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Stitch Fix, Inc. (NASDAQ: SFIX) Q4 2018 Earnings Conference Call of October 1, 2018 at 5:00 pm Eastern Time
managerial staff
David Pearce – Head, Strategic Finance and IR
Katrina Lake – Founder and CEO
Paul Yee – Chief Financial Officer
Mike Smith – COO
Analysts
Chris Merwin – Goldman Sachs
Douglas Anmuth – JP Morgan
Mark Mahaney – RBC Capital Markets
Erinn Murphy – Piper Jaffray
Ryan Domyancic – William Blair
Ross Sandler – Barclays
Youssef Squali – SunTrust
Ike Boruchow – Wells Fargo
Edward Yruma – KeyBanc Capital Markets
Operator
Have a good day everyone. Welcome to the Stitch Fix Q4 2018 earnings conference call. Today's lecture is being recorded.
For the moment, I would like to give the floor to Mr. David Pearce. Please go ahead, sir.
David Pearce
Thank you for being here today to discuss the results of our fourth quarter and full fiscal year 2018. We are also joined by Katrina Lake, founder and CEO of Stitch Fix; Paul Yee, our chief financial officer; and Mike Smith, our COO. We have published the complete financial results for the fourth quarter and the full year in our letter to shareholders in the investor relations section of our website, investors.stitchfix.com. A link to the webcast of today's teleconference is also available on our site.
We also wish to remind everyone that we will make forward-looking statements about this call involving risks and uncertainties. Actual results could differ materially from those contemplated in our forward-looking statements. Reported results should not be taken as an indication of future performance. Please refer to our filings with the SEC for an analysis of factors that could cause our results to differ. Please also note that the forward-looking statements contained in this call are based on information we have as of today. We disclaim any obligation to update forward-looking statements, except as required by law.
During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are presented in the letter to shareholders on our IR website. These non-GAAP measures are not intended to replace our GAAP results. Finally, this call is fully broadcast on our IR website. A retransmission of this call will be available soon on the website.
I would now like to make the call to Katrina.
Lake Katrina
Thank you, David and thank you for joining us. After the market closed today, we published our quarterly shareholder newsletter containing more details about our results, which I encourage you to read. I will take a moment to highlight our fourth quarter and full year results and discuss how we are sticking to our strategic roadmap.
In the fourth quarter, we achieved net income at the upper end of our forecast range and adjusted EBITDA that exceeded our guidance for the quarter. Our active customer base grew to 2.7 million on July 28, 2018, an increase of 548,000 and 25% from the previous year. We generated net revenues of $ 318 million, which represents a 23% increase over the previous year. In the fourth quarter, we generated net income of $ 18.3 million and Adjusted EBITDA of $ 11.1 million.
These results demonstrate our ongoing drive to generate disciplined growth while investing significantly in future categories and capabilities.
Stitch Fix transforms the way people find what they like, one client at a time and one fix at a time. We are proud of what we achieved in our first year as a public company and the momentum we created at the start of fiscal 2019. We are pleased with the growth prospects that we have offer to us.
Over the past year, we generated net sales of more than $ 1.2 billion, up 26% over the previous year, net earnings of approximately $ 45 million, and EBITDA adjusted by $ 54 million. During this period, we also expanded our addressable total market with the launch of Stitch Fix Kids in July and introduced new innovations in our core services through such efforts as Style Pass and Extras, which adds flexibility and allows us to further customize our offer.
The capital efficiency of our model allowed us to make these investments while generating free cash flow of $ 56 million for the 2018 fiscal year, with a cash balance of about $ 300 million. USD and no debt.
In recent quarters, we have discussed three growth pillars that form the basis of our strategic roadmap. First, develop relationships with existing customers; secondly, to acquire new customers; and third, the growth of our addressable market. Today, I would like to spend a moment on the first and third pillars with the fourth quarter updates.
First, I will be sharing a Style Pass update, a service we rolled out in December 2017. It offers select customers unlimited style for an annual fee of $ 49. To date, Style Pass has outperformed the results of our pilot project as we continue our disciplined rollout of the program. Beginning in the fourth quarter of 2018, the number of Style Pass customers increased by almost 60% over the third quarter of 2018. In addition, we found that Style Pass customers spend more on patches, receive patches more frequently, and post satisfaction rates higher than those observed. Non-Style Pass customers.
Services and new initiatives such as Style Pass add flexibility to our offering, enabling us to increase customer satisfaction and serve as a powerful catalyst for customer reengagement. During our IPO, we shared that from the beginning of fiscal 2014 to the end of fiscal 2017, more than 650,000 unique customers had been re-engaged by verifying a solution after more than 16 weeks of # 39; inactivity. By updating this figure to include fiscal year 2018, we have successfully rehired more than one million unique customers.
In the fourth quarter, we also expanded our address market with the launch of Stitch Fix Kids. The offer allows us to effectively serve the entire household and includes both market brands and exclusive brands. To date, our existing customers have shown a keen interest in the program. Although children still represent only a small part of our business today, we look forward to providing you with updates in the coming quarters.
For 2019, we are pleased to announce our UK launch project by the end of the year. The successful launches of our previous categories in Men, Plus and Kids give us confidence and allow us to take advantage of this international growth opportunity. Based on our consumer research and planning, we believe that our customization capabilities will resonate with UK customers and that we can be a powerful partner of international brands with which we do not yet work.
Our engineering and data science capabilities will allow us to establish a localized presence to effectively serve UK customers with the same highly personalized approach that we have used in the United States. We hope to share more information and updates on this initiative in the coming quarters.
I will now turn to Mike, who will explain some of the highlights of the quarter's operations.
Mike Smith
Thank you Katrina and good morning to everyone who joined us today. I would like to take a moment to provide an update on our fourth quarter marketing and learning initiatives, as well as to discuss some of the ways we started using Style Shuffle data during the quarter.
In the fourth quarter, one of the key marketing objectives was to promote TV-related channel learning and to better determine channel efficiency through a series of incrementality tests. To do this, we temporarily captured our national television campaign for 10 weeks to measure the effectiveness of the channels. Thanks to these tests, we learned that television was a more efficient acquisition channel than the one we had previously modeled, measured in cost per acquisition. The test also allows us to evaluate and quantify the interaction between television and other advertising channels, which, in our opinion, will help us better determine the optimal ratio of advertising spending between television and television. other channels in our portfolio over the next few quarters.
Last quarter, we shared the details of Style Shuffle, an interactive game for mobile and the Internet that includes a set of Stitch Fix products. This game allows us to collect much more customer preference data on every garment we could have before the game was introduced and allows us to improve our customization capabilities. We started leveraging Style Shuffle data to improve the overall customer experience and generate business results. In the fourth quarter, we began incorporating data into our woman's stylist / client matching algorithm, which resulted in an increase in the average order value compared to the previous algorithm. Shuffle Style data not only improves results for the customer, but also helps us better serve those who have not played yet. In the fourth quarter of '18, we used the data to increase revenue per customer and engagement of active and non-active customers, which highlights the network effects of our data and the broad applicability of these Style Shuffle data.
I will now give the floor to Paul, who will explain our financial performance and our perspectives.
Paul Yee
Thank you, Mike In December, in our first call for results as a public company, we shared the commitment to grow revenue responsibly and profitably in order to reinvest available cash flow and improve the bottom line. customer experience and expand our target market.
Looking back in 2018, I am proud to say that we have kept that promise. We have expanded our client base and generated strong revenue growth. We generated adjusted EBITDA and positive free cash flow and invested in talent, marketing and new categories from a long-term perspective. For 2019, we have committed to propel this cycle of growth and reinvestment.
Our letter to shareholders provides details on our financial results for the fourth quarter and the full year, but here are some highlights. In the fourth quarter of year 18, in addition to additional revenue growth of more than 20%, we expanded our gross margin, our Adjusted EBITDA margin, our EPS and our free cash flow. one exercise to another. These results reflect the cumulative benefits of the investments we have made in recent years in our Company-wide efforts to improve the efficiency, size and profitability of working capital.
Net income for the quarter was $ 318 million, up 23% from a year earlier. Our performance is mainly related to the increase in the number of active clients, women and men. Child launches at the end of the quarter did not significantly contribute to the number of clients or net income.
The gross margin was 44.4%, our strongest quarterly margin for the year 2018 and 90 basis points higher in Q4 of the previous year. This improvement is attributable to the decrease in inventory reserves, the reduction in customs clearance costs and the reduction of losses, all the initiatives taken to strengthen our activities and the management of our inventory. We also continue to stagger in the fourth quarter, where gross margins improved, from 2 to 3 warehouses, and increased initial margins or IMUs in all commodity sub-classes.
We also leveraged selling, administrative and other overhead expenses. Other selling, advertising and other advertising expenses, other than advertising, accounted for 32.8% of net sales for the quarter, an improvement of 140 basis points over the same period last year. last year. The variable workforce generated 90 basis points, reflecting the efficiency of warehouses made possible by system improvements. The balance is due to the leverage effect of non-salary expenses such as professional fees and facilities. These efficiencies have more than offset our investments in our technological talent. We have finished the exercise with 180 engineers and 100 computer experts.
We also benefited from our advertising spend this quarter, achieving an improvement of 10 basis points over the previous year, as we continue to invest responsibly in our marketing programs. Adjusted EBITDA for the quarter was $ 11.1 million or 3.5% of net revenues. This has adjusted both the top of our forecast range, under the effect of higher net revenues, higher gross margin and variable labor saving. .
Fourth quarter net income was $ 18.3 million and diluted earnings per share were $ 0.18. These results reflect a $ 9.4 million credit to the provision for income taxes in the income statement, primarily due to stock-based compensation deductions associated with shareholder activities during the quarter. We also realized tax benefits related to R & D credits and certain other deductions.
Finally, we generated free cash flow of $ 55.6 million in fiscal 2018. We ended the year with capital expenditures representing less than 1.4% of net revenues. . With respect to working capital, we continued to close the gap between our inventory growth and our revenue growth as year-end inventories increased by 26% year-over-year, including investments in categories like Kids. For the year, we turned stocks 6 times based on the cost of goods.
For fiscal 2019, I will now provide our forecasts for the first quarter and for the full year. For the first quarter of year 19, we expect net sales of between $ 354 and $ 360 million, which is 20% to 22% growth over the previous year. We expect adjusted EBITDA of between $ 5 million and $ 9 million, or an adjusted EBITDA margin of 1.4% to 2.5%. For the 2019 fiscal year, we expect net revenues of between $ 1.47 and $ 1.53 billion, a growth of 20% to 25% over the previous year. We expect adjusted EBITDA of between $ 20 million and $ 40 million, or an adjusted EBITDA margin of 1.4% to 2.6%.
Finally, we expect operating expenses to represent approximately 2% of net sales for the year, as we invest more in warehouse automation, headquarters space and proprietary software. Please note that our revenue forecast does not include any impact of the launch in the UK, which should take place at the end of the fiscal year. Our Adjusted EBITDA Forecast, on the other hand, reflects the investments in people and infrastructure we make to support our international expansion. These investments, combined with the launch of our Children category, account for the vast majority of the 12-month adjusted EBITDA decrease. Finally, please note that 2019 is a 53-week exercise and that the fourth quarter of year 19 will include 14 weeks. Our forecasts for 2019 reflect the impact of this extra week.
With that, we are ready to answer your questions. Operator, I will give you the floor.
Question and answer session
Operator
Thank you. [Operator Instructions] Chris Merwin and Goldman Sachs hear us first today.
Chris Merwin
D & # 39; agreement! Great. Thank you very much. Just two questions for me. I think that in the last quarter, we have witnessed an acceleration in the growth of the activity. What are the reasons? How are you with the improvement of customer retention? And I was wondering if you could just talk about the underlying trends, retention for women's quote and how we should think about the extra contribution of Men's Plus and children in the context of your exercise 19 orientation? And then I have a follow-up. Thank you.
Lake Katrina
Awesome. Thank you Chris. With regard to underlying trends and retention, I think there are two data points I would like to point out. The first is that we have seen very high revenues per client this quarter, reflecting the combined efforts of retention and re-engagement. We also shared a new re-engagement number, updating our number to 1 million clients who were re-engaged between 2014 and 2018. And I think both show the strength we're seeing on the retention side. we are excited about.
And I guess, in terms of business contribution, I can ask Paul to take that.
Paul Yee
Sure. As a result, our revenue growth forecast of 20% to 25% for 2019 reflects some of the trends seen in 2018, which is a continued strength in the core business of women, as we have added flexibility to our offerings. by adding Style Pass to further engage our customers. often as well as scaling up our new businesses. Thus, Men celebrated his birthday this year, just as Kids is standing out from the crowd. So we are seeing a kind of momentum on both fronts, and that is reflected in the forecast for the full year.
Chris Merwin
I have it. And in terms of gross margin, gross margin in particular, it's clear that the quarter was very strong. And I think you've called, I guess, to reduce inventory reserves and liquidation expenses. In fiscal year 19, should we consider continued improvement in gross margin as you continue to ramp up Men's and Plus activities and become more active? What is envisioned in the advice you gave? Thank you.
Paul Yee
Sure. Our implicit forecasts for 2019 therefore reflect the same dynamic that we experienced in 2018. We therefore, underlying our activities, the dilutive effects of new categories. Thus, Men's, Plus, children today have a lower gross margin than women, since they are still at the very beginning of the process. But what was exciting in the fourth quarter and one that we are focusing on again is that we will try to mitigate these impacts on three fronts. The first is that our investment management capabilities are really at work and that our ability to properly purchase the products initially and to contact the right customer has really helped us reduce the authorities over time. Thus, these tools, such as tools, allow our merchants to buy and size images correctly, then algorithms also derive tools from our stylist to match the product to the customer.
Secondly, we are really excited to be able to reduce your turnover from one year to the next and one quarter to the other, which is an important goal for us. and a capacity that we continue to develop over the course of the year.
And finally, as we invest in a new category, we see the magnitude. Thus, the second consecutive year of Men allowed us to increase this margin for the activity, both from one quarter to the next and from one year to the next. We had a third warehouse for Men's in the last quarter, which should reduce shipping costs. All these dynamics really help us to mitigate the impacts of new categories. And again, we are excited about the extension of TAM. And the dynamics of gross margins are reflected in the forecasts we have given for 2019.
Operator
We now go to Douglas Anmuth with JP Morgan.
Douglas Anmuth
Perfect, thank you for taking the question. I had a couple. First, I hope you will be able to provide a little more clarity on Q4 revenue growth and the right trajectory compared to what we saw in the third quarter, or 29% versus 23%. %. Secondly, about Style Pass, Kat, you talked about some of the early indicators, at least qualitatively. Just curious if that changes or accelerates in any way the way you deploy that and extend it to more users. Finally, just in third place in terms of marketing, I know that television revenues are better than expected. More color than you can add on the type of marketing plan around when you enter "19"? Thank you – your fiscal '19. Thank you.
Lake Katrina
Right. I think in terms of overall revenue growth, we really focus on the whole year. And so, what we shared I think at this stage, even very consistent I think for some years around 20% to 25%. And we're looking at it on an annual basis and we're really proud of the consistency we've demonstrated this year and, I think, somehow reflects the way we think about next year. We are also committed to this profitable growth and the balance between profitability and growth. And I think the results reflect that.
Regarding your question about Style Pass, we were very excited about the first results. I think these are customers who behave really, very well. They contribute a lot to the company. And I think that right now, we have the impression that the program is being deployed to the appropriate audience. But over time, we find that our business is improving, that we can cope with all the tides, we have the optimism that there could be a greater opportunity for Style Pass. But for the moment, I think we're really excited about what we've seen with the rollout and we're really excited, as it has been a way to continue to really keep the customers excited for a long time.
Finally, on marketing. I think what we learned from the TV test is more about the actual performance of TV in terms of customer distribution and its impact on other channels. And I think the way of thinking about this is just that we are really adjusting, understanding how all of our different marketing channels contribute to our portfolio. The diversification of marketing is a subject we have been talking about for a long time. And we always knew that television was an important part of it, but I think after having passed this test and really understood in a more granular way the impact of television, I think we have the feeling that it is a very important part of the portfolio and you will continue to do it. we see investing there.
Operator
From Barclays, we'll go to Ross Sandler. Mr. Sandler, you may be mute. Hearing no response, we will move on to Mark Mahaney with RBC Capital Markets.
Mark Mahaney
D & # 39; agreement! Great. Three questions One, just a follow up on this issue of Doug's advertising. Is the idea then that you have already turned your back on this TV commercial? I know you talked about having it turned off. Has it ever returned? Secondly, in terms of reducing the wait times for children that you mentioned, has this problem been solved or must it be solved? And maybe the last question about the estimates for the 19's, maybe this one is for you, Paul. The indications suggest a potential for acceleration during the year, but you do not include a contribution from the United Kingdom. Basically, what would make that happen? What would it be that the top of the growth range is higher throughout the year than the beginning of the year or is it just the week? additional? Thank you very much.
Lake Katrina
Thank you Mark. I will begin with the question of advertising and then, probably, Mike and Paul will answer the other two questions. I have the easiest question. The answer is that we – we will come back – we have turned on the television. Television is an important part of this portfolio. It is easy enough to reignite. And the good news is that it is now even more measurable. We understand the contribution even more deeply and you will see it on the air. Mike will talk about children.
Mike Smith
So Mark, we have improved every week our ability to meet a higher demand than expected in the children's sector. We focused specifically on older children and girls, and we were able to look at the inventory to improve the situation week after week. So the process is under way, but we are about to regain the normal wait times we expected when we started our business.
Paul Yee
And Mark, regarding your question on the forecast for fiscal year 19, the growth rate of 20% to 25% reflects the impact of the 53-week period, which equates to about 2 points of growth for the year. But this also reflects a whole series of initiatives that we have presented from the point of view of products and marketing. And we believe that the rate of growth is a healthy growth rate that allows us to somehow provide an exceptional customer experience, while maintaining profitability and investing in geographic areas such as the United Kingdom. So the ability to reach the top of the range is really determining the impact of these initiatives. And we will definitely give you an update; We are in two months and we will inform you of upcoming calls.
Mark Mahaney
I am sorry. A particular reason why you chose the UK as your first international launch compared to other markets?
Lake Katrina
Yes. In the UK, I think we are very excited and optimistic for many reasons. And maybe taking a step back generally, internationally, I think, overall, it's an opportunity that people have a lot of access to and we've spent a lot of time looking at, and I think at the international level, this is an opportunity for us & # 39; re excited about.
Ensuite, en ce qui concerne plus particulièrement le Royaume-Uni, il y a quelques attributs du consommateur britannique qui sont, à mon avis, particulièrement intéressants. L’un, c’est que c’est déjà un public très dense en e-commerce de vêtements. Et oui, les clients là-bas, les clients là-bas dépensent plus en ligne et dans l’habillement qu’aux États-Unis. C’est donc un élément que nous aimons bien. C’est aussi un public qui est un peu moins axé sur les rabais que les États-Unis. Il n’ya tout simplement pas autant de rabais ici. Et donc, c'est aussi un attribut utile. Enfin, je pense que, du point de vue de l'adéquation du marché des produits, de la personnalisation, de la possibilité de faire des emplettes personnelles en remplacement des autres acteurs de l'e-commerce, il s'agit d'un modèle très différencié au Royaume-Uni et je pense que les consommateurs sont vraiment excités. sur. Et donc, je pense que le fait que nous puissions adopter une approche vraiment personnalisée et localisée sur le marché nous offre une plus grande possibilité de réussite sur ce marché. Et je pense que le marché nous enthousiasme vraiment pour toutes ces raisons.
Opérateur
Et de Piper Jaffray, nous allons passer à Erinn Murphy.
Erinn Murphy
Quelques questions pour moi. Je reconnais que vous avez éteint la télévision pendant la majeure partie du trimestre. Mais si vous deviez savoir ce que vous savez maintenant sur son efficacité, si cela avait été tout au long du trimestre, comme ce fut peut-être le cas par le passé, à quoi ressemblerait l'ajout net à la clientèle? Y a-t-il un moyen de revenir en arrière? Et puis, je suppose que la deuxième question, en ce qui concerne les dépenses de publicité, a quand même augmenté en glissement annuel, bien qu’elle n’ait pas de télévision? Peut-être partager certains des supports ou types d’autres domaines que vous dépensez dans le budget publicitaire?
Lac Katrina
Oui, je peux les prendre. Je veux dire, je pense que sur la première question sur la télévision et ses détails, malheureusement, nous n’avons pas ces données à partager. Je pense que le test de la télévision concerne moins le volume du trimestre, qu’il s’agissait vraiment de comprendre et d’apprendre l’impact. Et de ce point de vue, c’était vraiment une réussite et il était très important pour nous d’effectuer ce test afin de pouvoir utiliser la télévision avec confiance dans les trimestres à venir et de vraiment comprendre en quoi elle contribuait à notre activité. Et donc, je pense que c’est vraiment ce que nous recherchons dans ce test.
En ce qui concerne cette dernière question, nos dépenses de publicité ont augmenté par rapport à l’année précédente, mais en réalité, la croissance de notre clientèle a également atteint 25% d’ajouts nets du côté client. Nous sommes donc très heureux des résultats que nous constatons du côté de la publicité et du marketing. cela continue d'être vrai. Et encore une fois, une philosophie, comme celle-ci, n’est pas une société dans laquelle nous jetons tout le carburant dans l’évier de la cuisine et le feu du côté du marketing et de la publicité. Nous fonctionnons vraiment dans un esprit de retour sur investissement. Nous cherchons à rentabiliser les dépenses en marketing. Et cela continue à être à travers ce trimestre. Et certainement, les connaissances acquises au cours de ce trimestre nous aident à nous assurer que cela est encore plus précis et plus vrai dans les trimestres à venir.
Erinn Murphy
D & # 39; agreement. Je vous remercie. Et puis, juste deux autres, si je peux. Un, je suppose pour Paul. En ce qui concerne les prévisions pour le premier trimestre, vous vous attendez à une décélération un peu plus forte, même si vous aurez un trimestre complet de l’impact de Kids. Je suppose que je suis curieux de savoir si vous êtes conservateur sur la façon dont vous envisagez d’inviter Kids à monter en puissance ou si cela reflète plus une décélération de Women’s? Et puis, une question plus vaste, ma dernière question, Katrina, concerne uniquement le commerce vocal. Je suis curieux de savoir quel rôle vous envisagez de jouer et de garder, et c’est un domaine d’investissement, c’est que vous envisagez de diriger l’équipe? Je vous remercie.
Paul Yee
Je vais prendre la question Q1 puis céder la parole à Kat. Ainsi, nos prévisions de croissance du chiffre d’affaires pour le premier trimestre de 20% à 22% s’inscrivent dans les prévisions plus larges pour l’année complète, qui prévoient une croissance de 20% à 25%. Nous avons fait une série de choix en termes d’investissements dans nos activités principales ainsi que dans de nouvelles catégories. Et il y aura des coûts entre les trimestres, mais rien n’est particulier à appeler au premier trimestre par rapport au reste de l’année. Nous pensons que c’est un bon taux de croissance qui, à mon avis, joue à long terme.
Lac Katrina
Et Erinn, merci pour votre question du côté de la voix. Je pense que le commerce de la voix se situe dans la catégorie de nombreuses autres technologies que nous observons et que nous surveillons certainement. Mais, je pense qu’aujourd’hui, bon nombre des applications de commerce vocal que vous avez vues traitent vraiment de la proposition de valeur de type bon marché, rapide et pratique. Et je pense que ce que nous avons découvert plus généralement, c’est que, avec les vêtements, il ya beaucoup plus de nuances, il ya beaucoup plus à comprendre. Et que cette proposition de valeur bon marché, rapide et pratique n’est vraiment pas suffisante pour résoudre le véritable problème de la découverte, à savoir comment trouver des vêtements qui me conviennent, qui correspondent à mon style et à mon occasion. Nous examinons donc bon nombre des technologies adoptées sur le marché ou qui ne l’ont pas encore été. Et c'est certainement l'un d'entre eux. Mais je pense que lorsque nous réfléchissons aux outils les plus puissants qui aident les personnes à découvrir les choses qu’elles aiment, ce n’est pas un outil que nous considérons comme le principal outil de la boîte à outils.
Erinn Murphy
Awesome. Thanks guys.
Paul Yee
Merci Erinn.
Opérateur
Nous allons passer à Ryan Domyancic avec William Blair.
Ryan Domyancic
Bonjour et merci d'avoir pris ma question. Alors, en ce qui concerne le lancement de Kids, avez-vous commencé à mettre des fonds de publicité payée significatifs derrière cette nouvelle verticale ou dirigez-vous des campagnes de marketing vers cette clientèle? Je pense à environ la moitié de votre clientèle, ils ont actuellement des enfants? Et puis, si vous n’avez pas encore commencé à dépenser de l’argent publicitaire, quand comptez-vous affecter plus d’argent à cette nouvelle tendance en 2019?
Mike Smith
C'est Mike. Ryan, je vais prendre ça. Nous n'avons pas mis beaucoup de publicité payée contre cela. Comme vous l'avez mentionné, un client sur deux de notre clientèle existante a des enfants, qui comprennent Stitch Fix et sont enthousiastes à propos de Stitch Fix. Il n’est donc pas facile de les convertir, mais c’est évidemment moins cher de développer de manière organique notre clientèle existante. Nous examinons simplement le secteur des enfants, essayant de le développer comme dans toutes nos entreprises, de la bonne manière, ce qui signifie que, du point de vue de la rentabilité, nous devons équilibrer croissance et rentabilité afin de fournir une expérience client exceptionnelle. Nous ne savons donc pas quand nous allons simplement payer beaucoup. Mais, je pense que nous sommes à l’aise avec les plans de croissance pour les enfants et vraiment enthousiasmés par la demande organique que nous constatons chez les enfants.
Opérateur
Et nous entendrons maintenant Ross Sandler de Barclays.
Ross Sandler
Awesome. Pouvez-vous m'entendre cette fois?
Mike Smith
Nous pouvons.
Ross Sandler
D'accord, d'accord. Juste deux questions. D'abord sur la cadence de la marge brute. So, you guys have talked about how new categories take a while to kind of build up to where the core Women’s business is? Do you feel like the mix shift to Plus and Men’s is fully cycled through at this point, and we should be in a position to see steady gross margin improvement into the future kind of permanently? And given that the UK is more of a geography rollout, not a new category. And you guys have a lot of history with the existing Women’s category, how will the UK rollout impact gross margin, if at all, once that gets up and running? And then, the second question is just back to the retention kind of net adds earlier questions. So, if we will get client net adds quarter-on-quarter, they are only up about 54,000 from last quarter. That cadence was a little bit lower than the previous trend line. So, is that mostly just cutting back the TV program or is there a different mix of one and dones from these new categories that are growing fast? Any other color on the net adds would be helpful. Thank you.
Paul Yee
So, Ross, I’ll take the gross margin question. So, looking ahead to 2019, we do expect the penetration of our newer categories, namely Men’s, Plus and now Kids to be increasing at a higher rate than it was in 2018. And therefore, there will be a mix shift impact, resulting from the higher penetration. That being said, we’re really excited to see sort of the strength of men’s in particular of the scale we’re getting from that as well as offset some of that dilution from various cost efficiencies and other cogs focused areas that we’ve shown in Q4 frankly. So, certainly, we’ll see sort of those dynamics playing out.
Specific to the UK, we do expect the gross margins to be lower early on, just like Men’s and so forth. There is going to be a smaller scale business obviously early on. And so, our buys will be smaller, but also be investing in inventory upfront to make sure that we kind of really are able to serve our new clients well, and that will probably translate to higher clearance. So we have a roadmap here as we launch new businesses or new geographies, but we certainly derive our benefits over time as scale them later along the way.
Katrina Lake
And then Ross, I can take your question on retention. I think, we’re looking at kind of year-over-year rate and we saw active clients grow 25% year-over-year. We’re really happy with kind of the foundational fundamental that really helped us to achieve that higher end of our guidance range. We don’t have any of — we wouldn’t say that this is a quality issue of like that we have more one and dones. I mean, if anything, I think this is a business where we’re really focusing on client quality and really focusing on ROI and now TV and how clients are demonstrating the value over the long term. And then more that we’re able to learn through things like the TV incrementality tests, the more we’re able to hone that and really improve that over time. And so, I think is just — these are — our top-line revenue is consistent with where we share that we would be and consistent with where we plan to go in the future. And I think the underlying fundamentals are ones that we’re happy with.
Operator
We’ll move on to Youssef Squali with SunTrust.
Youssef Squali
One clarification, couple of questions. So, as you expand into the UK, do we know whether you are going to be going with Women’s first or with the entire offering? That’s the first clarification, please.
Katrina Lake
Thanks for the question. We’re planning to go with Women’s and Men’s. And so, Kids is still a newer business for us. So, Women’s and Men’s will be part of the offering.
Youssef Squali
And would that include Plus as well or just Women’s and Men’s?
Katrina Lake
I think we’re a little bit early I think to share the really specific size — the really specifics around kind of which sizes we’re going to cover. There are also sizing differences between the UK and the U.S. And so, I think we’ll probably wait to share more details around that when we get closer to market.
Youssef Squali
And then, I know you don’t break out growth by segment. But could you just help us maybe gauge the health of growth in core Women either on year-on-year basis or whichever, just to kind of get a sense of how your oldest business continues to perform? That’s one question we often get. And then, lastly, just broadly speaking on the competitive landscape, maybe you can just update us is there any changes that you’ve seen out there that may made you change your mind either on the TAM or whatever? Amazon obviously made a lot of noise last week with scale. Just for example, as you take that as an example, how much of is that to your — to the growth in the business over time? Je vous remercie.
Mike Smith
Yes. This is Mike. I’ll take the core Women’s question. The core metrics of the business have been healthy. And I can give a couple of categories stories I think that kind of help demonstrate that. We’ve mentioned in past quarters that we were expanding our offering in premium brands and lower price point brands. And we’re seeing increased satisfaction scores and success rates in both of those offerings. The other thing in premium brands that I continue to be excited about is this idea of evolving the conversations that we have with our premium brands. For example, over 50% of our product now in that category is exclusive to us. And I would say, all of our conversations with contemporary brands and premium brands is around doing special product for us. So, the business is very healthy and the underlying metrics are healthy. But, we do believe there’s a TAM opportunity to continue to expand in Women’s and believe that our investments in adding assortment, as well as probably using some marketing against that will help realize that TAM expansion.
Katrina Lake
And then, to answer your question on the competition, I mean, apparel has always been a pretty competitive space, and I don’t think that’s changed too much in the seven or so years that we’ve been doing the business. In particular, I think a lot of the innovation that we’ve seen over the years has really been around this kind of cheap and fast value proposition. And we really haven’t seen anybody address the really hard part of shopping for apparel, which is the discovery element, which jeans are going to be right for me, which dress is going to be right for the occasion. And those are still things that we don’t see a ton of — we don’t see a lot of other businesses that are really approaching it with a similar solution that’s truly personalized and really incorporating human element.
Specific to your question on Amazon, look, I mean, we obviously watch Amazon closely. They also had 8% of their total market share. And so, if you think about kind of how much market opportunity there is out there, 92% of that opportunity is out there, a lot of it is in stores, a lot of it is in a pretty disperse set of retailers. And we really think it’s differentiated to be focused on how do we help people find what they love and really applying it truly human element to this very nuance category. And so, we think we of course keep an eye on what’s going on competitively. We are very aware that it’s competitive industry. But at the same time, we have a lot of confidence in the differentiation of an approach that is a very human personalized approach.
Operator
[Operator Instructions] We’ll move next to Ike Boruchow with Wells Fargo.
Ike Boruchow
Hi, everyone. Thanks for taking my question. Two questions. First, on the UK investment. Maybe can you explain a bit what’s behind the additional spend that you’re making this year? And then, just putting some of the commentary together. Is it a fair assumption to say that all else equal without this UK push, EBITDA dollars this year would actually be higher year-over-year?
Paul Yee
Hi, Ike. This is Paul. I’ll take questions. So, as is the case with a lot of our investments, it flows to the P&L. So, with our investment in the UK and launch by the end of this year, a lot of that will be on talent. We know as a personalization company, we need to have an ability to understand our clients well. So, we are building a buying team in country and also we’ll be ultimately building a styling organization over there. So, to sort of build out that capability next year, we’ll be hiring ahead of the launch and making sure we have the right assortment and capabilities to do a very successful launch.
In terms of your question about broader EBITDA impact. As I noted in my comments, a lot of our year-over-year decline in EBITDA, as implied in my guidance, is due to the launch of the UK and to a lesser extent Kids. I would also note that as we look at marketing, we’ve really seen that’s an opportunity for us to drive returns. And in 2017, we spent 7% of revenue; we increased that to 8% in 2018; and we do see an opportunity to step further and 2019. Not only do we have a diverse set of channels in which we can communicate. Our offerings are also with Deirdre Findlay, our new CMO on board, really trying to think about brand, and how do we continue to build that love with both our existing and future clients. So, we see an opportunity to expand our marketing spend that’s also sort of embedded in that EBITDA guidance for 2019.
Ike Boruchow
Got it. And just a quick follow-up. So, sticking with the UK, how do you think about, I guess, higher level, how do you think about scaling that market relative to the U.S. market? Because I believe the UK is much smaller apparel market and online penetration rates are lower than in the U.S.? So, again, I’m just trying — I’m just curious how you kind of frame the ultimate opportunity there versus what you guys are working on here in the U.S.?
Katrina Lake
Yes. I mean, we’ve been really — I think, the data to us is really optimistic in terms of the size of the market. It’s a market where there’s 50 million people. Yes, that’s smaller than the U.S. But it’s a really sizable opportunity I think relative to some of the other markets out there. And actually, what we found is that there’s a lot more — there’s a much higher penetration of e-commerce shopping in the UK than in the U.S. I think it’s a smaller country, shipping times are faster, people are much more used to shopping apparel in an e-commerce format than they are in the U.S. And so, I think both of those give us some really some positive signals that the UK is a really right kind of opportunity for us.
Operator
And we’ll hear now from Edward Yruma with KeyBanc Capital Markets.
Edward Yruma
Hey, guys. Thanks for taking my question. I guess, first on the UK spend. How should we think about the shape of the UK spend through next fiscal year? Is it backend weighted? And then, I guess second, you used to give some detailed core performance data in terms of that Women’s core Women’s spend. I guess, when you look at that core female that maybe 3 or 4 years customer efficiency, I guess kind of how has her spending changed? And are you starting to see some better results from things like extras that can include — that can increase that take rate? Je vous remercie.
Katrina Lake
I’ll probably let Paul start out and I’ll jump in on the cohort.
Paul Yee
Yes. I think directionally, given that a good portion of our investments to the UK is talent, it will be sort of increasing over the course of the year. We’ve hired a general manager and a head of buying. And they’ll be starting to fill up the team, now that we’ve publicly announced the launch. So you will see that ramp up over the course of the year.
Katrina Lake
Yes. And the question on cohorts. I think, when you’re looking at 3 to 4 years out, I mean firstly, we are operating on an ROI mentality when we’re thinking about marketing. And so, we’re really looking for quick payback. And as cohorts get to those 3, 4, 5, 6-year marks, to continue to add value to the business that’s all really incremental to the spend — kind of initial spend there, and that’s something that is really important to the business. I think revenue per client is probably one good place to look at to really think about how we’ve been able to generate more value from those clients. Actually, it definitely has something to do with that. Style Pass which we shared some enrollment numbers are kind of enrollment expectations around and being able to see a lot of in on Style Pass. And those are clients that are spending more that are higher value clients. I think, these are all initiatives that really help us certainly in those first few years but definitely in those years 3, 4 and 5, as well as we’re kind of looking for things, continue to be excited about what we see there?
Edward Yruma
Awesome. And one final, if I may. I know that you’ve had some favorability from a shrink perspective. Is that tied to kind of how you would have initially thought the new categories would have progressed or is that against the core Women’s business? And I guess as we think about all the new categories and then doing I guess the geography, how do we think about your opportunity to kind of continue to move that shrink number lower? Je vous remercie.
Mike Smith
Sure. I’ll take that. So, yes, we’ve seen shrink increase over the past 1.5 years. And while as we’ve seen that across the board as we’d expanded in new category and mainly Men’s and female brands, we have seen a correlation there. And I think you’re seeing results of our sort of conservative efforts across the organization to be pretty tenacious on managing that through engineering work to make sure we value the credit cards as well as helping our customer service agents upfront identify clients are likely fraudulent. So, as we expand to new geographies as well as new categories, rest assured we see this as a capability. We need to continue to bolster and strengthen. But again, I think Q4 is really exciting to kind of see sort of the results of our efforts today.
Operator
And with that I’d like to turn things back to Katrina Lake, Founder and CEO.
Katrina Lake
Awesome. Thank you again for joining us today. We look forward to seeing you on the road and keeping you updated on our performance.
Operator
And that will conclude today’s conference. Again, thank you all for joining us.
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