Crescent Energy Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
June 6, 2023

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Third Quarter Fiscal Year 2023 Stitch Fix Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

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

Speaker 1

Good afternoon, and thank you for joining us today to discuss the results for Stitch Fix's Q3 of fiscal year 2023. Joining me on the call today are Katrina Lake, Interim CEO of Stitch Fix and David Afterhar, CFO. We have posted complete Q3 2023 financial results and 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.

Speaker 1

We would like to remind everyone that we will be making forward looking statements on this call, which involves risks and uncertainties. Actual results could differ materially from those contemplated by our forward looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause results to differ, in particular, our press release issued and filed today as well as the Risk Factors sections of our annual report on Form 10 ks for our fiscal year 2022 previously filed with the SEC and the quarterly report on Form 10 Q for our Q3 of fiscal year 2023, which we expect to be filed tomorrow. Also note that the forward looking statements on this call are based on information available to us as of today's date.

Speaker 1

We disclaim any obligation to update any forward and statements except as required by law. During this call, we will discuss certain non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our Investor Relations website. These non GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our Investor Relations website and a replay of this call will be available on that website shortly.

Speaker 1

With that, I will turn the call over to Kat. Please go ahead.

Speaker 2

Thanks, Hayden. 5 months ago, I came back as interim CEO, motivated by the opportunity ahead and with a clear understanding of the need to reposition and refocus the company to set ourselves up for success. Today, amidst a challenging macroeconomic climate, preserving profitability and cash flow remain top priorities. Generally, we are focusing on the near term protecting the balance sheet, actively managing our inventory levels, while improving composition and managing the global impact of tightening credit standards on vendors and manufacturers. But we are also mindful of the long term opportunity ahead and by no means standing still.

Speaker 2

We understand that focusing on our clients is key to success and we continue to invest in personalization and AI to maximize our long term potential. We also completed a strategic review of our business operations in Q3 with a critical eye on operational efficiency and effectiveness, while maintaining profitability and cash flow over a longer timeframe as we focus on driving future growth. This was a robust review of our operations and processes across the company to identify areas to enhance the client experience and drive improved business results. One aspect of this review was a full analysis of our network strategy. As we have refocused on our core fixed business, we believe our inventory will be better optimized across a smaller network of warehouses in the U.

Speaker 2

S. Understanding this, we have developed a 3 node strategy that will allow us to more optimally serve the entire country and simultaneously showcase the greatest breadth and depth of inventory to our clients and stylists. This consolidated network will allow us to deliver a better client experience with access to more inventory for a given fix, while at the same time allowing us to operate with lower, more cash efficient inventory levels. Because of this, we intend to close 2 additional fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. As we have a lease already expiring in Bethlehem, we are choosing not to renew that.

Speaker 2

Our analysis has also shown that our remaining 3 fulfillment centers in Atlanta, Indianapolis and Phoenix will remain optimal even with a larger client base in the future as we could expand capacity within these locations in the short term and the long term. We will undertake a phased approach with the closures to maintain our current high levels of client service. We expect to begin the Bethlehem wind down in Q1 and we will move on to Dallas later in the year. We expect to achieve approximately $15,000,000 in annualized cost savings once this re node strategy is completed. I want to thank all of our associates and team at the busy and the dizzy.

Speaker 2

We are immensely grateful for your hard work and commitment to our clients. Thank you. Additionally, the continued realities of economic conditions in both the U. S. And the U.

Speaker 2

K. Has led us to re examine our geographic footprint. And this morning, we informed our employees in the U. K. That we are exploring exiting the U.

Speaker 2

K. Market in FY 2024. In FY2023, the U. K. Will represent approximately $50,000,000 in annual revenue and negative $15,000,000 of adjusted EBITDA.

Speaker 2

So we believe Stitch Fix is a service that will We find success across many geographies, including the UK and Western Europe. Today, we are not confident in a path to profitability in the near term in that market, especially as we prepare for potentially extended periods of complicated macroeconomic conditions in both the U. S. And UK.

Speaker 3

There are

Speaker 2

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

Speaker 2

Law, we will enter into a consultation period with U. K. Employees regarding potentially exiting the U. K. Market prior to making any final decision.

Speaker 2

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

Speaker 2

For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engines and more recently automatically generated product descriptions. We have also developed and implemented more advanced proprietary tools such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market. A new area we have enhanced our AI capabilities in is our inventory buying. We have historically utilized a number of tools to make data informed decisions with our inventory purchases. Now directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize MAP scores at the client level to drive company level buying action.

Speaker 2

We expect the clarity of demand signals at individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and AOV over time. This back end personalization will also allow us to more effectively tailor the depth and timing of our buying decisions, so it will allow us to buy the right inventory in the right amount at the right time. Early testing of this approach compared against our existing buying tools have shown a 10% lift in keep rate and AOV and by the end of Q1, we expect 20% of all POs created to be algorithmically informed. We will continue to scale adoption throughout the year and we are excited about the capabilities.

Speaker 2

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

Speaker 4

Thank you, Cat, and hello to everyone on the call. Fiscal Q3 results exceeded expectations. Revenue came in at the high end of our guidance range at $395,000,000 down 20% year over year and 4% sequentially. Consistent with some of our retail peers, we saw strength during February March, but did see increased macroeconomic headwinds in April. Net active clients in the quarter declined 11% year over year and 3% sequentially to approximately 3,500,000 while our overall average order value is holding relatively steady year over year similar to Q1 and Q2, our analysis shows that all client cohorts are spending less than in prior years, and we expect this trend to continue in Q4.

Speaker 4

Q3 gross margins expanded 150 basis points quarter over quarter 42.5 percent due to improved inventory composition and less promotional activity in the quarter. We continue to expect gross margins to be around 42% for the fiscal year and are actively focused on improving gross margins with opportunities to improve product margin, transportation efficiency and inventory efficiency over time. The network strategy initiative that Kat highlighted in her comments is a good example of that focus. Net inventory ended the quarter at $152,000,000 down 5% quarter over quarter and down 29% year over year. We do expect overall inventory levels to decline in Q4 as we continue to manage inventory closer to demand and revise our assortment strategy to better align with our core experience.

Speaker 4

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

Speaker 4

Q3 adjusted EBITDA came in ahead of our outlook at $10,100,000 due to the continued realization of cost savings in FY2023 and tight ongoing cost controls. And finally, we once again generated positive cash flow this quarter, delivering $21,900,000 of free cash flow in Q3. We continue to feel good about our strong balance sheet and ended the quarter with over $240,000,000 in cash, cash equivalents and highly rated securities and no bank debt. Moving on to the outlook. For Q4, we expect revenues to be between 3 $65,000,000 $375,000,000 reflecting a relatively similar trajectory to what we saw in April.

Speaker 4

We expect adjusted EBITDA for the quarter to be between $0,000,000 $10,000,000 largely reflecting the impact of our implemented cost structure initiatives on a sequentially lower top line. Going forward, we will continue to focus on profitability in the short term, while maximizing our long term potential. As a reminder, we have already completed $135,000,000 of cost savings initiatives in FY2023 and the proposed initiatives that Kath discussed earlier to drive an additional $50,000,000 in annualized expense savings. We are mindful that we've been profitable at different revenue levels in the past, and we are making the tough decisions now to endure a wide range of possible macroeconomic scenarios. Over time, we expect the investments in improving client experience, along with the increased leverage in our P and L will enable us to establish a healthy base on which to grow.

Speaker 4

With that, I'll turn the call over to the operator for Q and A.

Operator

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

Speaker 5

Yes. Hi, guys. Thank you for taking the questions. I have a couple of those. Maybe just a high level question, Cat.

Speaker 5

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

Speaker 5

Thank you.

Speaker 2

Yes. Great. Thank you for the great questions, Youssef. I mean, firstly, on the long term opportunity, I mean, I feel super excited and optimistic. I think a lot of the strategy right now is focusing on the core, on our differentiators, on the things that we know that we do best, which is really this human in the loop styling of being able to combine the best in the world algorithms in combination with human stylists to be able to deliver an That's really differentiated.

Speaker 2

And so to be able to kind of spend this time where we're stabilizing the business, but still continuing to push forward in the areas that we really believe that we have long term competitive differentiation. That's kind of high level how we're thinking about the business right now and we're really excited. And in terms of the addressable market, I think we continue to feel really optimistic about that. I think as we think about some of the capabilities that we're really pushing on, Which really are at the kind of intersection of AI and so it's a good kind of link of questions that you asked. Like one of the things that I love about our experience is that We have, generative AI that's really in more of visual format.

Speaker 2

And so the outfits that we have in our app, those are actually taking into account your preferences, What we know about you and then in combination with what we know that you own in your closet and to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix. That's a really good example of I think a capability that Is firstly really aligned with our capabilities around data and personalization and really unique to us. And then I think it's also really compelling because I really think that push As we think about what that addressable market is, I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able To have access to advice on a daily basis around what to wear and how to wear it. And so as we're thinking about the ways in which We are innovating and the ways that we're investing in particular in AI. I think a lot of that actually is with an eye towards how do we make sure that we're pushing the addressable market, making sure that we're serving our clients that we serve well today, but also really thinking about like are these Features and capabilities value add to a broader universe of clients.

Speaker 2

And so I think we feel really excited about those capabilities And we're excited about the plan that we have to be able to continue to invest in those.

Speaker 5

Okay, great. Thank you, Cat.

Operator

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

Speaker 6

Thanks. Hey, everyone. Hope you're all doing well. Could you quantify any of the UK impact of the P and L maybe last year, just give us context? How many active Clients are there, maybe revenues, EBIT pressures, however you want to help us understand to contextualize that.

Speaker 6

And then Maybe also share what you think P and L impacts might be from closing the 2 distribution centers? Thank you.

Speaker 2

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

Speaker 4

Yes, Simeon, thanks. A couple of things. First on the UK, just a reminder that Yes, this is still a proposal and so there's no decision that's been made. But just size and shape, I think Cat called out that in this year, it's around $50,000,000 in revenue and about negative $15,000,000 in EBITDA. So if you just do the simple math of flow through that means there's about $35,000,000 in SG and A expense in the UK as well.

Speaker 4

And so that's sort of the high level P and L for the UK. And then on the second question was the distribution centers. With this, it would be about an annualized savings of $10,000,000 to $15,000,000 It's more of a timing question of we want to make sure that as we do this, we do this in a very client right way so that we aren't impacting the client and that's why we're phasing The closings and so savings in FY 2024 would obviously be smaller than that.

Speaker 6

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

Speaker 2

Yes. It's a great question, Simeon. I mean, honestly, we've talked about it a lot internally and we have a wide range of price points. We have items that are in the 20s all the way up to over $100 And so we have a pretty wide range of kind of inventory price points and it's an area of our business that we definitely have kept our eye on as we've Kind of seeing a little bit of macroeconomic softness. So far, I think customer acquisition is probably the thing that's been more hard in a macroeconomic climate.

Speaker 2

We've So far, I think seeing more strength in terms of people spending in AOV than one might expect. But I think our strategy really is to be able to have that broad range of price points to be able to meet the customer where they are. And so we feel very prepared to be able to do that. But candidly, I don't know that we've seen I don't know that our data reflects like a huge amount of trade down, but it's definitely something we're keeping an eye on.

Speaker 6

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

Speaker 4

Thank you. Thank you.

Operator

Thank you. Our next question comes from David Bellinger with ROTHAM Kam. You may proceed.

Speaker 3

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

Speaker 2

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

Speaker 3

Yes, that's correct.

Speaker 2

Yes. So that's so as we One of the things as we kind of really took a fresh look at our business is that as we think about a styling first model and really Kind of channeling clients through a funnel where we are collecting the right preferences so that we can really personalize for them. Like that model depends on having co located inventory.

Speaker 6

And so, historically, we've had

Speaker 2

5 and even 6 And so, historically, we've had 5 and even 6 warehouses at different points. And when we have that many warehouses, we're spreading the inventory across a broader network, which means that there's going to be times when we have pockets of good inventory and pockets of more challenging inventory. And so if you think especially in use cases where like somebody It's coming in with to a stylist with a very specific request. If we don't have kind of that density of inventory and the breadth and depth, It makes it potentially harder for a stylist to be able to meet that specific need of the client. And so consolidating that warehouse into 3 nodes is something that really helps as we think about our future ability to be able to meet specific requests of clients And for our stylists to be able to have availability and all of the breadth and depth of inventory that we buy to and that we have in our system.

Speaker 2

And So it really we see this as something that I think can help us to be able to achieve more of our Goals as we think about being able to meet our stylist needs and ultimately our clients' needs.

Speaker 3

Does that make sense? No, that's perfect. It's very helpful. And then just my follow-up, could you talk a bit more about some of the April trends? Is there anything specific you can point to that stood out as you exited the quarter.

Speaker 3

And then just can you clarify too on the Q4 guidance, is that consistent with the deceleration you later in the period. Is there anything you can comment on in regard to quarter to date revenue growth just would help us in our models?

Speaker 2

Yes. David, you want to add that? Yes.

Speaker 4

Yes, David. For April, it wasn't to Cat's point, it wasn't anything around AOV or pricing that tended to hold steady. It was more we saw some macro headwinds around sort of volume that was coming through. And it was pretty consistent with what we heard from some of our peers as well where we were we saw strength in February March and then it sort of tailed off in April. And that is included in our guide for Q4 as well.

Speaker 3

Understood. Thank you very much.

Operator

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

Speaker 6

Great, thanks. First one just on the reduced DC footprint. As that plays out into next year, should we contemplate some further thinning of your inventory on balance sheet. I'm just trying to get a sense of should that continue to come in a little bit or are we now kind of level set on inventory and as you contemplate having more breadth and depth as you were talking about Katrina that we're kind of at the right levels here. And then David, just a housekeeping one, just that commentary on advertising maintaining similar levels of spend in 4Q.

Speaker 6

Did you mean that as a percentage of revenue or in absolute dollars?

Speaker 2

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

Speaker 4

And I'll answer the second one first, just that's a really quick one. Advertising, it's a percentage of revenue. So we do Got to be similar to the 7% of revenue we saw this quarter. And so then on the inventory, I mean, I think there's Two things to think about there. 1 is actually the work that we're doing right now with the teams that are really focusing on composition and focusing on the core experience.

Speaker 4

I think we touched on this last quarter is that helps us really focus the inventory and the teams have done a great job chasing into Q4 to get Really relevant inventory for our clients. And so because of that, we do expect inventory to go down in Q4. And then with regard to the closures, Certainly, that could be an added impact or benefit. We want to make sure first that we have the right inventory to Cat's point around density and making sure that stylists have everything available. But absolutely, as you concentrate in less warehouses, There is the ability to do that with less inventory.

Speaker 4

And so we would expect inventory turns to go up over time.

Operator

Great. Thank you. Thank you. Our next question comes from Tom Nikic with Wedbush Securities. You may proceed.

Speaker 5

Hey, good afternoon. Thanks for taking my question. So I know You've done a lot of work to right size the cost structure of the business. But I think ultimately at some point, the Top line needs to inflect and some of the customer attrition needs to ease up and the Customer count needs are rising again. Like how do we think about potential bottoming of The customer base, I mean like do we kind of think like next year the customer count starts rising again?

Speaker 5

Is there more Normalization needs to happen and how do you go about driving a reacceleration of the top line and the customer count? Thanks.

Speaker 2

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

Speaker 2

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

Speaker 2

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

Operator

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

Speaker 7

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

Speaker 7

Thank you.

Speaker 2

Yes, great questions. And I think the first one on the assortment, I mean, we're seeing like on the men's side. We're seeing short sleeve wovens work. We're seeing across the board, I think we're seeing more occasion and dressy. In the women's business, dresses have been a place where we've been historically under penetrated and We've seen a lot of success in dresses.

Speaker 2

We've seen success in fitted dresses and more of the work dresses, definitely in events. I think you're Probably hearing that across the board, but I think people are excited to be out and be doing things and we're certainly seeing that in our business. And the consolidation of the warehouses really does allow us to be able to hit more of that variety. And so I would say that historically like we've Our business is probably more over indexed in places like tops and it's maybe been harder to serve some of the categories that are less In our inventory, partly because it's I think the it's easier I think going forward, we believe it will be easier to be able to have kind of even underrepresented categories available for our stylists to be putting in fixes more often with the consolidation of warehouses. And so We really do believe that the consolidation of the warehouses will help us to be able to achieve for our clients greater and our stylists greater Kind of access to variety and that could potentially help us to be able to address more parts of the client's wardrobe and more parts of kind of wallet share in those categories.

Speaker 2

In terms of like what we're excited about in terms of Keep rates in enhancing the customer experience. As David mentioned and I said earlier, it's interesting like we really haven't seen AOV be problematic, I would say, even though we feel like we're seeing macro in some other ways. But I think AOV is a place where we're actually Seeing some holding, which is great. And longer term, we talked about kind of some of the ways that we're using Algorithms in our buying and I'm just like really, really excited about that. I think there is, what we're doing now is we're using Algorithms not just to kind of give insights to our buying team, but actually to buy product.

Speaker 2

And That's starting we're starting to see some of the product that we bought that way, kind of hit our warehouses and we're really excited about kind of the And I think scaling that capability is something that we're really excited about that I think really can play a large part in enhancing the customer experience And longer term, definitely impacting things like keep rate. Thank

Operator

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

Speaker 8

Hi, thanks for taking our questions. First, just any color on the declines in active And then I know in the past you've talked about targeting marketing to reactivate clients. Any update on how that's progressing? Thanks so much.

Speaker 4

Yes. Thanks for the question. On active clients, we were down 97,000 quarter over quarter. That's around 3%. And we did see higher gross adds this quarter compared to Q2 and that was sort of a function of both increased Acquisition spend, but also I think to your point the call out is we also saw strong reengagement.

Speaker 4

Reengagement went up 34% quarter over quarter and 24% year over year. And so I think we're definitely leaning in on the reengagement side from a marketing standpoint. With that, we do continue to expect active clients to be negative in Q4 and that's because we're still Sort of lapping this high dormancy, just as a reminder, we spent last year in Q3 and Q4 over $50,000,000 each quarter on marketing and a good portion of that was focused on this Freestyle First client acquisition and pulling back on that, that's sort of that's still a headwind

Operator

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

Speaker 9

Hey guys, thanks for taking the question. I guess first a housekeeping question. I know stock based comp is down pretty significantly year over year, but less so on a trailing 9 month basis, I guess, is this kind of the trend we should think about going forward? And then Cat, just like a bigger picture question, it was kind of been asked about when could you bend the curve on client growth. But maybe ask differently, do you think you need a more supportive macro to kind of bring the business back to growth?

Speaker 9

Or do you think You had the levers and tools today that even if macro remains tough that you could try to drive that client growth

Speaker 4

in the medium term? Thank you.

Speaker 2

Thanks, Ed. I will take the second question and then maybe and David you can come back to SBC. I mean, it's a great question, Ed. I mean, we know that we have A macro effect on our business, like there's no question. That being said, like I think it's hard for us to quantify.

Speaker 2

And frankly, I think it's kind of a waste of time to really Spend too much time quantifying it because I do think I don't know that I can answer your question exactly like is it enough to Inflect without macro, like I don't know if I can answer that exactly, but I do think there are real opportunities. And I think right now we're working on our kind of strategic plan for the next And I'm really excited, I think, where we do have very clearly identified opportunities for us to deliver a better experience, to have a more For a more compelling value proposition for a broad range of people. And so I think regardless of the macro, there are definitely things that we can be doing to positively Our business and positively impact our clients. And so we're really focused there. And as I said, like I think we just really want to prepared for a wide range of whatever macro is going to hand us over the next 12 to 24 months.

Speaker 2

And so, we want to make sure we're focused on the right things that are going to be the right things Regardless of macro and we want to be able to be prepared to take advantage when macro turns our way. And so I can't answer it exactly, but like We definitely believe we can make forward progress, even and we'll keep an eye on what's happening with macro.

Speaker 4

And then Ed on the SBC side, this quarter definitely came down from last quarter. I think it's around 12% down from last quarter and it's around 28% down year over year. And so the level that we're at right now is probably the right level if you think about it from a near And just like the rest of our fixed cost structure, it's something that we'll want to leverage going forward.

Speaker 9

Thanks so much.

Operator

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

Speaker 2

Great. Thanks. I just wanted to dig a little deeper into your comments about investing more around AI, just sort of any incremental And then just bigger picture, how are you thinking about sort of AI as a competitive threat, whether that be personal etcetera, over the coming months years frankly. Thanks. Yes.

Speaker 2

Thanks, Lauren. I mean, we could probably spend An entire hour on this, so maybe I'll just share a few highlights. But I think we like it's like I hear what you're saying is like it is like it's In a lot of ways, it's positive that like AI has been part of our story since the very beginning. We've been using data science and machine learning, since day 1 to power our business. And I think there's some real competitive differentiation that we've developed over our 10 plus years of leading in that space that are benefiting us today.

Speaker 2

And at the same time, obviously, a lot of people are really interested in the space right now and looking at things that we've done. And so I think we plan to kind of Have the best of both worlds. And so I was with our technology team the other day and we have an AI road map, which is part of what's kind of being Kind of sliced into our strategic plan for next year. And that's a combination of I think there are opportunities where we can take advantage of off The shelf advancements in AI that have happened where there are capabilities that 5, 10 years ago would have required us to build a 5 or 7 or 10 And teams developed a capability that's now off the shelf. That's something that we can bring into our business and deliver value to our clients.

Speaker 2

And then there are other places where we need to push and we need to continue our advantage. And one of the real things about AI is that like Your capabilities around AI are only as good as the data that you're training on. And the data that we have is really proprietary. It's been developed over 10 years. It's really, really predictive.

Speaker 2

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

Speaker 2

We know that there's a benefit that we saw in the AB test. We're starting to gradually integrate that into our buying processes, but that's a place where we're really excited where this is actually Algorithmic buying that we are starting to roll out that, I think is going to be able to deliver better experiences to our clients and stylists and ultimately better Numbers and better numbers to our bottom line. And so that's something that really only we can do because of the depth of data that we have, because of the connection we have with our client, because we have individualized data about every single client and their preferences that they're sharing with us that allows us to then be able to buy in a way that I think it would be very, very challenging for any other retailer to do. Great. Thank you.

Speaker 2

Thank

Operator

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

Speaker 8

Great. Thank you. So there's been a lot of kind of ups and downs in the last few years. But if you go back to If we just rewind back to pre COVID levels in about February 2020, so right before COVID, you had about 3,500,000 active customers kind of where you are now. And so you've sort of anniversaried all of the ups and downs and come full circle.

Speaker 8

But in many ways, it's a stronger business now. You have higher awareness levels, you have better customer data, better algo, broader assortment. So why are those same 3,500,000 customers generating lower total revenue? Like what's different about their behavior? Is it Are they buying lower priced items?

Speaker 8

Are the keep rates different? Can you help us contextualize like what is different versus where you were back then pre COVID?

Speaker 2

It's hard without knowing exactly the specific data points that you're pointing to. But I would say like At a high level, like some of what we are anniversarying is some of clients that were brought in, in a freestyle first experience and those clients did not generate the same level of engagement and revenue delivery that historically our clients did. And so I think my guess is kind of that's probably What you're looking at and like going forward now we are bringing people into an experience where they're sharing with us their style preferences, what they're looking for, what they like, what they don't like. And during some of those Freestyle First Days, we weren't gathering that kind of information about clients. And so that made it hard for us to retain and engage them in the way that we've historically done that.

Speaker 2

And so My guess is that's probably the reason and the good news is that we're largely getting back to where certainly getting back to where we were and I would say even pushing forward past I think we're now at a place where we the algorithmic buying as an example is that's a step change. That is a paradigm shift That is an improvement from the way that we were doing things in 2019. And as we look forward, I think there are other opportunities for us to be able to deliver more value and a more compelling Client experience in a similar way to be able to return back to that business where we are bringing people in, who are engaged, who are excited, who are Looking at this as a long term relationship and that's a lot of what we talked that's a lot of what's actually happening when we talk about kind of focusing on our core.

Speaker 4

And I think one other

Speaker 5

call

Speaker 4

out is just client tenure is it's the same amount of clients, but there's definitely a different mix from a client perspective. And so clients tend to be more active earlier in that life cycle until it stabilizes and so that's another one of the factors.

Speaker 8

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

Speaker 4

That is, yes.

Speaker 8

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

Speaker 4

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

Speaker 8

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

Speaker 4

Not necessarily the newer cohorts. It's more specifically those Freestyle First clients that we were bringing in. Those are certainly some of our newer clients, but there are specific cohort. And for that cohort, we're definitely seeing higher churn rates. And that's one of the reasons we pulled back on that and we're focusing more on the core.

Speaker 8

Super helpful. Overall,

Speaker 4

Yes. Macro still pressures sort of all of

Speaker 1

them in the same way though.

Speaker 2

Thank you. Yes.

Operator

Thank you. And this concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Crescent Energy Q3 2023
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