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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 29, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-38291
STITCH FIX, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | | 27-5026540 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
|
1 Montgomery Street, Suite 1500
San Francisco, California 94104
(Address of principal executive offices and zip code)
(415) 882-7765
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Class A common stock, par value $0.00002 per share | | SFIX | | Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 4, 2022, the number of outstanding shares of the registrant’s Class A common stock, par value $0.00002 per share, was 82,970,674, and the number of outstanding shares of the registrant’s Class B common stock, par value $0.00002 per share, was 25,486,335.
STITCH FIX, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
| | | | | |
ITEM 1. | FINANCIAL STATEMENTS |
Stitch Fix, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| January 29, 2022 | | July 31, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 193,878 | | | $ | 129,785 | |
Short-term investments | 73,052 | | | 101,546 | |
Inventory, net | 183,458 | | | 212,294 | |
Prepaid expenses and other current assets | 53,440 | | | 50,512 | |
Income tax receivable | 27,624 | | | 27,667 | |
Total current assets | 531,452 | | | 521,804 | |
Long-term investments | 82,182 | | | 59,035 | |
Income tax receivable, net of current portion | 27,054 | | | 27,054 | |
Property and equipment, net | 104,557 | | | 86,959 | |
Operating lease right-of-use assets | 144,836 | | | 118,565 | |
| | | |
Other long-term assets | 8,167 | | | 5,732 | |
Total assets | $ | 898,248 | | | $ | 819,149 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 124,431 | | | $ | 73,499 | |
Operating lease liabilities | 26,716 | | | 25,702 | |
Accrued liabilities | 95,021 | | | 99,028 | |
| | | |
Gift card liability | 13,164 | | | 9,903 | |
Deferred revenue | 14,445 | | | 18,154 | |
Other current liabilities | 2,864 | | | 2,027 | |
Total current liabilities | 276,641 | | | 228,313 | |
Operating lease liabilities, net of current portion | 151,704 | | | 121,623 | |
| | | |
Other long-term liabilities | 8,821 | | | 8,364 | |
Total liabilities | 437,166 | | | 358,300 | |
Commitments and contingencies (Note 6) | | | |
Stockholders’ equity: | | | |
| | | |
Class A common stock, $0.00002 par value – 2,000,000,000 shares authorized; 84,214,880 and 76,780,570 shares issued; 83,532,696 and 76,780,570 shares outstanding | 1 | | | 1 | |
Class B common stock, $0.00002 par value – 100,000,000 shares authorized; 25,486,335 and 31,175,418 shares issued and outstanding | 1 | | | 1 | |
Additional paid-in capital | 463,143 | | | 416,755 | |
Accumulated other comprehensive income | 991 | | | 3,411 | |
Retained earnings | 7,942 | | | 40,681 | |
Treasury stock at cost (682,184 and 0 shares) | (10,996) | | | — | |
Total stockholders’ equity | 461,082 | | | 460,849 | |
Total liabilities and stockholders’ equity | $ | 898,248 | | | $ | 819,149 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Stitch Fix, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | For the Six Months Ended |
| January 29, 2022 | | January 30, 2021 | | January 29, 2022 | | January 30, 2021 |
Revenue, net | $ | 516,724 | | | $ | 504,087 | | | $ | 1,097,968 | | | $ | 994,510 | |
Cost of goods sold | 283,920 | | | 287,744 | | | 592,247 | | | 558,716 | |
Gross profit | 232,804 | | | 216,343 | | | 505,721 | | | 435,794 | |
Selling, general, and administrative expenses | 263,502 | | | 256,694 | | | 538,269 | | | 495,678 | |
Operating loss | (30,698) | | | (40,351) | | | (32,548) | | | (59,884) | |
| | | | | | | |
Interest income | 171 | | | 642 | | | 505 | | | 1,803 | |
Other expense, net | (45) | | | (107) | | | (154) | | | (312) | |
Loss before income taxes | (30,572) | | | (39,816) | | | (32,197) | | | (58,393) | |
Provision (benefit) for income taxes | 340 | | | (18,777) | | | 542 | | | (46,895) | |
Net loss | $ | (30,912) | | | $ | (21,039) | | | $ | (32,739) | | | $ | (11,498) | |
Other comprehensive loss: | | | | | | | |
Change in unrealized gain (loss) on available-for-sale securities, net of tax | (654) | | | (388) | | | (969) | | | (1,051) | |
Foreign currency translation | (848) | | | 1,929 | | | (1,451) | | | 1,591 | |
Total other comprehensive income, net of tax | (1,502) | | | 1,541 | | | (2,420) | | | 540 | |
Comprehensive loss | $ | (32,414) | | | $ | (19,498) | | | $ | (35,159) | | | $ | (10,958) | |
Net loss attributable to common stockholders: | | | | | | | |
Basic | $ | (30,912) | | | $ | (21,039) | | | $ | (32,739) | | | $ | (11,498) | |
Diluted | $ | (30,912) | | | $ | (21,039) | | | $ | (32,739) | | | $ | (11,498) | |
Loss per share attributable to common stockholders: | | | | | | | |
Basic | $ | (0.28) | | | $ | (0.20) | | | $ | (0.30) | | | $ | (0.11) | |
Diluted | $ | (0.28) | | | $ | (0.20) | | | $ | (0.30) | | | $ | (0.11) | |
Weighted-average shares used to compute loss per share attributable to common stockholders: | | | | | | | |
Basic | 109,178,086 | | | 105,544,515 | | | 108,776,998 | | | 104,840,283 | |
Diluted | 109,178,086 | | | 105,544,515 | | | 108,776,998 | | | 104,840,283 | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Stitch Fix, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands, except share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended January 29, 2022 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | | Shares | | Amount | |
Balance as of October 30, 2021 | | 108,794,956 | | | $ | 2 | | | $ | 437,246 | | | $ | 2,493 | | | $ | 38,854 | | | — | | | $ | — | | | $ | 478,595 | |
Issuance of common stock upon exercise of stock options | | 48,983 | | | — | | | 311 | | | — | | | — | | | — | | | — | | | 311 | |
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings | | 857,276 | | | — | | | (8,620) | | | — | | | — | | | — | | | — | | | (8,620) | |
| | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 34,206 | | | — | | | — | | | — | | | — | | | 34,206 | |
Repurchase of common stock | | — | | | — | | | — | | | — | | | — | | | (682,184) | | | (10,996) | | | (10,996) | |
Net loss | | — | | | — | | | — | | | — | | | (30,912) | | | — | | | — | | | (30,912) | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | (1,502) | | | — | | | — | | | — | | | (1,502) | |
Balance as of January 29, 2022 | | 109,701,215 | | | $ | 2 | | | $ | 463,143 | | | $ | 991 | | | $ | 7,942 | | | (682,184) | | | $ | (10,996) | | | $ | 461,082 | |
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended January 30, 2021 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | | Shares | | Amount | |
Balance as of October 31, 2020 | | 104,721,741 | | | $ | 2 | | | $ | 367,760 | | | $ | 1,727 | | | $ | 59,098 | | | — | | | $ | — | | | $ | 428,587 | |
Issuance of common stock upon exercise of stock options | | 1,076,410 | | | — | | | 15,433 | | | — | | | — | | | — | | | — | | | 15,433 | |
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings | | 509,589 | | | — | | | (17,114) | | | — | | | — | | | — | | | — | | | (17,114) | |
Stock-based compensation | | — | | | — | | | 26,126 | | | — | | | — | | | — | | | — | | | 26,126 | |
| | | | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | — | | | (21,039) | | | — | | | — | | | (21,039) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | 1,541 | | | — | | | — | | | — | | | 1,541 | |
Balance as of January 30, 2021 | | 106,307,740 | | | $ | 2 | | | $ | 392,205 | | | $ | 3,268 | | | $ | 38,059 | | | — | | | $ | — | | | $ | 433,534 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended January 29, 2022 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | | Shares | | Amount | |
Balance as of July 31, 2021 | | 107,955,988 | | | $ | 2 | | | $ | 416,755 | | | $ | 3,411 | | | $ | 40,681 | | | — | | | $ | — | | | $ | 460,849 | |
Issuance of common stock upon exercise of stock options | | 140,377 | | | — | | | 1,365 | | | — | | | — | | | — | | | — | | | 1,365 | |
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings | | 1,604,850 | | | — | | | (23,372) | | | — | | | — | | | — | | | — | | | (23,372) | |
| | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 68,395 | | | — | | | — | | | — | | | — | | | 68,395 | |
Repurchase of common stock | | — | | | — | | | — | | | — | | | — | | | (682,184) | | | (10,996) | | | (10,996) | |
Net loss | | — | | | — | | | — | | | — | | | (32,739) | | | — | | | — | | | (32,739) | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | (2,420) | | | — | | | — | | | — | | | (2,420) | |
Balance as of January 29, 2022 | | 109,701,215 | | | $ | 2 | | | $ | 463,143 | | | $ | 991 | | | $ | 7,942 | | | (682,184) | | | $ | (10,996) | | | $ | 461,082 | |
| | | | | | | | | | | | | | | | |
| | For the Six Months Ended January 30, 2021 |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Treasury Stock | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | | Shares | | Amount | |
Balance as of August 1, 2020 | | 103,755,507 | | | $ | 2 | | | $ | 348,750 | | | $ | 2,728 | | | $ | 49,557 | | | — | | | $ | — | | | $ | 401,037 | |
Issuance of common stock upon exercise of stock options | | 1,601,726 | | | — | | | 20,539 | | | — | | | — | | | — | | | — | | | 20,539 | |
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings | | 950,507 | | | — | | | (24,116) | | | — | | | — | | | — | | | — | | | (24,116) | |
| | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | — | | | 47,032 | | | — | | | — | | | — | | | — | | | 47,032 | |
| | | | | | | | | | | | | | | | |
Net loss | | — | | | — | | | — | | | — | | | (11,498) | | | — | | | — | | | (11,498) | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | 540 | | | — | | | — | | | — | | | 540 | |
Balance as of January 30, 2021 | | 106,307,740 | | | $ | 2 | | | $ | 392,205 | | | $ | 3,268 | | | $ | 38,059 | | | — | | | $ | — | | | $ | 433,534 | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Stitch Fix, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
(In thousands) | | | | | | | | | | | |
| For the Six Months Ended |
| January 29, 2022 | | January 30, 2021 |
Cash Flows from Operating Activities | | | |
Net loss | $ | (32,739) | | | $ | (11,498) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
| | | |
| | | |
| | | |
Change in inventory reserves | 445 | | | 4,619 | |
Stock-based compensation expense | 64,713 | | | 44,684 | |
Depreciation, amortization, and accretion | 17,374 | | | 14,206 | |
Other | 7 | | | 214 | |
Change in operating assets and liabilities: | | | |
Inventory | 28,100 | | | (62,024) | |
Prepaid expenses and other assets | (5,755) | | | 2,524 | |
Income tax receivables | 43 | | | (44,154) | |
Operating lease right-of-use assets and liabilities | 4,855 | | | (793) | |
Accounts payable | 51,296 | | | 11,261 | |
Accrued liabilities | (4,267) | | | 38,763 | |
Deferred revenue | (3,699) | | | 1,884 | |
Gift card liability | 3,261 | | | 3,669 | |
Other liabilities | 1,298 | | | 2,311 | |
Net cash provided by operating activities | 124,932 | | | 5,666 | |
Cash Flows from Investing Activities | | | |
Purchases of property and equipment | (30,900) | | | (13,894) | |
Purchases of securities available-for-sale | (77,532) | | | (112,646) | |
Sales of securities available-for-sale | 4,690 | | | 29,317 | |
Maturities of securities available-for-sale | 76,109 | | | 90,439 | |
Net cash used in investing activities | (27,633) | | | (6,784) | |
Cash Flows from Financing Activities | | | |
| | | |
Proceeds from the exercise of stock options, net | 1,365 | | | 20,539 | |
Payments for tax withholdings related to vesting of restricted stock units | (23,372) | | | (24,116) | |
Repurchase of common stock | (9,996) | | | — | |
| | | |
| | | |
Net cash used in financing activities | (32,003) | | | (3,577) | |
Net increase (decrease) in cash and cash equivalents | 65,296 | | | (4,695) | |
Effect of exchange rate changes on cash | (1,203) | | | 1,271 | |
Cash and cash equivalents at beginning of period | 129,785 | | | 143,455 | |
Cash and cash equivalents at end of period | $ | 193,878 | | | $ | 140,031 | |
| | | |
| | | |
| | | |
Supplemental Disclosure | | | |
Cash paid for income taxes | $ | 389 | | | $ | 227 | |
Supplemental Disclosure of Non-Cash Investing and Financing Activities: | | | |
Purchases of property and equipment included in accounts payable and accrued liabilities | $ | 3,040 | | | $ | 5,530 | |
Capitalized stock-based compensation | $ | 3,682 | | | $ | 2,348 | |
Repurchase of common stock included in accrued liabilities | $ | 1,000 | | | $ | — | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Stitch Fix, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business
Stitch Fix, Inc. (“we,” “our,” “us” or the “Company”) delivers personalization to our clients through the pairing of data science and human judgment. Currently, clients can engage with us in one of two ways that, combined, form an ecosystem of personalized experiences across styling, shopping and inspiration: (1) by receiving a personalized shipment of items informed by our algorithms and sent by a Stitch Fix stylist (a “Fix”); or (2) by purchasing directly from our website or mobile app based on a personalized assortment of outfit and item recommendations (“Freestyle”). Clients can choose to schedule automatic shipments or order a Fix on demand after they fill out a style profile on our website or mobile app. After receiving a Fix, our clients purchase the items they want to keep and return the other items, if any. Freestyle utilizes our algorithms to recommend a personalized assortment of outfit and item recommendations that will update throughout the day and will continue to evolve as we learn more about the client. We are incorporated in Delaware and have operations in the United States and the United Kingdom (“UK”).
COVID-19 Update
There continues to be uncertainty around the COVID-19 pandemic as the Omicron variant of COVID-19, which appears to be the most transmissible and contagious variant to date, has caused an increase in COVID-19 cases globally. The full impact of the COVID-19 pandemic on our business will depend on factors such as the length of time of the pandemic; how federal, state and local governments are responding, the impact of the Omicron variant and other variants that may emerge; vaccination rates among the population; the efficacy of the COVID-19 vaccines against the Omicron variant and other variants that may emerge; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our clients, employees, vendors, and other partners.
We believe our financial resources will allow us to manage the impact of COVID-19 on our business and operations. We believe our existing cash, cash equivalents, short-term investment balances, and the borrowing available under our credit agreement with Silicon Valley Bank and other lenders (the “2021 Credit Agreement”), if needed, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.
We also do not anticipate any impairments with respect to long-lived assets or short-term and long-term investments that would have a material impact on our financial statements.
2. Summary of Significant Accounting Policies
Basis of Presentation
Our fiscal year is a 52-week or 53-week period ending on the Saturday closest to July 31. The fiscal years ending July 30, 2022 (“2022”), and July 31, 2021 (“2021”), consist of 52 weeks.
The unaudited condensed consolidated financial statements include the accounts of Stitch Fix, Inc. and our wholly owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending July 30, 2022, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended July 31, 2021, included in our Annual Report on Form 10-K filed with the SEC on September 27, 2021 (the “2021 Annual Report”).
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in our condensed consolidated financial statements and accompanying footnotes.
Significant estimates and assumptions are used for inventory, stock-based compensation expense, income taxes, and revenue recognition. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.
Change in Accounting Principle
Effective August 1, 2021, we completed the implementation of a new inventory management process and system, which enhances our procure-to-pay processes. In connection with this implementation, we changed our inventory costing method from specific identification to the first-in-first-out (“FIFO”) method. We believe this change in accounting principle is preferable because it streamlines our inventory accounting process, is generally consistent with the physical flow of our inventories, and is more consistent with the inventory costing method used by industry peers. This change in accounting principle did not have a material effect on inventory, net or cost of goods sold for all periods presented; therefore, prior comparative financial statements have not been restated.
Short-Term and Long-Term Investments
Our short-term and long-term investments have been classified and accounted for as available-for-sale securities. We determine the appropriate classification of our investments at the time of purchase and reevaluate the classification at each balance sheet date. Available-for-sale securities with maturities of 12 months or less are classified as short-term and available-for-sale securities with maturities greater than 12 months are classified as long-term. Our available-for-sale securities are carried at fair value, with unrealized gains and losses, net of taxes, reported within accumulated other comprehensive income (loss) (“AOCI”) in stockholders’ equity. The cost of securities sold is based upon the specific identification method.
For debt securities with an amortized cost basis in excess of estimated fair value, we determine what amount of that deficit, if any, is caused by expected credit losses. The portion of the deficit attributable to expected credit losses is recognized in other (income) expense, net on our condensed consolidated statements of income. During the three and six months ended January 29, 2022, we did not record any expected credit losses on our available-for-sale debt securities.
We have elected to present accrued interest receivable separately from short-term and long-term investments on our condensed consolidated balance sheets. Accrued interest receivable was $0.7 million and $1.0 million as of January 29, 2022, and January 30, 2021, respectively, and was recorded in prepaid expenses and other current assets. We have also elected to exclude accrued interest receivable from the estimation of expected credit losses on our available-for-sale securities and reverse accrued interest receivable through interest income (expense) when amounts are determined to be uncollectible. We did not write off any accrued interest receivable during the three and six months ended January 29, 2022.
Inventory, net
Inventory, net consists of finished goods which are recorded at the lower of cost or net realizable value using the first-in-first-out (FIFO) method. Gross inventory costs include both merchandise costs and in-bound freight costs. Inventory, net includes reserves for excess and slow-moving inventory we expect to write off based on historical trends, damaged inventory, and shrinkage. We estimate and accrue shrinkage as a percentage of inventory out to the client and damaged items at 100% of cost.
Leases
Our leasing portfolio consists of operating leases, which include lease arrangements for our corporate offices, fulfillment centers, and, to a lesser extent, equipment. Operating leases with a term greater than one year are recorded on the consolidated balance sheets as operating lease right-of-use assets and operating lease liabilities at the commencement date. These balances are initially recorded at the present value of future minimum lease payments calculated using our incremental borrowing rate and expected lease term. Certain adjustments to our operating lease right-of-use assets may be required for items such as initial direct costs paid or incentives received.
In November 2020, we entered into an agreement to lease approximately 700,000 square feet of space to be used as a fulfillment center in Salt Lake City, Utah. This lease commenced in August 2021 and was classified as an operating lease with an initial lease liability of $28.8 million and a right-of-use asset of $24.6 million. In September 2021, we entered into an expansion agreement to lease an additional 300,000 square feet of space at this fulfillment center. This expansion commenced in January 2022 and was classified as an operating lease with an initial lease liability of $14.5 million and right-of-use asset of $14.5 million.
Foreign Currency
The functional currency of our international subsidiary is the British pound sterling. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in AOCI as a component of stockholders’ equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are recorded in other income, net in the condensed consolidated statements of operations and comprehensive income.
Revenue Recognition
We generate revenue primarily from the sale of merchandise in a Fix and from Freestyle purchases. Clients create an online account on our website or mobile app, complete a style profile, and order a Fix or merchandise to be delivered on a specified date.
Each Fix represents an offer made by us to the client to purchase merchandise. The client is charged a nonrefundable upfront styling fee before the Fix is shipped. As an alternative to the styling fee, we offer select clients the option to purchase a Style Pass. Style Pass clients pay a nonrefundable annual fee for unlimited Fixes that is credited towards merchandise purchases. If the offer to purchase merchandise is accepted, we charge the client the order amount for the accepted merchandise, net of the upfront styling fee or Style Pass annual fee. For each Fix, acceptance occurs when the client checks out the merchandise on our website or mobile app. We offer a discount to clients who purchase all of the items in the Fix.
We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.
Our styling fee and Style Pass arrangements represent the option to purchase merchandise. These fees and arrangements are not distinct within the context of the contract with our Fix customers and therefore do not give rise to separate performance obligations. Both the upfront styling fee and Style Pass annual fee are included in deferred revenue until the performance obligation is satisfied when the client exercises his or her option to purchase merchandise (i.e., upon checkout of a Fix) or when the option(s) to purchase merchandise expire(s).
Revenue is recognized when control of the promised goods is transferred to the client. For a Fix, control is transferred when the client accepts or rejects the offer to purchase merchandise. Upon acceptance by purchasing one or more items within the Fix at checkout, the total amount of the order, including the upfront styling fee, is recognized as revenue. If none of the items within the Fix are accepted at checkout, the upfront styling fee is recognized as revenue at that time. The Style Pass annual fee is recognized at the earlier of (i) the time at which a client accepts and applies the Style Pass fee to an offer to purchase merchandise or (ii) upon expiry of the annual period. Under Style Pass arrangements, if a client does not accept any items within the Fix, the annual fee will continue to be deferred until it is applied to a future purchase or upon expiry of the annual period. If a client would like to exchange an item, we recognize revenue at the time the exchanged item is shipped, which coincides with the transfer of control to the customer. For a Freestyle purchase, control is transferred and revenue is recognized upon shipment to the client.
We deduct discounts, sales tax, and estimated refunds to arrive at net revenue. Sales tax collected from clients is not considered revenue and is included in accrued liabilities until remitted to the taxing authorities. All shipping costs are accounted for in cost of goods sold and all handling costs are accounted for as fulfillment costs within selling, general, and administrative expense (“SG&A”), and are therefore not evaluated as a separate performance obligation. Discounts are recorded as a reduction to revenue when the order is accepted. We record a refund reserve based on our historical refund patterns. Our refund reserve, which is included in accrued liabilities in the condensed consolidated balance sheets, was $10.7 million and $11.7 million as of January 29, 2022, and July 31, 2021, respectively.
We have five types of contractual liabilities: (i) cash collections of upfront styling fees, which are included in deferred revenue and are recognized as revenue upon the earlier of application to a merchandise purchase or expiry of the offer, (ii) cash collections of Style Pass annual fees, which are included in deferred revenue and are recognized upon the earlier of application to a merchandise purchase or expiry of the Style Pass annual period, (iii) unredeemed gift cards, which are included in gift card liability and recognized as revenue upon usage or inclusion in gift card breakage estimates, (iv) referral credits, which are included in other current liabilities and are recognized as revenue when used, and (v) cash collections of Freestyle purchases, which are included in deferred revenue and are recognized as revenue upon shipment.
We sell gift cards to clients and establish a liability based upon the face value of such gift cards. We reduce the liability and recognize revenue upon usage of the gift card. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies. All commissions paid to third parties upon issuance of gift cards are recognized in SG&A as incurred, as on average, gift cards are used within a one-year period. Similarly, referral credits that are considered incremental costs of obtaining a contract with a customer are recognized in SG&A when issued, as on average, referral credits are used within a one-year period.
We expect deferred revenue for upfront styling fees, Freestyle orders, and Style Pass annual fees to be recognized within one year. On average, gift card liability and other current liabilities are also recognized within one year.
The following table summarizes the balances of contractual liabilities included in other current liabilities, deferred revenue and gift card liability as of the dates indicated:
| | | | | | | | | | | | | | |
(in thousands) | | January 29, 2022 | | July 31, 2021 |
Deferred revenue | | | | |
Upfront styling fees | | $ | 9,567 | | | $ | 11,989 | |
Style Pass annual fees | | 3,801 | | | 3,474 | |
Freestyle orders | | 1,077 | | | 2,691 | |
| | | | |
Total deferred revenue | | $ | 14,445 | | | $ | 18,154 | |
Gift card liability | | $ | 13,164 | | | $ | 9,903 | |
Other current liabilities | | | | |
Referral credits | | $ | 1,188 | | | $ | 1,231 | |
| | | | |
The following table summarizes revenue recognized during the six months ended January 29, 2022, that was previously included in deferred revenue, gift card liability, and other current liabilities at July 31, 2021:
| | | | | | | | | | |
(in thousands) | | Revenue Recognized From Amounts Previously Included in Deferred Balances at July 31, 2021 | | |
Upfront styling fees | | $ | 11,767 | | | |
Style Pass annual fees | | 2,495 | | | |
Freestyle orders | | 2,341 | | | |
Gift card liability | | 2,085 | | | |
Referral credits | | 665 | | | |
Concentration of Credit Risks
We are subject to concentrations of credit risk principally from cash and cash equivalents and investment securities. The majority of our cash is held by two financial institutions within the United States. Our cash balances held by these institutions may exceed federally insured limits. The associated risk of concentration for cash is mitigated by banking with credit-worthy institutions. The associated risk of concentration for cash equivalents and investments is mitigated by maintaining a diversified portfolio of highly rated instruments.
No client accounted for greater than 10% of total revenue, net for the three and six months ended January 29, 2022, and January 30, 2021, respectively.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. This update amends and simplifies the accounting for income taxes by eliminating certain exceptions in existing guidance related to performing intraperiod tax allocation, calculating interim period taxes, and recognizing deferred taxes for investments. The update also provides new guidance to reduce complexity in certain areas. The Company adopted this guidance on August 1, 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
3. Fair Value Measurements
We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level 3: Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued liabilities. At January 29, 2022, and July 31, 2021, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities.
The following table sets forth the amortized cost, gross unrealized gains, gross unrealized losses and fair values of our short-term and long-term investments accounted for as available-for-sale securities as of January 29, 2022, and July 31, 2021:
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| | January 29, 2022 | | July 31, 2021 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Financial Assets: | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 54,991 | | | $ | — | | | $ | (373) | | | $ | 54,618 | | | $ | 42,009 | | | $ | 35 | | | $ | — | | | $ | 42,044 | |
Certificates of deposit | | 700 | | | — | | | — | | | 700 | | | 1,500 | | | — | | | — | | | 1,500 | |
Commercial paper | | 3,000 | | | — | | | — | | | 3,000 | | | 10,192 | | | — | | | — | | | 10,192 | |
Asset-backed securities | | 8,666 | | | 3 | | | (14) | | | 8,655 | | | 10,393 | | | 18 | | | (9) | | | 10,402 | |
Corporate bonds | | 88,706 | | | 6 | | | (451) | | | 88,261 | | | 96,347 | | | 103 | | | (7) | | | 96,443 | |
Total | | $ | 156,063 | | | $ | 9 | | | $ | (838) | | | $ | 155,234 | | | $ | 160,441 | | | $ | 156 | | | $ | (16) | | | $ | 160,581 | |
The following table sets forth the fair value of available-for-sale securities by contractual maturity as of January 29, 2022, and July 31, 2021:
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| | January 29, 2022 | | July 31, 2021 |
(in thousands) | | One Year or Less | | Over One Year Through Five Years | | Over Five Years | | Total | | One Year or Less | | Over One Year Through Five Years | | Over Five Years | | Total |
Financial Assets: | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 11,680 | | | $ | 42,938 | | | $ | — | | | $ | 54,618 | | | $ | 41,633 | | | $ | 411 | | | $ | — | | | $ | 42,044 | |
Certificates of deposit | | 700 | | | — | | | — | | | 700 | | | 1,500 | | | — | | | — | | | 1,500 | |
Commercial paper | | 3,000 | | | — | | | — | | | 3,000 | | | 10,192 | | | — | | | — | | | 10,192 | |
Asset-backed securities | | 3,029 | | | 5,626 | | | — | | | 8,655 | | | 29 | | | 10,373 | | | — | | | 10,402 | |
Corporate bonds | | 54,643 | | | 33,618 | | | — | | | 88,261 | | | 48,192 | | | 48,251 | | | — | | | 96,443 | |
Total | | $ | 73,052 | | | $ | 82,182 | | | $ | — | | | $ | 155,234 | | | $ | 101,546 | | | $ | 59,035 | | | $ | — | | | $ | 160,581 | |
The following table sets forth our cash equivalents, and short-term and long-term investments accounted for as available-for-sale securities that were measured at fair value on a recurring basis based on the fair value hierarchy as of January 29, 2022, and July 31, 2021:
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| | January 29, 2022 | | July 31, 2021 |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Financial Assets: | | | | | | | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 15,687 | | | $ | — | | | $ | — | | | $ | 15,687 | | | $ | 10,728 | | | $ | — | | | $ | — | | | $ | 10,728 | |
| | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | 54,618 | | | — | | | — | | | 54,618 | | | 42,044 | | | — | | | — | | | 42,044 | |
Certificates of deposit | | — | | | 700 | | | — | | | 700 | | | — | | | 1,500 | | | — | | | 1,500 | |
Commercial paper | | — | | | 3,000 | | | — | | | 3,000 | | | — | | | 10,192 | | | — | | | 10,192 | |
Asset-backed securities | | — | | | 8,655 | | | — | | | 8,655 | | | — | | | 10,402 | | | — | | | 10,402 | |
Corporate bonds | | — | | | 88,261 | | | — | | | 88,261 | | | — | | | 96,443 | | | — | | | 96,443 | |
Total | | $ | 70,305 | | | $ | 100,616 | | | $ | — | | | $ | 170,921 | | | $ | 52,772 | | | $ | 118,537 | | | $ | — | | | $ | 171,309 | |
There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 for the three and six months ended January 29, 2022, and January 30, 2021.
4. Accrued Liabilities
Accrued liabilities consisted of the following: | | | | | | | | | | | | | | |
(in thousands) | | January 29, 2022 | | July 31, 2021 |
Compensation and related benefits | | $ | 10,683 | | | $ | 13,645 | |
Advertising | | 13,039 | | | 12,649 | |
Sales taxes | | 9,316 | | | 9,937 | |
Shipping and freight | | 8,727 | | | 6,209 | |
Accrued accounts payable | | 8,463 | | | 5,804 | |
Inventory purchases | | 25,274 | | | 30,384 | |
Sales refund reserve | | 10,677 | | | 11,704 | |
Other | | 8,842 | | | 8,696 | |
Total accrued liabilities | | $ | 95,021 | | | $ | 99,028 | |
5. Credit Agreement
In June 2021, we entered into an amended and restated credit agreement with Silicon Valley Bank and other lenders (the “2021 Credit Agreement”), to provide a revolving line of credit of up to $100.0 million, including a letter of credit sub-facility in the aggregate amount of $30.0 million, and a swingline sub-facility in the aggregate amount of $50.0 million. We also have the option to request an incremental facility of up to an additional $150.0 million from one or more of the lenders under the 2021 Credit Agreement.
Under the terms of the 2021 Credit Agreement, revolving loans may be either Eurodollar Loans or ABR Loans. Outstanding Eurodollar Loans incur interest at the Eurodollar Rate, which is defined in the 2021 Credit Agreement as LIBOR (or any successor thereto), plus a margin of 2.25%. Outstanding ABR Loans incur interest at the highest of (a) the Prime Rate, as published by the Wall Street Journal, (b) the federal funds rate in effect for such day plus 0.50%, and (c) the Eurodollar Rate plus 1.00%, in each case plus a margin of 1.25%. We are charged a commitment fee of 0.25% for committed but unused amounts. The revolving line of credit under the 2021 Credit Agreement will terminate on May 31, 2024, unless the termination date is extended at the election of the lenders.
Our obligations under the 2021 Credit Agreement and any hedging or cash management agreements entered into with any lender thereunder are secured by substantially all of our current and future property, rights, and assets, including, but not limited to, cash, inventory, equipment, contractual rights, financial assets, and intangible assets. The 2021 Credit Agreement contains covenants limiting the ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make investments, in each case subject to certain exceptions. The 2021 Credit Agreement also contains financial covenants requiring us to maintain minimum free cash flow and an adjusted current ratio above specified levels, measured in each case at the end of each fiscal quarter. The 2021 Credit Agreement contains events of default that include, among others, non-payment of principal, interest, or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, and material judgments.
As of January 29, 2022, we did not have any borrowings outstanding under the 2021 Credit Agreement and we were in compliance with all financial covenants.
6. Commitments and Contingencies
Contingencies
We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results, financial position, and cash flows.
On October 11, 2018, October 26, 2018, November 16, 2018, and December 10, 2018, four putative class action lawsuits alleging violations of the federal securities laws were filed in the U.S. District Court for the Northern District of California, naming as defendants us and certain of our officers. The four lawsuits each make the same allegations of violations of the Securities Exchange Act of 1934, as amended, by us and our officers for allegedly making materially false and misleading statements regarding our active client growth and strategy with respect to television advertising between June 2018 and October 2018. The plaintiffs seek unspecified monetary damages and other relief. The four lawsuits have been consolidated and a lead plaintiff has been appointed. On September 18, 2019, the lead plaintiff in the consolidated class action lawsuits (the “Class Action”) filed a consolidated complaint for violation of the federal securities laws. On October 28, 2019, we and other defendants filed a motion to dismiss the consolidated complaint. The lead plaintiff filed an opposition to the motion to dismiss on December 9, 2019, and we and the other defendants filed our reply in support of our motion to dismiss on December 30, 2019. The court granted our motion to dismiss on September 30, 2020 but allowed the lead plaintiff to file an amended complaint. On November 6, 2020, the lead plaintiff filed his amended complaint. We filed a motion to dismiss the amended complaint on December 7, 2020. The lead plaintiff filed an opposition to the motion to dismiss on January 8, 2021, and we filed our reply in support of our motion to dismiss on January 22, 2021. The court granted our motion to dismiss on October 1, 2021. On October 29, 2021, the plaintiffs filed a notice of appeal to the Ninth Circuit Court of Appeals.
On December 12, 2018, a derivative action was filed against our directors in the same court, alleging the same violations of securities laws as alleged in the Class Action and breach of fiduciary duties. On December 12, 2019, a second derivative action was filed against our directors in the same court, alleging the same violations of securities laws and breach of fiduciary duties as the other derivative action. The two derivative actions have been related to each other and to the Class Action, and all the related cases are now proceeding before a single judge in the U.S. District Court for the Northern District of California. The derivative actions have been stayed pending resolution of the plaintiffs’ appeals of the dismissal of the Class Action pursuant to the parties’ stipulation.
There have been no other material changes to our commitments and contingencies disclosed in our 2021 Annual Report.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.
7. Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in AOCI by component and, if applicable, the reclassifications out of AOCI for the periods presented:
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| | | | | | | | | | | | |
| | For the Three Months Ended January 29, 2022 | | For the Three Months Ended January 30, 2021 |
(in thousands) | | Available-for-sale Securities | | Foreign Currency Translation | | Total | | Available-for-sale Securities | | Foreign Currency Translation | | Total |
Beginning balance | | $ | (605) | | | $ | 3,098 | | | $ | 2,493 | | | $ | 550 | | | $ | 1,177 | | | $ | 1,727 | |
Other comprehensive income (loss) before reclassifications(1) | | (654) | | | (848) | | | (1,502) | | | (389) | | | 1,929 | | | 1,540 | |
Amounts reclassified from AOCI | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Net change in AOCI | | (654) | | | (848) | | | (1,502) | | | (388) | | | 1,929 | | | 1,541 | |
Ending balance | | $ | (1,259) | | | $ | 2,250 | | | $ | 991 | | | $ | 162 | | | $ | 3,106 | | | $ | 3,268 | |
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| | For the Six Months Ended January 29, 2022 | | For the Six Months Ended January 30, 2021 |
(in thousands) | | Available-for-sale Securities | | Foreign Currency Translation | | Total | | Available-for-sale Securities | | Foreign Currency Translation | | Total |
Beginning balance | | $ | (290) | | | $ | 3,701 | | | $ | 3,411 | | | $ | 1,213 | | | $ | 1,515 | | | $ | 2,728 | |
Other comprehensive income (loss) before reclassifications(1) | | (969) | | | (1,451) | | | (2,420) | | | (937) | | |