sfix-10q_20171028.htm

 

 

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 October 28, 2017

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, CA

 

94104

(Address of Principal Executive Offices)

 

(Zip Code)

 

(415) 882-7765

(Registrant’s Telephone Number, Including Area Code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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. (Check one):

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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 December 15, 2017, the number of outstanding shares of the registrant’s Class A common stock, par value $0.00002 per share, was 9,175,557, and the number of outstanding shares of the registrant’s Class B common stock, par value $0.00002 per share, was 87,748,954.

 

 

 

 


 

STITCH FIX, INC.

TABLE OF CONTENTS

 

 

 

Page No.

PART I. FINANCIAL INFORMATION

  

 

Item 1. Financial Statements:

  

3

Condensed Consolidated Balance Sheets as of October 28, 2017 and July 29, 2017

  

3

Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended October 28, 2017 and October 29, 2016

  

4

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity for the three months ended October 28, 2017

 

5

Condensed Consolidated Statements of Cash Flows for the three months ended October 28, 2017 and October 29, 2016

  

6

Notes to the Condensed Consolidated Financial Statements

  

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

14

Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

21

Item 4. Controls and Procedures

  

21

 

 

 

PART II. OTHER INFORMATION

  

23

Item 1. Legal Proceedings

  

23

Item 1A. Risk Factors

  

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

39

Item 3. Defaults Upon Senior Securities

  

40

Item 4. Mine Safety Disclosures

  

40

Item 5. Other Information

  

40

Item 6. Exhibits

  

40

Signatures

  

42

 

In this Quarterly Report on Form 10-Q, “we,” “our,” “us,” “Stitch Fix,” and “the Company” refer to Stitch Fix, Inc. The Stitch Fix logo and other trade names, trademarks or service marks of Stitch Fix are the property of Stitch Fix, Inc. This Quarterly Report on Form 10-Q contains references to our trademarks and to trademarks belonging to other entities. Trade names, trademarks and service marks of other companies appearing in this Quarterly Report on Form 10-Q are the property of their respective holders. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Stitch Fix, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

October 28,

 

 

July 29,

 

 

 

2017

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

131,096

 

 

$

110,608

 

Restricted cash

 

 

250

 

 

 

250

 

Inventory, net

 

 

87,576

 

 

 

67,592

 

Prepaid expenses and other current assets

 

 

16,584

 

 

 

19,312

 

Total current assets

 

 

235,506

 

 

 

197,762

 

Property and equipment, net

 

 

29,545

 

 

 

26,733

 

Deferred tax assets

 

 

21,357

 

 

 

19,991

 

Restricted cash, net of current portion

 

 

9,100

 

 

 

9,100

 

Other long-term assets

 

 

3,203

 

 

 

3,619

 

Total assets

 

$

298,711

 

 

$

257,205

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

58,519

 

 

$

44,238

 

Accrued liabilities

 

 

64,315

 

 

 

46,363

 

Preferred stock warrant liability

 

 

17,608

 

 

 

26,679

 

Gift card liability

 

 

5,071

 

 

 

5,190

 

Deferred revenue

 

 

8,813

 

 

 

7,150

 

Other current liabilities

 

 

4,645

 

 

 

4,298

 

Total current liabilities

 

 

158,971

 

 

 

133,918

 

Deferred rent, net of current portion

 

 

11,354

 

 

 

11,781

 

Other long-term liabilities

 

 

7,897

 

 

 

7,423

 

Total liabilities

 

 

178,222

 

 

 

153,122

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

Convertible preferred stock, $0.00002 par value – 60,577,280 shares authorized as of

   October 28, 2017 and July 29, 2017; 59,511,055 shares issued and outstanding as of

   October 28, 2017 and July 29, 2017; aggregate liquidation preference of

   $42,389 as of October 28, 2017 and July 29, 2017

 

 

42,222

 

 

 

42,222

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.00002 par value – 100,000,000 shares authorized as of

   October 28, 2017 and July 29, 2017; 27,026,292 and 26,834,535 shares issued

   and outstanding as of October 28, 2017 and July 29, 2017, respectively

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

29,920

 

 

 

27,002

 

Retained earnings

 

 

48,346

 

 

 

34,858

 

Total stockholders’ equity

 

 

78,267

 

 

 

61,861

 

Total liabilities, convertible preferred stock and stockholders’ equity

 

$

298,711

 

 

$

257,205

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3

 


 

Stitch Fix, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Revenue, net

 

$

295,563

 

 

$

236,004

 

Cost of goods sold

 

 

166,548

 

 

 

125,926

 

Gross profit

 

 

129,015

 

 

 

110,078

 

Selling, general and administrative expenses

 

 

119,471

 

 

 

83,550

 

Operating income

 

 

9,544

 

 

 

26,528

 

Remeasurement of preferred stock warrant liability

 

 

(9,071

)

 

 

1,503

 

Other income, net

 

 

(17

)

 

 

(7

)

Income before income taxes

 

 

18,632

 

 

 

25,032

 

Provision for income taxes

 

 

5,144

 

 

 

11,789

 

Net income and comprehensive income

 

$

13,488

 

 

$

13,243

 

Net income attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

3,915

 

 

$

3,595

 

Diluted

 

$

1,347

 

 

$

4,055

 

Earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

 

$

0.15

 

Diluted

 

$

0.04

 

 

$

0.14

 

Shares used to compute earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

 

26,329,495

 

 

 

24,349,434

 

Diluted

 

 

33,262,082

 

 

 

28,940,058

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4

 


 

Stitch Fix, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity

(Unaudited)

(In thousands, except share amounts)

 

 

 

Convertible

Preferred Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of July 29, 2017

 

 

59,511,055

 

 

$

42,222

 

 

 

 

26,834,535

 

 

$

1

 

 

$

27,002

 

 

$

34,858

 

 

$

61,861

 

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 

 

 

211,236

 

 

 

 

 

 

444

 

 

 

 

 

 

444

 

Repurchase of common stock related to early exercised options

 

 

 

 

 

 

 

 

 

 

 

(19,479

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vesting of early exercised options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

315

 

 

 

 

 

 

315

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,159

 

 

 

 

 

 

2,159

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,488

 

 

 

13,488

 

Balance as of October 28, 2017

 

 

59,511,055

 

 

$

42,222

 

 

 

 

27,026,292

 

 

$

1

 

 

$

29,920

 

 

$

48,346

 

 

$

78,267

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5

 


 

Stitch Fix, Inc.

Condensed Consolidated Statements of Cash Flow

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

13,488

 

 

$

13,243

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

(1,366

)

 

 

(648

)

Remeasurement of preferred stock warrant liability

 

 

(9,071

)

 

 

1,503

 

Inventory reserve

 

 

4,224

 

 

 

1,933

 

Stock-based compensation expense

 

 

2,038

 

 

 

610

 

Depreciation and amortization

 

 

2,270

 

 

 

1,461

 

Loss on disposal of property and equipment

 

 

131

 

 

 

27

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Inventory

 

 

(24,208

)

 

 

(10,142

)

Prepaid expenses and other assets

 

 

4,084

 

 

 

(34

)

Accounts payable

 

 

13,967

 

 

 

7,682

 

Accrued liabilities

 

 

16,942

 

 

 

21,119

 

Deferred revenue

 

 

1,663

 

 

 

2,173

 

Gift card liability

 

 

(119

)

 

 

(48

)

Other liabilities

 

 

748

 

 

 

2,725

 

Net cash provided by operating activities

 

 

24,791

 

 

 

41,604

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,180

)

 

 

(5,478

)

Proceeds from sale of property and equipment

 

 

 

 

 

31

 

Net cash used in investing activities

 

 

(4,180

)

 

 

(5,447

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

444

 

 

 

206

 

Repurchase of common stock related to early exercised options

 

 

(39

)

 

 

 

Payment of deferred offering costs

 

 

(528

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(123

)

 

 

206

 

Net increase in cash and restricted cash

 

 

20,488

 

 

 

36,363

 

Cash and restricted cash at beginning of period

 

 

119,958

 

 

 

101,492

 

Cash and restricted cash at end of period

 

$

140,446

 

 

$

137,855

 

Components of cash and restricted cash

 

 

 

 

 

 

 

 

Cash

 

$

131,096

 

 

$

127,114

 

Restricted cash – current portion

 

 

250

 

 

 

1,391

 

Restricted cash – long-term portion

 

 

9,100

 

 

 

9,350

 

Total cash and restricted cash

 

$

140,446

 

 

$

137,855

 

Supplemental Disclosure

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

 

 

$

8,749

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment included in

   accounts payable and accrued liabilities

 

$

1,022

 

 

$

4,303

 

Capitalized stock-based compensation

 

$

121

 

 

$

22

 

Vesting of early exercised options

 

$

315

 

 

$

229

 

Deferred offering costs included in accounts payable and accrued liabilities

 

$

920

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

 


 

Stitch Fix, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.

Description of Business

Stitch Fix, Inc. (“we,” “our,” “us” or “the Company”) delivers one-to-one personalization to our clients through the combination of data science and human judgment. Our stylists hand select items from a broad selection of merchandise. Stylists pair their own judgment with our analysis of client and merchandise data to provide a personalized shipment of apparel, shoes and accessories suited to each client’s needs. We call each of these unique shipments a Fix. After receiving a Fix, our clients purchase the items they want to keep and return the other items. We were incorporated in Delaware and have operations in the United States.

Initial Public Offering

On November 16, 2017, we completed an initial public offering (“IPO”), in which we issued and sold 8,000,000 shares of our Class A common stock at a public offering price of $15.00 per share. We received approximately $110.4 million in net proceeds after deducting $6.2 million of underwriting discounts and $3.4 million in offering costs. Upon the closing of the IPO, all of the outstanding shares of common stock were reclassified into Class B common stock, all of the outstanding shares of convertible preferred stock automatically converted into 59,511,055 shares of Class B common stock and all of the outstanding preferred stock warrants were automatically exercised for 1,066,225 shares of Class B common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or preferred stock warrants outstanding. In December 2017, we issued an additional 1,175,557 shares of Class A common stock at a price of $15.00 per share following the underwriters’ exercise of their option to purchase additional shares and received $16.7 million in net proceeds after deducting underwriting discounts and expenses. The condensed consolidated financial statements as of October 28, 2017, including share and per share amounts, do not give effect to the sale of shares of Class A common stock in connection with the IPO, conversion of the convertible preferred stock, or the exercise of the preferred stock warrants, as the IPO was completed subsequent to October 28, 2017.

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 ended July 29, 2017 (“2017”) and July 28, 2018 (“2018”) each 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 following the requirements of the Securities and Exchange Commission (“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 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 28, 2018 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 and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended July 29, 2017 contained in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on November 17, 2017.

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, common stock valuation, remeasurement of preferred stock warrant liability, revenue recognition and income taxes. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.

7

 


 

Restricted Cash

Restricted cash represents cash balances held in segregated accounts collateralizing letters of credit for our leased properties as of October 28, 2017 and July 29, 2017.

Deferred Offering Costs

Deferred offering costs, which consist of direct incremental legal, consulting, banking and accounting fees relating to the IPO are capitalized and will be offset against proceeds upon the consummation of the IPO, which became effective on November 16, 2017 (See Note 1). As of October 28, 2017 and July 29, 2017, there were $3,327,000 and $2,387,000 capitalized deferred offering costs in prepaid expenses and other current assets on the condensed consolidated balance sheet, respectively.

Concentration of Credit Risks

The majority of our cash is held by three 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. No client accounted for greater than 10% of total revenue, net for the three months ended October 28, 2017 and October 29, 2016.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, which amended the existing FASB Accounting Standards Codification. ASU 2014-09 establishes a principle for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services and also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. We expect to adopt this standard in our first quarter of fiscal 2019. We are in the process of evaluating the impact this standard will have on our consolidated financial statements. As part of our process, we are still assessing the adoption methodology, which allows the amendment to be applied either retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial application.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02, which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. We expect to adopt this standard in our first quarter of fiscal 2020. We are currently evaluating the impact that this standard will have on our consolidated financial statements but we expect that it will result in a substantial increase in our long-term assets and liabilities.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718), which simplifies the accounting and reporting of share-based payment transactions, including adjustments to how excess tax benefits and payments for tax withholdings should be classified and provides the election to eliminate the estimate for forfeitures. Upon adoption, ASU 2016-09 requires that excess tax benefits for share-based payments be recorded as a reduction of income tax expense and reflected within operating cash flows, rather than being recorded within equity and reflected within financing cash flows. ASU 2016-09 also permits the repurchase of more of an employee’s shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments made on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s statement of cash flows, and provides an accounting policy election to account for forfeitures as they occur. We adopted this standard in our first quarter of 2018. We made an accounting policy election to continue to estimate forfeitures. All excess tax benefits and tax deficiencies related to share-based payment awards are now reflected in the consolidated statement of operations and comprehensive income as a component of the provision for income taxes on a prospective basis, whereas they were recognized in equity under the previous guidance. Additionally, excess tax benefits related to share-based payment awards are now reflected in operating activities, along with other income tax related cash flows, in our consolidated statement of cash flows on a prospective basis. The adoption did not have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740), which amends existing guidance on the recognition of current and deferred income tax impacts for intra-entity asset transfers other than inventory. This amendment should be applied on a modified retrospective basis. We expect to adopt this standard in fiscal 2019 and are currently evaluating the impact that it will have on our consolidated financial statements.

8

 


 

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, accounts payable, accrued liabilities and the preferred stock warrant liability. At October 28, 2017 and July 29, 2017, the carrying values of cash, accounts payable and accrued liabilities approximated fair value due to their short-term maturities.

 

The following table sets forth our financial instruments that were measured at fair value on a recurring basis based on the fair value hierarchy (in thousands):

 

 

 

October 28, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability

 

$

 

 

$

 

 

$

17,608

 

 

$

17,608

 

Total

 

$

 

 

$

 

 

$

17,608

 

 

$

17,608

 

 

 

 

July 29, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock warrant liability

 

$

 

 

$

 

 

$

26,679

 

 

$

26,679

 

Total

 

$

 

 

$

 

 

$

26,679

 

 

$

26,679

 

 

There were no transfers of financial assets or liabilities into or out of Level 1, Level 2 or Level 3 for the three months ended October 28, 2017 and October 29, 2016. The key assumptions used in the Black-Scholes option-pricing model for the valuation of the preferred stock warrant liability upon remeasurement were as follows:

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Expected term (in years)

 

 

2.0

 

 

 

5.3

 

Fair value of underlying shares

 

$

16.53

 

 

$

8.89

 

Volatility

 

 

39.2

%

 

 

40.2

%

Risk free interest rate

 

 

1.6

%

 

 

1.4

%

Dividend yield

 

 

%

 

 

%

 

Generally, increases or decreases in the fair value of the underlying convertible preferred stock would result in a directionally similar impact in the fair value measurement of the associated warrant liability.

9

 


 

The following table sets forth a summary of the changes in the fair value of the preferred stock warrant liability (in thousands):

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

Balance at July 29, 2017

 

$

26,679

 

Change in fair value

 

 

(9,071

)

Ending Balance at October 28, 2017

 

$

17,608

 

 

4.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

October 28, 2017

 

 

July 29, 2017

 

Inventory purchases

 

$

30,193

 

 

$

11,186

 

Advertising

 

 

11,242

 

 

 

9,995

 

Compensation and related benefits

 

 

4,848

 

 

 

9,632

 

Sales taxes

 

 

4,506

 

 

 

3,702

 

Shipping and freight

 

 

4,083

 

 

 

3,390

 

Other

 

 

9,443

 

 

 

8,458

 

Total accrued liabilities

 

$

64,315

 

 

$

46,363

 

 

5.

Preferred Stock Warrant Liability

In 2012 and 2013, in connection with financing arrangements, we issued warrants to purchase shares of our convertible preferred stock. For one of the financing arrangements, we issued warrants to purchase 375,230 shares of Series Seed convertible preferred stock at an exercise price of $0.1066 per share and 66,265 shares of Series A convertible preferred stock at an exercise price of $0.22636 per share. For the second financing arrangement, we issued warrants for the purchase of, at the warrant holder’s option, either (a) 624,730 shares of Series A-1 convertible preferred stock at an exercise price of $0.2401 per share or (b) 308,315 shares of Series B convertible preferred stock at an exercise price of $0.486516 per share. Prior to their automatic exercise in connection with the IPO, as described below, the warrants were exercisable for and expired ten years from the date of issuance. The warrants remained outstanding as of October 28, 2017 and July 29, 2017.

In November 2017, these warrants were automatically exercised in connection with the completion of the IPO and the preferred stock warrant liability was reclassed to stockholder’s equity.

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.

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.

10

 


 

7.

Stock-Based Compensation

2011 Equity Incentive Plan

In 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provided for the granting of stock-based awards to employees, including directors and non-employees under terms and provisions established by the board of directors. The number of shares authorized for issuance under the 2011 Plan was 23,223,374 as of October 28, 2017, of which 1,726,679 were available for grant.

The 2011 Plan allowed for the grant incentive stock options or nonqualified stock options as well as restricted stock units, restricted stock and stock appreciation rights. As of October 28, 2017, we had only granted incentive and nonqualified stock options under the 2011 Plan. Employee stock options generally vest 25% on the first anniversary of the grant date with the remaining vesting ratably over the next three years. Options generally expire after 10 years. Stock option activity under the 2011 Plan is as follows:

 

 

 

 

 

 

 

Options Outstanding

 

 

 

Shares

Available

for Grant

 

 

Number of

Options

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life (in Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

Balance – July 29, 2017

 

 

2,023,424

 

 

 

10,218,912

 

 

$

7.12

 

 

 

8.53

 

 

$

166,670

 

Repurchased

 

 

19,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Granted

 

 

(867,865

)

 

 

867,865

 

 

$

23.43

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

(211,236

)

 

$

2.10

 

 

 

 

 

 

 

 

 

Cancelled

 

 

551,641

 

 

 

(551,641

)

 

$

4.01

 

 

 

 

 

 

 

 

 

Balance – October 28, 2017

 

 

1,726,679

 

 

 

10,323,900

 

 

$

8.76

 

 

 

8.45

 

 

$

87,531

 

 

The aggregate intrinsic value is the difference between the current fair value of the underlying common stock and the exercise price for in-the-money stock options.

Stock-Based Compensation Expense

Stock-based compensation expense for options granted to employees was $2,038,000 and $552,000 for the three months ended October 28, 2017 and October 29, 2016, respectively. Stock-based compensation expense for options granted to non-employees was none for the three months ended October 28, 2017 and $58,000 for the three months ended October 29, 2016. Stock-based compensation expense is included in selling, general and administrative expenses in our condensed consolidated statements of operations.

The weighted-average grant date fair value of options granted during the three months ended October 28, 2017 and October 29, 2016 was $7.55 per share and $2.53 per share, respectively. As of October 28, 2017, the total unrecognized compensation expense related to unvested options, net of estimated forfeitures, was $36.8 million which we expect to recognize over an estimated weighted average period of 3.6 years.

We record stock-based compensation of stock options granted to employees by estimating the fair value of stock-based awards using the Black-Scholes option pricing model and amortizing the fair value of the stock-based awards granted over the applicable vesting period of the awards on a straight-line basis. The fair value of stock options granted to employees was estimated at the grant date using the Black- Scholes option-pricing model with the following assumptions:

 

 

 

Three Months Ended

 

 

October 28, 2017

 

October 29, 2016

Expected term (in years)

 

5.6 – 6.5

 

5.4 – 6.5

Volatility

 

42.1 – 43.5%

 

44.4 – 46.0%

Risk free interest rate

 

1.9 – 2.0%

 

1.3 – 1.5%

Dividend yield

 

—  %

 

—  %

 

11

 


 

In July 2017, we granted options to certain members of our executive management team to purchase an aggregate of 1,097,463 shares of common stock which had both a service-based condition and a liquidity event-related performance condition. Such options vest ratably over the 24 month period following the fourth anniversary of the grant date, subject to an IPO occurring within 12 months of the grant date and the option holder’s continuous service through each vesting date. The aggregate grant-date fair value of such option awards was $14.0 million. As of October 28, 2017, achievement of the performance condition was not deemed probable and accordingly, no expense was recognized related to these option awards through October 28, 2017.

The achievement of the performance condition was deemed probable upon consummation of the IPO in November 2017 at which time we recorded a cumulative catch-up stock based compensation expense related to periods prior to the IPO.

8.

Income Taxes

The following table summarizes our effective tax rate from income for the periods presented:

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Income before income taxes

 

$

18,632

 

 

$

25,032

 

Provisions for income taxes

 

 

5,144

 

 

 

11,789

 

Effective tax rate

 

 

27.6

%

 

 

47.1

%

 

We are subject to income taxes in the United States. Our effective tax rate for the three months ended October 28, 2017, differs from the federal statutory income tax rate primarily due to certain nondeductible expenses, effect of state taxes, partially offset by the benefit from the nonincludible gain on remeasurement of the preferred stock warrant liability.

Our effective tax rate for the three months ended October 29, 2016 differs from the federal statutory income tax rate primarily due to certain nondeductible expenses, effect of state taxes, and the nondeductible loss on remeasurement of the preferred stock warrant liability.  

9.

Earnings (Loss) Per Share Attributable to Common Stockholders  

A reconciliation of the numerator and denominator used in the calculation of the basic and diluted earnings per share attributable to common stockholders is as follows (in thousands except share and per share amounts):

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

13,488

 

 

$

13,243

 

Less: noncumulative dividends to preferred stockholders

 

 

(635

)

 

 

(635

)

Less: undistributed earnings to participating securities

 

 

(8,938

)

 

 

(9,013

)

Net income attributable to common stockholders - basic

 

 

3,915

 

 

 

3,595

 

Less: change in fair value of preferred stock warrant liability

   (net of tax)

 

 

(9,071

)

 

 

 

Add: adjustments to undistributed earnings to participating securities

 

 

6,503

 

 

 

460

 

Net income attributable to common stockholders - diluted

 

 

1,347

 

 

 

4,055

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Weighted-average shares of common stock - basic

 

 

26,329,495

 

 

 

24,349,434

 

Effect of dilutive stock options

 

 

5,876,621

 

 

 

4,590,624

 

Effect of potentially dilutive preferred stock warrants

 

 

1,055,966

 

 

 

 

Weighted-average shares of common stock - diluted

 

 

33,262,082

 

 

 

28,940,058

 

Earnings per share attributable to common stockholders:

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

 

$

0.15

 

Diluted

 

$

0.04

 

 

$

0.14

 

 

12

 


 

The following common stock equivalents were excluded from the computation of diluted earnings (loss) per share for the periods presented because including them would have been antidilutive:

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Convertible preferred stock

 

 

59,511,055

 

 

 

59,511,055

 

Preferred stock warrants

 

 

 

 

 

1,066,225

 

Stock options to purchase common stock

 

 

954,706

 

 

 

712,925

 

Total

 

 

60,465,761

 

 

 

61,290,205

 

 

10.

Subsequent Events

Initial Public Offering

On November 16, 2017, we completed an IPO in which we issued and sold 8,000,000 shares of our Class A common stock at a public offering price of $15.00 per share. We received approximately $110.4 million in net proceeds after deducting $6.2 million of underwriting discounts and $3.4 million in offering costs. Upon the closing of the IPO, all of our outstanding shares of common stock were reclassified into Class B common stock, all of our outstanding shares of convertible preferred stock automatically converted into 59,511,055 shares of Class B common stock and our outstanding preferred stock warrants were automatically exercised into 1,066,225 shares of Class B common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or preferred stock warrants outstanding.

In December 2017, we issued an additional 1,175,557 shares of Class A common stock at a price of $15.00 per share following the underwriters’ exercise of their option to purchase additional shares and received proceeds of $16.7 million, net of underwriting discounts and commissions.

2017 Incentive Plan

Our board of directors and stockholders adopted our 2017 Incentive Plan (the “2017 Plan”) in November 2017. The 2017 Plan became effective upon, and no stock award was permitted to be granted prior to, the execution and delivery of the underwriting agreement related to the IPO. Our 2017 Plan provides for the grant of incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other forms of stock awards to employees, directors and consultants, including employees and consultants of our affiliates.  

13

 


 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited financial statements and related notes thereto for the year ended July 29, 2017, included in the final prospectus for our initial public offering (“IPO”), dated as of November 16, 2017, and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) on November 17, 2017 (File No. 333-221014) (the “Final Prospectus”). We use a 52 or 53 week fiscal year, with our fiscal year ending each year on the Saturday that is closest to July 31 of that year. Each fiscal year generally consists of four 13-week fiscal quarters, with each fiscal quarter ending on the Saturday that is closest to the last day of the last month of the quarter. The years ended July 30, 2016 and July 29, 2017 included 52 weeks of operations. Throughout this Quarterly Report, all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report, including without limitation, statements in the following discussion and analysis of our financial condition and results of operations regarding our projected financial position and results, [estimated quantities and net present values of reserves], business strategy, plans and objectives of our management for future operations are forward-looking statements. In some cases, forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain known and unknown risks, uncertainties and other factors that could cause our actual results, performance or achievements to differ materially from any future results, performances or achievements anticipated, expressed or implied by the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q in Part II, Item 1A — “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

Overview

Stitch Fix is transforming the way people find what they love, one client at a time and one Fix at a time.

We are reinventing the shopping experience by delivering one-to-one personalization to our clients through the combination of data science and human judgment. This combination drives a better client experience and a more powerful business model than either element could deliver independently. Our stylists hand select items from a broad selection of merchandise. Stylists pair their own judgment with our analysis of client and merchandise data to provide a personalized shipment of apparel, shoes and accessories suited to each client’s needs. We call each of these unique shipments a Fix. Our clients may choose to schedule automatic shipments that arrive every two to three weeks or on a monthly, bi-monthly or quarterly cadence, or schedule a Fix on-demand. Clients can increase or decrease their desired Fix frequency at any time, and can select the exact date by which they want to receive a Fix. After receiving a Fix, our clients purchase the items they want to keep and return the other items. For each Fix, we charge clients a $20 styling fee that is credited towards the merchandise purchased. If the client chooses to keep all items in a Fix, she receives a 25% discount on her entire purchase.

The very human experience that we deliver is powered by data science. Our data science capabilities consist of our rich data set and our proprietary algorithms, which fuel our business by enhancing the client experience and driving business model efficiencies. The vast majority of our client data is provided directly and explicitly by our clients, rather than inferred, scraped or obtained from other sources. We also gather extensive merchandise data, such as inseam, pocket shape, silhouette and fit. This large and growing data set provides the foundation for proprietary algorithms that we use throughout our business, including those that predict purchase behavior, forecast demand, optimize inventory and enable us to design new apparel. We believe our data science capabilities give us a significant competitive advantage, and as our data set grows, our algorithms become more powerful.

14

 


 

Our stylists leverage our data science through a custom-built, web-based styling application that provides recommendations from our broad selection of merchandise. Our stylists then apply their judgment to select what they believe to be the best items for each Fix. Our stylists provide a personal touch, offer styling advice and context to each item selected, and help us develop long-term relationships with our clients. Our stylists are U.S.-based employees, most of whom work part-time and remotely.

We maintain a broad range of product offerings to serve our clients. We offer both merchandise sourced from brand partners and our own Exclusive Brands. We use our data to inform the merchandise we buy and develop that will best suit our clients.

We reach clients through a combination of word of mouth, referrals, advertising and other marketing efforts. We invest in marketing with the goal of attracting new clients, improving engagement with current clients and expanding our client closet share over time. As we continue to expand our marketing efforts, we plan to remain disciplined in measuring the return on advertising spend.

We believe our success in serving clients has resulted in our rapid and profitable growth. We have achieved positive cash flows from operations on an annual basis since 2014, while continuing to make meaningful investments to drive growth. For the three months ended October 28, 2017 and October 29, 2016, we reported $295.6 million and $236.0 million in net revenue, respectively, representing year-over-year growth of 25.2%. As of October 28, 2017 and October 29, 2016, we had 2,396,000 active clients and 1,847,000 active clients, respectively, representing year-over-year growth of 29.7%.

Net income for the three months ended October 28, 2017 and October 29, 2016 was $13.5 million and $13.2 million, respectively. Included in net income for the three months ended October 28, 2017 is a $9.1 million gain on remeasurement of our preferred stock warrant liability compared to a $1.5 million loss on remeasurement of our preferred stock warrant liability included in net income for the comparable prior year period. In the second quarter of 2018, we will record a gain on remeasurement of our preferred stock warrant liability of $1.6 million to reflect the change in fair value to the date of our IPO. Our preferred stock warrants were automatically exercised into shares of Class B common stock upon the completion of our IPO and, accordingly, there will be no remeasurement gain or loss related to our preferred stock warrants subsequent to the IPO date of November 16, 2017.  

Key Metrics

We report our financial results in accordance with generally accepted accounting principles in the United States, or GAAP. However, management believes that certain non-GAAP financial measures provide investors of our financial information with additional useful information in evaluating our performance. Management believes that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income (loss) provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. Management also believes that adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, and that such supplemental measure facilitates comparisons between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies. For instance, we do not exclude stock-based compensation expense from adjusted EBITDA or non-GAAP net income (loss). Stock-based compensation is an important part of how we attract and retain our employees, and we consider it to be a real cost of running the business.

Our non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include:

 

our non-GAAP net income and adjusted EBITDA exclude compensation expense that we recognized related to certain stock sales by current and former employees;

 

our non-GAAP net income and adjusted EBITDA exclude the remeasurement of preferred stock warrant liability, which is a non-cash expense incurred in the periods prior to the completion of our initial public offering;

 

adjusted EBITDA also excludes the recurring, non-cash expenses of depreciation and amortization of property and equipment and, although these are non-cash expenses, the assets being depreciated and amortized may have to be replaced in the future;

 

adjusted EBITDA does not reflect our tax provision that reduces cash available to us; and

 

free cash flow does not represent the total residual cash flow available for discretionary purposes and does not reflect our future contractual commitments.

15

 


 

Adjusted EBITDA

Adjusted EBITDA is net income (loss) excluding other (income) expense, net, provision for income taxes, depreciation and amortization, the remeasurement of preferred stock warrant liability and, when present, compensation expense related to certain stock sales by current and former employees. The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to adjusted EBITDA for each of the periods presented:

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Adjusted EBITDA reconciliation:

 

 

 

 

 

 

 

 

Net income

 

$

13,488

 

 

$

13,243

 

Add (deduct):

 

 

 

 

 

 

 

 

Other income, net

 

 

(17

)

 

 

(7

)

Provision for income taxes

 

 

5,144

 

 

 

11,789

 

Depreciation and amortization

 

 

2,270

 

 

 

1,461

 

Remeasurement of preferred stock warrant liability

 

 

(9,071

)

 

 

1,503

 

Adjusted EBITDA

 

$

11,814

 

 

$

27,989

 

 

Non-GAAP Net Income (Loss)

Non-GAAP net income (loss) is net income (loss) excluding the remeasurement of preferred stock warrant liability and, when present, compensation expense related to certain stock sales by current and former employees, and their related tax impacts, if any. The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to non-GAAP net income (loss) for each of the periods presented:

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Non-GAAP net income (loss) reconciliation:

 

 

 

 

 

 

 

 

Net income

 

$

13,488

 

 

$

13,243

 

Add (deduct):

 

 

 

 

 

 

 

 

Remeasurement of preferred stock warrant liability

 

 

(9,071

)

 

 

1,503

 

Non-GAAP net income

 

$

4,417

 

 

$

14,746

 

 

Free Cash Flow

Free cash flow is cash flow from operations reduced by purchases of property and equipment which is included in cash flow from investing activities. The following table presents a reconciliation of cash flows from operating activities, the most comparable GAAP financial measure, to free cash flow for each of the periods presented:

 

 

 

Three Months Ended

 

 

 

October 28, 2017

 

 

October 29, 2016

 

Free cash flow reconciliation:

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

24,791

 

 

$

41,604

 

Deduct:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(4,180

)

 

 

(5,478

)

Free cash flow

 

$

20,611

 

 

$

36,126

 

Cash flows from investing activities

 

$

(4,180

)

 

$

(5,447

)

Cash flows from financing activities

 

$

(123

)

 

$

206

 

 

16

 


 

Active Clients

We believe that the number of active clients is a key indicator of our growth and the overall health of our business. We define an active client as a client who checked out a Fix in the preceding 12-month period, measured as of the last date of that period. A client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We had 2,396,000 and 1,847,000 active clients as of October 28, 2017 and October 29, 2016, respectively, representing year-over-year growth of 29.7%.

Factors Affecting Our Performance

Client Acquisition and Engagement

To grow our business, we must continue to acquire clients and successfully engage them. We believe that implementing broad-based marketing strategies that increase our brand awareness has the potential to strengthen Stitch Fix as a national consumer brand, help us acquire new clients and drive revenue growth. As our business has achieved a greater scale and we are able to support a large and growing client base, we have increased our investments in marketing to take advantage of more marketing channels to profitably acquire clients. For example, we recently significantly increased our advertising spend, from $15.3 million in the three-month period ended October 29, 2016 to $28.2 million in the three-month period ended October 28, 2017, to support the growth of our business. We expect to continue to make significant marketing investments to grow our business. We currently utilize both digital and offline channels to attract new visitors to our website or mobile app and subsequently convert them into clients. Our current marketing efforts include client referrals, affiliate programs, partnerships, display advertising, television, print, radio, video, content, direct mail, social media, email, mobile “push” communications, search engine optimization and keyword search campaigns.

To successfully acquire clients and increase engagement, we must also continue to improve the diversity of our offering. These efforts may include broadening our brand partnerships and expanding into new categories, product types, price points and geographies.

Investment in our Operations and Infrastructure

To grow our client base and enhance our offering, we will incur additional expenses. We intend to leverage our data science and deep understanding of our clients’ needs to inform investments in operations and infrastructure. We anticipate that our expenses will increase as we continue to hire additional personnel and further advance our technological and data science capabilities. Moreover, we intend to make capital investments in our inventory, fulfillment centers and office space and logistics infrastructure as we launch new categories, expand internationally and drive operating efficiencies. We expect to increase our spending on these investments in the future and cannot be certain that these efforts will grow our client base or be cost-effective. However, we believe these strategies will yield positive returns in the long term.

Inventory Management

We leverage our data science to buy and manage our inventory, including merchandise assortment and fulfillment center optimization. To ensure sufficient availability of merchandise, we generally enter into purchase orders well in advance and frequently before apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. We incur inventory write-offs and changes in inventory reserves that impact our gross margins. Because our merchandise assortment directly correlates to client success, we may at times optimize our inventory to prioritize long-term client success over short-term gross margin impact. Moreover, our inventory investments will fluctuate with the needs of our business. For example, entering new categories or adding new fulfillment centers will require additional investments in inventory.

Merchandise Mix

We offer apparel, shoes and accessories across categories, brands, product types and price points. We currently serve our clients in the following categories: Women’s, Petite, Maternity, Men’s and Plus. We also carry a mix of third-party branded merchandise, including premium brands, and our own Exclusive Brands. We also offer a wide variety of product types, including denim, dresses, blouses, skirts, shoes, jewelry and handbags. We sell merchandise across a broad range of price points and may further broaden our price point offerings in the future.

While changes in our merchandise mix have not caused significant fluctuations in our gross margin to date, categories, brands, product types and price points do have a range of margin profiles. For example, our Exclusive Brands have generally contributed higher margin, and shoes have generally contributed lower margin. Shifts in merchandise mix driven by client demand may result in fluctuations in our gross margin from period to period.

17

 


 

Components of Results of Operations

Revenue

We generate revenue from the sale of merchandise. We charge a $20 nonrefundable upfront fee, referred to as a “styling fee,” that is applied against any merchandise purchased in the Fix. We deduct discounts, sales tax and estimated refunds to arrive at net revenue, which we refer to as revenue throughout report. We expect our revenue to increase in absolute dollars as we grow our business, although our revenue growth rate may continue to slow in future periods.

Cost of Goods Sold

Cost of goods sold consists of the costs of merchandise, expenses for shipping to and from clients and inbound freight, inventory write-offs and changes in our inventory reserve, payment processing fees and packaging materials costs. We expect our cost of goods sold to fluctuate as a percentage of revenue primarily due to how we manage our inventory and merchandise mix. Our classification of cost of goods sold may vary from other companies in our industry and may not be comparable.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of compensation and benefits costs, including stock-based compensation expense, for our employees including our stylist, fulfillment center operations, data analytics, merchandising, engineering, client experience, marketing and corporate personnel. Selling, general and administrative expenses also include marketing and advertising costs, third-party logistics costs, facility costs for our fulfillment centers and offices, professional service fees, information technology costs and depreciation and amortization expense. We expect our selling, general and administrative expenses to increase in absolute dollars and to fluctuate as a percentage of revenue due to the anticipated growth of our business, increased marketing investments and additional costs associated with becoming a public company. Our classification of selling, general and administrative expenses may vary from other companies in our industry and may not be comparable.

Remeasurement of Preferred Stock Warrant Liability

We estimate the fair value of the preferred stock warrant liability at the end of each reporting period and recognize changes in the fair value through our statement of operations. In connection with our initial public offering, all warrants were automatically exercised for no consideration, so we will not have preferred stock warrant liability in future periods.

Provision for Income Taxes

Our provision for income taxes consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions and the valuation allowance against deferred tax assets, as applicable.

Results of Operations

Comparison of the Three Months Ended October 28, 2017 and October 29, 2016

The following table sets forth our results of operations for the periods indicated:

 

 

 

Three Months Ended

 

 

$

 

 

%

 

 

 

October 28, 2017

 

 

October 29, 2016

 

 

Change

 

 

Change

 

Revenue, net

 

$

295,563

 

 

$

236,004

 

 

$

59,559

 

 

 

25.2

%

Cost of goods sold

 

 

166,548

 

 

 

125,926

 

 

 

40,622

 

 

 

32.3

%

Gross profit

 

 

129,015

 

 

 

110,078

 

 

 

18,937

 

 

 

17.2

%

Selling, general and administrative expenses

 

 

119,471

 

 

 

83,550

 

 

 

35,921

 

 

 

43.0

%

Operating income

 

 

9,544

 

 

 

26,528

 

 

 

(16,984

)

 

 

(64.0

)%

Remeasurement of preferred stock warrant liability

 

 

(9,071

)

 

 

1,503

 

 

 

(10,574

)

 

 

(703.5

)%

Other income, net

 

 

(17

)

 

 

(7

)

 

 

(10

)

 

 

142.9

%