being so methodical about the approach of how we're bringing new clients in and making sure that the new clients that we're bringing into the experience are truly healthy long-term clients because that is driving up that RPAC number. And that's one of the reasons why RPAC is up for the second quarter in a row from a year-over-year standpoint.

[Operator]

Our next question comes from the line of Aneesha Sherman of Alliance Bernstein.

[Aneesha Sherman, analyst]

So if I look back to where the business was about kind of 7, 8 years ago in 2017, 2018, you had a similar-sized active client base of about $2 million to $2.5 million, but the margin profile was a lot stronger. You were doing about 5%, 6% adjusted EBITDA margin.

Can you talk about kind of how the business has evolved? Like if you compare the cost base then versus now on a similar sized customer base and similar sized revenue base, could the cost base get back to that kind of algo? Or what are the things that have changed over the last 7, 8 years that prevent you from getting back to that margin profile?

[David Aufderhaar, executive]

Yes, Aneesha, it's a good question. I guess one of the big reasons that we want to be careful about going back to that profile is because of what Matt was describing of where we are in a turnaround and in transforming our business. We want to make sure that we are balancing driving cost savings and leveraging our P&L with investing in growth. And especially at this time now, when we see a path to returning to growth, in FY '26, I think it's that much more important to make sure that we're balancing that.

And so I think we've done, to your point, a lot of great work over the last few years of driving leverage in the P&L. But we're also looking at areas to reinvest that leverage into the P&L to make sure that we're driving towards that growth. And that's sort of the focus and where the balance is right now.

[Aneesha Sherman, analyst]

That makes sense. And then I have a quick follow-up. David, you mentioned new client acquisition. I know all the -- as you were talking about your success with teachers and certain pockets of consumers, I maybe wonder whether you are seeing more of a referral strategy work out for you. I know there was some adverse selection in referrals a couple of years ago and you backed off from that. Is that part of the increase in advertising spend? And is that a strategy that seems to be paying off now as you look closer into it?

[David Aufderhaar, executive]

Yes. I think I'd highlight a couple of things on active clients. Like, one, some of the teacher strategy, I think, is both around just being very focused, to Matt's point, around customer segmentation, but also what we're seeing is strength in reactivation. And I think that's the area where we're leaning into maybe a little bit more than referral right now. Referrals are a certain area that we continue to focus on as well. But reactivation is a big area of strength for us, and it's been up year-over-year over the past 3 fiscal years, and we expect that to continue into FY '25.

I think the other area, when you think about sort of double clicking into our guide in active clients, where I think Matt called this out, but just to double check. Like for the full year, I know I said we expect active clients to be down, but we expect them -- if you think about it from a comps perspective, to be approximately in line with revenue comps. And a big part of that trend improvement is actually on the dormancy side as well.

All of the things that we've talked about over the last couple of quarters around really making sure that we're engaging our existing clients in new and dynamic ways, making sure that we're giving them more license and making sure that when we do engage with them, it's valuable. I think we talked about the Quick Fix experience and adjustments we made to that last quarter, talking about the auto ship management changes this quarter. Those are all things to make sure that we are truly listening to our clients and giving them the license to be as flexible with our experience as possible and see value at sort of every interaction.

And because of that, that's where we're seeing a big improvement going into FY '25. And that's -- those are 2 of the big components as to why those trends will continue into FY '26 and that provides us a path of sort of what I had called out earlier, which is a quarter-over-quarter increase during FY '26.

[Operator]

Our next question comes from the line of Maria Ripps of Canaccord.

[Maria Ripps, analyst]

Two questions, please. Can you please talk about any additional costs associated with including up to 8 items in one shipment? How should we think about sort of any additional inventory investments needed to accomplish this?

[Matt Baer, executive]

Maria, it's Matt. I appreciate the question. And one of the things and I shared in the prepared remarks is how excited we are for the flexibility that we're building into our business model and what that's been able to do for us to better serve our clients. We're approaching it in a few different ways and ensuring that as we roll this new service or new feature out for our clients, that we're providing it for the clients that it's going to be the most benefit for, and it's going to be the greatest benefit for them at the right time.

And what we've seen in all of the testing that led up to our wide launch of this feature is that when clients select into it, they ultimately have higher keep rates than in our traditional Fix experience and better order economics for us. We'll continue to monitor that going forward, but it is something that's really important. So it's not just an increase of revenue that we're seeing through the these transactions, but also improve profitability as well because it's generating higher keep rates for the clients that are self-selecting into these fixes with more than 5 items.

[Maria Ripps, analyst]

Got it. That makes sense. And then I just wanted to follow up on your expenses. So your fiscal '25 guidance implies sort of further decline in expenses in terms of year-over-year. So as we look towards fiscal 2026, so it looks like it's going to be another year of revenue decline for the full year, it sounds like. But how should we think about sort of margin that year? And would you expect sort of your expense base to decline maybe a little bit further in 2026?

[David Aufderhaar, executive]

Maria, in FY '25, I think you're right. I think in the guide, it definitely assumes additional savings. I think I called out a couple of areas there. One, is just the $100 million savings that we had this year. Some of those initiatives were only partially -- they started halfway through the year. And so going into FY '25, if you think about it, it gets the full year annualization of those savings. And so that's part of that. I know we had talked about the warehouse consolidation. That's part of that savings from an annualization standpoint.

And then the other big thing is sort of that variable labor leverage that we talked about of being above the 30%. Those are 2 big components to the savings in FY '25.

And in FY '26, what I just want to make sure of is that just like we're being on the top line that we're being very methodical in our investments in FY '26, that we still want to be able to make sure that we're doing targeted investments in the areas that will grow the business. But I think the thing that we're encouraged by and excited by is as we return to growth, like what Matt said, we have very good unit economics. And so as we return to growth, we'll be able to continue to drive leverage.

[Operator]

Our next question comes from the line of Dylan Carden of William Blair.

[Alexander Vasti, analyst]

This is Alex Vasti on for Dylan. Firstly, maybe just a bit of a follow-up on one of the prior questions. Maybe if you could just talk about your expectations for advertising spend heading into the holiday season and throughout the rest of fiscal '25. You previously mentioned that you're being very judicious with marketing spend, targeting specific client cohorts especially, given the elevated broader advertising spend going on in the industry.

I would just love to get an update on how you're viewing advertising spend for the year. And maybe any color on how you plan to spend it, via bias towards new or existing customers? Anything on that?

[Matt Baer, executive]

Alex, I appreciate the question. I'll speak to it a little bit, and then David can follow up with some additional color.

I'll go back to what I said earlier, too, just in terms of the work that we've done to strengthen the foundation, improve our marketing capabilities over the course of the year. That's enabled us to be much more targeted, much more segmented in terms of how we go to market with our media budget, with our advertising budget in order to drive increased productivity. Along those lines, our customer acquisition costs in Q4 actually declined. It's the first time that we've seen that in a while.

And in terms of conversion, which we've talked about on prior calls, we're comfortable with where conversion is today. It's stabilized and feel that where conversion is and where we have it forecasted a trend, enables us to get back to growth over time.

So feel pretty good overall in terms of our advertising budget and the effectiveness of it. We also feel really good about our ability to compete in a crowded marketplace or during a period of inflated media investment. In part, that's due to the differentiation of the service that we offer at a very tactical level. We're not out there bidding on the same keywords, for example, is a more traditional retail experience and having to compete with the likes of Amazon or Walmart or Macy's in order to win those impressions or win that conversion.

And feel really good about how we continue to tailor and segment the creative content as well so that we can speak to very unique audiences and have a message that clearly explains the value proposition of our business. And brings potential clients into the experience with the right expectations, and then brings them into the right landing experience as well that aligns with how we best meet their needs.

Something else that's important to hit on, too, when you're talking about how our advertising budget would be deployed relative to new client acquisition versus engaging our current clients. One of the awesome things about our business model is that once we've acquired a client, almost all future transactions are organic ones. In a traditional retail environment, a retailer is often having to pay not just to acquire a client but having to pay for every subsequent transaction over the course of that client's lifetime.

For us, once we bring a client into the Stitch Fix ecosystem, and they've signed up for the Fix experience. Fix continue to comment, we don't have to pay for those subsequent purchases. It's one of the unique advantages of our business model. It's one of the reasons why we have such confidence in the future profitability as well once we return to growth.

So David, if there's anything additional that you'd want to add?

[David Aufderhaar, executive]

Yes, I think just a couple of data points. I mean, I think we guided to 8% to 9% of revenue from an advertising spend perspective. But I think we've always sort of voiced over with that. We'll be opportunistic with that. And so that number, from a quarter-to-quarter standpoint, can vary.

And because of all the cost savings initiatives and what we've done to really create leverage in our P&L, it allows us that opportunity that when we do see opportunity, we'll lean in. And it's just more about that methodical approach to make sure that when we are leaning in that we're driving healthy client growth and not just driving growth for growth's sake. And so that approach has served us very well as we've gone through sort of this transformation and we'll continue to use that approach.

[Alexander Vasti, analyst]

And then just one quick one on modeling, a little clarification. So you talked about the SG&A savings that came as a result of your rationalization phase at over $100 million for fiscal '24. Just wondering if you could give a bit more color on these savings going forward.

You mentioned in a response to a prior question that some of these savings are run rate going forward and then that you'll also be getting the full annualization of others. I'm just wondering if you could give a bit more color on where you expect overall SG&A savings to land in fiscal '25, if that $100 million number is a good run rate one going forward?

[David Aufderhaar, executive]

Yes. I think you could back into that, Alex. If you just think about sort of the midpoint of our guide, then we guided to 44% to 45% gross margin. And really, the remaining part of that below the 44.5%, which is the midpoint, would be the SG&A spend. So you could back into that assumption of SG&A to make sure that we are always looking at ways to save in the quarter. But also a big part of it is driving leverage across those line items.

[Operator]

[Operator Instructions] Our next question comes from the line of Jay Sole of UBS.

[Mauricio Serna Vega, analyst]

This is Mauricio Serna dialing in for Jay Sole. We were just wondering how things are trending in August and September so far, right? So in terms of top line and also kind of just based on how things are trending so far in August and September, where do you expect active clients to come in?

[David Aufderhaar, executive]

Thanks for that. Right now, things are trending right within where our guidance is. From an active client standpoint, we tend to talk about active clients. When we talk about quarterly active clients, we tend to talk quarter-over-quarter instead of year-over-year. And from a quarter-over-quarter standpoint, we do expect the quarter to be down, but definitely better than the last couple of quarters.

If you think about where we've been, we were at 6%, then we were at 5%. Going into Q1, rough size and shape, probably a little bit above 3% from -- down quarter-over-quarter from an active client standpoint. And then on the revenue side, everything is included within our guide.

[Mauricio Serna Vega, analyst]

Got it. Got it. And just to follow up. So if there is a macro downturn or the macro downturn continues, are you planning to make any additional adjustments?

[David Aufderhaar, executive]

Yes. I mean I think we have a proven track record in really being able to identify cost savings in our P&L. I also think we have -- when you think about the leverage that we've created in gross margin and variable labor from a contribution margin standpoint, all of that is variable. And so that also gives us the ability that if we did see a headwind to be able to reduce expenses when volume goes down. And so I think we feel really comfortable that we're in a good place.

[Operator]

With that, I see no further questions in the queue. Thank you for your participation in today's conference. This does conclude the program. You may all disconnect. Have a great day.