Stitch Fix(US:SFIX)2024-03-05 21:25PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations and comprehensive loss, stockholders' equity, and cash flow, along with detailed notes explaining significant accounting policies, fair value measurements, credit facilities, and restructuring activities Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric | January 27, 2024 (in thousands) | July 29, 2023 (in thousands) | | :-------------------------------- | :------------------------------- | :----------------------------- | | Total Assets | $538,316 | $614,478 | | Total Liabilities | $325,045 | $367,168 | | Total Stockholders' Equity | $213,271 | $247,310 | | Cash and Cash Equivalents | $227,503 | $239,437 | | Inventory, net | $126,033 | $130,548 | Condensed Consolidated Statements of Operations and Comprehensive Loss This section outlines the company's revenues, expenses, and net loss over specific reporting periods | Metric | For the Three Months Ended Jan 27, 2024 (in thousands) | For the Three Months Ended Jan 28, 2023 (in thousands) | YoY Change (%) | | :------------------------------------------ | :----------------------------------------------------- | :----------------------------------------------------- | :------------- | | Revenue, net | $330,402 | $400,622 | -17.5% | | Net Loss from Continuing Operations | $(34,956) | $(63,444) | -44.9% | | Basic Loss per Share | $(0.29) | $(0.56) | -48.2% | | Gross Margin | 43.4% | 40.9% | +2.5 pp | | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | YoY Change (%) | | :------------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | :------------- | | Revenue, net | $695,187 | $844,363 | -17.7% | | Net Loss from Continuing Operations | $(61,127) | $(111,596) | -45.2% | | Basic Loss per Share | $(0.52) | $(0.99) | -47.5% | | Gross Margin | 43.5% | 41.6% | +1.9 pp | Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity, including stock-based compensation and net loss, over specific periods | Metric | January 27, 2024 (in thousands) | July 29, 2023 (in thousands) | | :-------------------------------- | :------------------------------- | :----------------------------- | | Total Stockholders' Equity | $213,271 | $247,310 | | Stock-based compensation (6 months) | $46,448 | $59,286 | | Net loss (6 months) | $(71,014) | $(121,489) | Condensed Consolidated Statements of Cash Flow This section reports the company's cash inflows and outflows from operating, investing, and financing activities | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :---------------------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Net cash provided by (used in) operating activities from continuing operations | $(1,736) | $20,783 | | Net cash provided by investing activities from continuing operations | $8,564 | $3,699 | | Net cash used in financing activities from continuing operations | $(8,730) | $(6,757) | | Cash and cash equivalents at end of period | $227,503 | $138,979 | Notes to the Condensed Consolidated Financial Statements This section provides detailed explanatory notes to the condensed consolidated financial statements 1. Description of Business Stitch Fix, Inc. delivers personalization through data science and human judgment, offering 'Fix' (personalized shipments) and 'Freestyle' (direct purchases from personalized assortments) - Stitch Fix, Inc. delivers personalization through data science and human judgment, offering 'Fix' (personalized shipments) and 'Freestyle' (direct purchases from personalized assortments)23 - The company ceased operations of its UK business during the first quarter of fiscal 2024, reporting it as a discontinued operation for all periods presented23 2. Summary of Significant Accounting Policies This section outlines the key accounting principles and estimates applied in preparing the financial statements - The fiscal year is a 52-week or 53-week period ending on the Saturday closest to July 31; fiscal 2024 consists of 53 weeks24 - The UK business is reported as a discontinued operation for all periods presented, following its cessation in Q1 fiscal 202427 - Significant estimates are made for inventory, stock-based compensation expense, income taxes, and revenue recognition29 | Metric | January 27, 2024 (in thousands) | July 29, 2023 (in thousands) | | :---------------------- | :------------------------------- | :----------------------------- | | Total Inventory Reserves | $33,500 | $38,700 | - Revenue is recognized when control of promised goods is transferred to the client; for 'Fix' upon acceptance, for 'Freestyle' upon shipment43 | Contractual Liability | January 27, 2024 (in thousands) | July 29, 2023 (in thousands) | | :-------------------- | :------------------------------- | :----------------------------- | | Deferred Revenue | $9,765 | $11,366 | | Gift Card Liability | $11,357 | $10,328 | | Referral Credits | $451 | $362 | - FASB ASUs 2023-07 (Segment Reporting) and 2023-09 (Income Taxes) are effective for fiscal 2025 and 2026, respectively; the company is evaluating their impact5051 3. Fair Value Measurements This section describes how financial instruments are measured at fair value using a three-level hierarchy - Financial instruments, including cash equivalents and investments, are measured at fair value using Level 1 (quoted prices in active markets) or Level 2 (observable inputs) of the fair value hierarchy53 | Category | January 27, 2024 (in thousands) | July 29, 2023 (in thousands) | | :-------------------- | :------------------------------- | :----------------------------- | | Money Market Funds | $127,499 | $80,251 | | U.S. Treasury Securities | $272 | $7,226 | | Corporate Bonds | $2,049 | $10,935 | | Total Fair Value | $129,820 | $98,412 | - Gross unrealized losses on available-for-sale securities were immaterial as of January 27, 2024, and the company intends and has the ability to hold these securities until maturity or recovery56 4. Accrued Liabilities This section details the company's accrued liabilities, including compensation, advertising, and inventory purchases | Category | January 27, 2024 (in thousands) | July 29, 2023 (in thousands) | | :-------------------------- | :------------------------------- | :----------------------------- | | Compensation and related benefits | $11,979 | $12,836 | | Advertising | $13,925 | $6,625 | | Sales taxes | $5,979 | $5,358 | | Shipping and freight | $8,819 | $8,628 | | Accrued accounts payable | $7,445 | $4,058 | | Inventory purchases | $18,760 | $22,684 | | Sales refund reserve | $5,802 | $6,509 | | Other | $2,985 | $3,195 | | Total accrued liabilities | $75,694 | $69,893 | 5. Credit Facility This section describes the company's revolving credit facility, including its terms and current borrowing capacity - On December 4, 2023, the company entered into a new $50.0 million revolving credit facility with Citibank, N.A., maturing on December 4, 2026, replacing a previous agreement60 - As of January 27, 2024, borrowing availability was $50.0 million, with a borrowing capacity of $29.4 million due to outstanding letters of credit, and no outstanding borrowings60 - The company was in compliance with all financial covenants of the 2023 Credit Facility as of January 27, 202463 6. Commitments and Contingencies This section outlines the company's legal commitments and potential liabilities, including ongoing lawsuits - A class action lawsuit was filed on August 26, 2022, alleging violations of federal securities laws regarding the Freestyle offering, and a derivative action was filed on March 17, 2023, alleging similar violations and breach of fiduciary duties65 - Management does not believe these legal actions, if resolved unfavorably, would have a material impact on operating results, financial position, and cash flows64 7. Accumulated Other Comprehensive Income (Loss) This section reports changes in accumulated other comprehensive income (loss), including foreign currency translation adjustments | Metric | January 27, 2024 (in thousands) | January 28, 2023 (in thousands) | | :-------------------------------- | :------------------------------- | :----------------------------- | | Ending Balance AOCI | $(432) | $(1,883) | - During the first quarter of fiscal 2024, $1,145 thousand of historical foreign currency translation losses associated with the UK business were reclassified from AOCI to loss from discontinued operations70 8. Stock-Based Compensation This section details the company's stock-based compensation expense and activity for stock options and restricted stock units | Metric | For the Three Months Ended Jan 27, 2024 (in thousands) | For the Three Months Ended Jan 28, 2023 (in thousands) | | :----------------------------- | :----------------------------------------------------- | :----------------------------------------------------- | | Stock-based compensation expense | $21,065 | $25,262 | | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :----------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Stock-based compensation expense | $40,967 | $56,391 | - As of January 27, 2024, total unrecognized compensation expense related to unvested options and RSUs was $96.5 million, expected to be recognized over an estimated weighted average period of 1.8 years81 | Stock Options Activity | Balance at July 29, 2023 | Granted | Cancelled | Balance at January 27, 2024 | | :--------------------- | :----------------------- | :------ | :-------- | :-------------------------- | | Number of Options | 8,106,110 | 2,450,951 | (545,451) | 10,011,610 | | Weighted Average Exercise Price | $7.06 | $4.00 | $10.18 | $6.14 | | RSU Activity | Unvested at July 29, 2023 | Granted | Vested | Forfeited | Unvested at January 27, 2024 | | :--------------------- | :------------------------ | :------ | :------- | :-------- | :--------------------------- | | Class A Common Stock | 11,455,577 | 12,073,155 | (4,549,301) | (3,790,619) | 15,188,812 | | Weighted Average Grant Date Fair Value | $10.47 | $3.27 | $7.07 | $8.38 | $6.29 | 9. Income Taxes This section provides information on the company's income tax provision and effective tax rates | Metric | For the Three Months Ended Jan 27, 2024 | For the Three Months Ended Jan 28, 2023 | | :------------------------------------------ | :-------------------------------------- | :-------------------------------------- | | Loss from continuing operations before income taxes | $(34,787) | $(63,313) | | Provision for income taxes | $169 | $131 | | Effective tax rate | (0.5)% | (0.2)% | | Metric | For the Six Months Ended Jan 27, 2024 | For the Six Months Ended Jan 28, 2023 | | :------------------------------------------ | :------------------------------------ | :------------------------------------ | | Loss from continuing operations before income taxes | $(60,789) | $(111,278) | | Provision for income taxes | $338 | $318 | | Effective tax rate | (0.6)% | (0.3)% | - The effective tax rate differs from the federal statutory rate primarily due to a full valuation allowance recorded on net federal and state deferred tax assets, with the tax provision mainly comprising state taxes83 10. Net Loss Per Share from Continuing Operations Attributable to Common Stockholders and Common Stock This section presents the calculation of basic and diluted net loss per share from continuing operations | Metric | For the Three Months Ended Jan 27, 2024 | For the Three Months Ended Jan 28, 2023 | | :---------------------------------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Basic Loss per share from continuing operations attributable to common stockholders | $(0.29) | $(0.56) | | Diluted Loss per share from continuing operations attributable to common stockholders | $(0.29) | $(0.56) | | Weighted-average shares of common stock - basic | 119,045,026 | 113,928,081 | | Weighted-average shares of common stock - diluted | 119,045,026 | 113,928,081 | - All potentially dilutive securities (25,200,422 common stock equivalents as of January 27, 2024) were excluded from diluted loss per share computation due to the reported net loss89 - The company has a $150.0 million share repurchase program authorized in January 2022, with $120.0 million remaining as of January 27, 2024; no shares were repurchased during the six months ended January 27, 2024, or January 28, 20239091 11. Restructuring This section details the company's restructuring activities, including charges incurred and future estimates | Metric | For the Three Months Ended Jan 27, 2024 (in thousands) | For the Three Months Ended Jan 28, 2023 (in thousands) | | :-------------------------- | :----------------------------------------------------- | :----------------------------------------------------- | | Total Restructuring Charges | $8,394 | $34,567 | | Severance and employee-related benefits | $3,827 | $15,571 | | Accelerated depreciation | $3,159 | $1,755 | | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :-------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Total Restructuring Charges | $16,344 | $35,494 | | Severance and employee-related benefits | $6,289 | $16,498 | | Accelerated depreciation | $7,337 | $1,755 | - Key restructuring actions include the cessation of operations at the Bethlehem, Pennsylvania fulfillment center (Q1 FY24), the expected cessation of operations at the Dallas, Texas fulfillment center (Q3 FY24), and an organizational realignment in January 2024 that eliminated styling leadership and corporate positions9495 - The company estimates an additional $4-5 million in cash restructuring charges over the next three fiscal quarters and $1-2 million in accelerated depreciation for the Dallas, Texas fulfillment center97 - In January 2024, the stylist compensation model shifted to a part-time only model, with one-time restructuring bonuses for continuing stylists96 12. Discontinued Operations This section reports the financial results and related expenses for the company's discontinued UK business operations - The UK business ceased operations during the first quarter of fiscal 2024 and is presented as a discontinued operation for all periods99 | Metric | For the Three Months Ended Jan 27, 2024 (in thousands) | For the Three Months Ended Jan 28, 2023 (in thousands) | | :------------------------------------------ | :----------------------------------------------------- | :----------------------------------------------------- | | Revenue, net | $824 | $11,496 | | Operating loss | $(1,460) | $(3,427) | | Loss from discontinued operations, net of income taxes | $(568) | $(2,127) | | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :------------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | | Revenue, net | $9,382 | $23,348 | | Operating loss | $(9,527) | $(10,021) | | Loss from discontinued operations, net of income taxes | $(9,887) | $(9,893) | - During the three and six months ended January 27, 2024, $0.5 million and $5.4 million, respectively, of expense was associated with the UK business exit, primarily for severance and early contract termination101 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting revenue declines, active client decreases, restructuring impacts, and liquidity management, while also discussing key financial and operating metrics and factors affecting performance Business Overview This section provides a high-level description of the company's business model and offerings - Stitch Fix offers personalized apparel, shoes, and accessories through 'Fix' (stylist-curated shipments) and 'Freestyle' (direct purchases from personalized online assortments)104 Discontinued Operations This section discusses the financial reporting and impact of the company's discontinued UK business - The UK business ceased operations in Q1 fiscal 2024 and is now reported as a discontinued operation, with all historical information adjusted accordingly105 Financial Overview This section provides a summary of the company's overall financial performance, including key revenue and loss figures | Metric | For the Three Months Ended Jan 27, 2024 (in millions) | For the Three Months Ended Jan 28, 2023 (in millions) | YoY Change (%) | | :------------------------------------------ | :----------------------------------------------------- | :----------------------------------------------------- | :------------- | | Net Revenue | $330.4 | $400.6 | -17.5% | | Net Loss from Continuing Operations | $(35.0) | $(63.4) | -44.9% | | Active Clients | 2,805,000 | 3,377,000 | -16.9% | | Metric | For the Six Months Ended Jan 27, 2024 (in millions) | For the Six Months Ended Jan 28, 2023 (in millions) | YoY Change (%) | | :------------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | :------------- | | Net Revenue | $695.2 | $844.4 | -17.7% | | Net Loss from Continuing Operations | $(61.1) | $(111.6) | -45.2% | | Active Clients | 2,805,000 | 3,377,000 | -16.9% | - The decline in net revenue is primarily due to challenges in acquiring and retaining clients, which are expected to continue negatively impacting revenue throughout fiscal 2024107 Restructuring This section discusses the company's restructuring efforts, including associated charges and future expectations | Metric | For the Three Months Ended Jan 27, 2024 (in millions) | For the Six Months Ended Jan 27, 2024 (in millions) | | :-------------------------- | :----------------------------------------------------- | :---------------------------------------------------- | | Additional Restructuring Charges | $8.4 | $16.3 | - An estimated $4-5 million in additional cash restructuring charges are expected over the next three fiscal quarters110 - The company continues to evaluate fixed and variable operating costs, rationalize its real estate footprint, and optimize marketing strategy to improve profitability112 Key Financial and Operating Metrics This section outlines the key financial and operational performance indicators, including non-GAAP measures like Adjusted EBITDA and Free Cash Flow Non-GAAP Financial Measures This section defines the non-GAAP financial measures used by the company to assess its performance - Adjusted EBITDA is defined as net loss from continuing operations excluding interest income, net other (income) expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, and restructuring and other one-time costs115 - Free Cash Flow is defined as cash flows from operating activities from continuing operations, reduced by purchases of property and equipment116 Adjusted EBITDA This section details the company's Adjusted EBITDA performance, a key non-GAAP profitability metric | Metric | For the Three Months Ended Jan 27, 2024 (in thousands) | For the Three Months Ended Jan 28, 2023 (in thousands) | | :---------------- | :----------------------------------------------------- | :----------------------------------------------------- | | Adjusted EBITDA | $4,447 | $6,281 | | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :---------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Adjusted EBITDA | $13,077 | $4,558 | Free Cash Flow This section presents the company's Free Cash Flow, indicating cash generated after capital expenditures | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :---------------------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Net cash provided by (used in) operating activities from continuing operations | $(1,736) | $20,783 | | Purchases of property and equipment from continuing operations | $(7,427) | $(11,398) | | Free Cash Flow | $(9,163) | $9,385 | Operating Metrics This section provides key operational metrics, including active clients, to assess business performance | Metric | January 27, 2024 (in thousands) | January 28, 2023 (in thousands) | YoY Change (%) | | :------------ | :------------------------------- | :----------------------------- | :------------- | | Active Clients | 2,805 | 3,377 | -16.9% | - The decline in active clients is primarily due to fewer new client additions, attributed to client conversion and retention challenges117 Net Revenue per Active Client This section analyzes the average net revenue generated per active client, a key efficiency metric | Metric | January 27, 2024 | January 28, 2023 | YoY Change (%) | | :-------------------------- | :--------------- | :--------------- | :------------- | | Net Revenue per Active Client | $515 | $530 | -2.8% | Factors Affecting Our Performance This section discusses the various internal and external factors influencing the company's operational and financial performance Macroeconomic Environment This section addresses how broader economic conditions impact the company's business and consumer spending - The company's business and operating results are subject to national and global economic conditions, including inflation, rising interest rates, and recessionary concerns, which impact consumer discretionary spending119 Inventory Management This section discusses the company's approach to inventory management and associated risks - Effective inventory management relies on data science for merchandise assortment and fulfillment center optimization, but the company is vulnerable to demand and pricing shifts, leading to potential write-offs or insufficient inventory120185 - The closure of two U.S. fulfillment centers aims to optimize inventory across a smaller network, but this creates increased risk related to inventory assortment if demand is not accurately predicted186187 Client Acquisition and Engagement This section describes the strategies and challenges related to attracting and retaining clients - Growth depends on cost-effective client acquisition and retention through diverse digital and offline marketing channels, with marketing spend adjusted based on performance121 | Metric | For the Three Months Ended Jan 27, 2024 (in millions) | For the Three Months Ended Jan 28, 2023 (in millions) | | :----------------- | :----------------------------------------------------- | :----------------------------------------------------- | | Advertising Expense | $24.2 | $19.2 | | Metric | For the Six Months Ended Jan 27, 2024 (in millions) | For the Six Months Ended Jan 28, 2023 (in millions) | | :----------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Advertising Expense | $53.9 | $59.8 | - Advertising expense is expected to approximate 8% to 9% of revenue in Q3 fiscal 2024 and 8% for the full fiscal year 2024122 Operations and Infrastructure This section outlines changes and optimizations in the company's operational infrastructure - The company is closing fulfillment centers in Bethlehem, Pennsylvania, and Dallas, Texas, to optimize network capacity and prioritize technology investments with near-term positive returns123 Merchandise Mix This section discusses the diversity of the company's product offerings and its impact on gross margin - The company offers a diverse merchandise mix across categories (Women's, Petite, Maternity, Men's, Plus, Kids), brands (third-party and Owned Private Label), and price points124 - Owned Private Label Brands generally contribute higher margins, and shifts in merchandise mix can cause fluctuations in gross margin125 Components of Results of Operations This section breaks down the key components contributing to the company's overall results of operations Revenue This section explains how the company generates revenue from its merchandise sales and styling services - Revenue is generated from merchandise sales through Fix and Freestyle offerings, including nonrefundable styling fees and Style Pass annual fees, net of discounts, sales tax, and estimated refunds126 Cost of Goods Sold This section details the components included in the cost of goods sold and factors influencing its fluctuations - Cost of goods sold includes merchandise costs, inbound/outbound freight, inventory write-offs and changes in reserves, payment processing fees, and packaging materials, with fluctuations expected due to inventory and merchandise mix management127 Selling, General, and Administrative Expenses This section describes the various expenses categorized under selling, general, and administrative costs - SG&A primarily consists of compensation and benefits (including stock-based), fulfillment operations, data analytics, merchandising, engineering, marketing, client experience, and corporate personnel costs, along with marketing, logistics, facility, professional service, IT, and depreciation/amortization expenses128 - SG&A is expected to decrease in fiscal 2024 compared to fiscal 2023 due to restructuring and cost reduction actions128 Interest Income This section explains the sources of the company's interest income - Interest income is generated from the company's cash equivalents and investments in available-for-sale securities129 Provision for Income Taxes This section outlines the methodology for estimating the company's income tax provision - The provision for income taxes from continuing operations is an estimate of federal and state income taxes, adjusted for credits, deductions, uncertain tax positions, and changes in the valuation of net federal and state deferred tax assets130 Results of Operations This section analyzes the company's financial performance, focusing on revenue, gross margin, and operating expenses Revenue and Gross Margin This section analyzes the company's net revenue and gross margin performance, highlighting key drivers and changes | Metric | For the Three Months Ended Jan 27, 2024 (in millions) | For the Three Months Ended Jan 28, 2023 (in millions) | YoY Change (%) | | :---------------- | :----------------------------------------------------- | :----------------------------------------------------- | :------------- | | Revenue, net | $330.4 | $400.6 | -17.5% | | Gross Margin | 43.4% | 40.9% | +2.5 pp | | Metric | For the Six Months Ended Jan 27, 2024 (in millions) | For the Six Months Ended Jan 28, 2023 (in millions) | YoY Change (%) | | :---------------- | :---------------------------------------------------- | :---------------------------------------------------- | :------------- | | Revenue, net | $695.2 | $844.4 | -17.7% | | Gross Margin | 43.5% | 41.6% | +1.9 pp | - The decrease in revenue was primarily due to a 16.9% decline in active clients, while the increase in gross margin was driven by improved product margin, inventory health, and transportation leverage133134 Selling, General, and Administrative Expenses This section details the trends and drivers of selling, general, and administrative expenses | Metric | For the Three Months Ended Jan 27, 2024 (in millions) | For the Three Months Ended Jan 28, 2023 (in millions) | YoY Change (%) | | :------------------------------------------ | :----------------------------------------------------- | :----------------------------------------------------- | :------------- | | SG&A Expenses | $181.5 | $227.0 | -20.0% | | SG&A as a percentage of revenue | 54.9% | 56.7% | -1.8 pp | | Metric | For the Six Months Ended Jan 27, 2024 (in millions) | For the Six Months Ended Jan 28, 2023 (in millions) | YoY Change (%) | | :------------------------------------------ | :---------------------------------------------------- | :---------------------------------------------------- | :------------- | | SG&A Expenses | $369.3 | $462.9 | -20.2% | | SG&A as a percentage of revenue | 53.1% | 54.8% | -1.7 pp | - The decrease in SG&A was primarily driven by restructuring actions, resulting in lower compensation and benefits (including stock-based) and reduced facilities costs, partially offset by an increase in advertising spend for the three-month period135136 Provision for Income Taxes This section outlines the company's income tax provision and effective tax rate | Metric | For the Three Months Ended Jan 27, 2024 | For the Three Months Ended Jan 28, 2023 | | :-------------------------- | :-------------------------------------- | :-------------------------------------- | | Effective tax rate | (0.5)% | (0.2)% | | Metric | For the Six Months Ended Jan 27, 2024 | For the Six Months Ended Jan 28, 2023 | | :-------------------------- | :------------------------------------ | :------------------------------------ | | Effective tax rate | (0.6)% | (0.3)% | - The effective tax rate for continuing operations remains negative due to a full valuation allowance on net federal and state deferred tax assets, with the tax provision primarily consisting of state taxes137 Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations, including cash sources and uses Sources of Liquidity This section identifies the primary sources of cash and capital available to the company - Principal liquidity sources include cash, cash equivalents ($227.5 million as of January 27, 2024, including $26.2 million in the UK), investments ($2.3 million short-term), cash flows from continuing operations, and borrowing capacity under the credit facility140 - Cash balances in the UK are expected to be repatriated to the U.S. within 12 months after settling outstanding liabilities related to discontinued operations140 Credit Facility This section describes the terms and current status of the company's revolving credit facility - A new $50.0 million revolving credit facility with Citibank, N.A., maturing in December 2026, provides borrowing capacity based on a formula141 - As of January 27, 2024, borrowing availability was $50.0 million, with a borrowing capacity of $29.4 million due to outstanding letters of credit141 Uses of Cash This section outlines the primary expenditures and capital needs of the company - Primary uses of cash include operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures to support the business143 - Existing cash, cash equivalents, investment balances, and credit facility are expected to be sufficient for working capital and capital expenditure needs for at least the next 12 months143 Share Repurchases This section provides information on the company's share repurchase program - The company has a $150.0 million share repurchase program authorized in January 2022, with $120.0 million remaining available as of January 27, 2024144 - No shares were repurchased during the six months ended January 27, 2024, or January 28, 2023144 Cash Flows This section provides an overview of the company's cash inflows and outflows from operating, investing, and financing activities | Metric | For the Six Months Ended Jan 27, 2024 (in thousands) | For the Six Months Ended Jan 28, 2023 (in thousands) | | :---------------------------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | | Net cash provided by (used in) operating activities from continuing operations | $(1,736) | $20,783 | | Net cash provided by investing activities from continuing operations | $8,564 | $3,699 | | Net cash used in financing activities from continuing operations | $(8,730) | $(6,757) | | Net increase (decrease) in cash and cash equivalents from continuing operations | $(1,902) | $17,725 | Cash Provided by (Used in) Operating Activities from Continuing Operations This section details the cash generated or used by the company's core business operations - Cash used in operating activities from continuing operations was $1.7 million for the six months ended January 27, 2024, primarily due to a net loss of $61.1 million, partially offset by $61.1 million in non-cash charges (stock-based compensation, depreciation/amortization) and a $1.7 million change in net operating assets and liabilities146 Cash Provided by Investing Activities from Continuing Operations This section outlines the cash flows related to the company's investment activities - Cash provided by investing activities from continuing operations was $8.6 million for the six months ended January 27, 2024, mainly from $16.0 million in maturities of available-for-sale securities, partially offset by $7.4 million in purchases of property and equipment148 Cash Used in Financing Activities from Continuing Operations This section details the cash flows related to the company's financing activities - Cash used in financing activities from continuing operations was $8.7 million for the six months ended January 27, 2024, primarily due to payments for tax withholdings related to the vesting of restricted stock units150 Contractual Obligations and Other Commitments This section confirms that there have been no material changes to the company's contractual obligations - There have been no material changes to contractual obligations and other commitments as disclosed in the fiscal 2023 Annual Report on Form 10-K151 Critical Accounting Policies and Estimates This section states that there have been no significant changes to the company's critical accounting policies - There have been no significant changes to the critical accounting policies and estimates disclosed in the fiscal 2023 Annual Report on Form 10-K153 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in market risk from the information previously presented in the company's fiscal 2023 Annual Report on Form 10-K - No material changes in market risk from the information presented in the fiscal 2023 Annual Report on Form 10-K154 Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter, while acknowledging the inherent limitations of any control system Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures - Management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of January 27, 2024156 Changes in Internal Control Over Financial Reporting This section reports on any material changes in the company's internal control over financial reporting - There were no changes during the quarter ended January 27, 2024, in the company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting157 Inherent Limitations on Effectiveness of Controls This section acknowledges the inherent limitations of any internal control system - An effective internal control system, despite its design, has inherent limitations, including the possibility of human error or overriding of controls, and therefore provides only reasonable assurance for reliable financial reporting158 PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section incorporates by reference the information on legal proceedings from Note 6, 'Commitments and Contingencies,' in the financial statements - Information on legal proceedings is incorporated by reference from Note 6, 'Commitments and Contingencies,' within the financial statements161 Item 1A. Risk Factors This section details the significant risks that could materially and adversely affect the company's business, financial condition, or results of operations, categorized into risks relating to the business, industry/market/economy, cybersecurity/legal/regulatory, taxes, and ownership of Class A common stock RISK FACTOR SUMMARY This section provides a concise overview of the principal risks facing the company - The summary highlights key risks across several categories: Risks Relating to Our Business, Risks Relating to our Industry, the Market, and the Economy, Cybersecurity, Legal, and Regulatory Risks, Risks Relating to Taxes, Risks Relating to Ownership of Our Class A Common Stock, and General Risk Factors164165166167168169172 RISK FACTORS This section elaborates on the various risks that could materially and adversely affect the company's business, financial condition, and operating results Risks Relating to Our Business This section identifies specific risks inherent to the company's operations, client management, inventory, and infrastructure - The company faces risks from its inability to retain or attract clients, which has negatively affected revenue and is expected to continue impacting fiscal year 2024177178179 - Reliance on paid marketing efforts may not be successful or cost-effective, with increased costs in digital channels and impacts from mobile operating system privacy changes (e.g., Apple iOS, Google cookies)181183 - Ineffective inventory management, including suboptimal selection and timing of purchases, can lead to significant write-offs or insufficient inventory, exacerbated by a smaller fulfillment network185186187 - Operational constraints at fulfillment centers, staffing difficulties, and disruptions from severe weather or public health crises could adversely affect client experience and operating results, especially with fewer fulfillment centers190191192 - Dependence on major shipping vendors exposes the company to risks of price increases, performance problems, and disruptions (e.g., inclement weather, labor disputes), which can delay revenue recognition and impact client satisfaction194 - The supply chain is vulnerable to price increases, tariffs, raw material fluctuations, and shipping delays, particularly for merchandise sourced from third-party vendors, which can increase cost of goods sold195196197 - The company may not return to revenue growth and future profitability is uncertain, despite restructuring plans, due to factors like decreased consumer demand, increased competition, and rising operating expenses199200 - Failure to attract and retain key personnel, manage succession, or effectively hire and motivate employees (including stylists, now part-time only) could adversely affect business operations and financial results202203204205215 - Challenges in developing and introducing new offerings or expanding into new markets in a timely and cost-effective manner could negatively impact growth and operating results207208 - The company's short operating history in an evolving industry makes future performance difficult to assess, and its success depends on effectively addressing various operational and market challenges210211 - Maintaining a strong brand and reputation is critical but vulnerable to client complaints, negative publicity, and ineffective client support212213 - Inability to acquire new merchandise vendors or retain existing ones on acceptable terms could limit product selection and harm operating results, especially for Owned Private Label Brands217218 - The company may incur significant losses from various types of fraud (e.g., stolen credit card numbers, unauthorized purchases) and is subject to payment-related risks, including compliance with payment card association rules219220 Risks Relating to our Industry, the Market, and the Economy This section addresses external risks stemming from the broader economic environment and competitive landscape - The business relies on consumer discretionary spending and is adversely affected by economic downturns, macroeconomic conditions (e.g., inflation, rising interest rates), and general uncertainty, which can reduce client demand221222223 - The retail apparel industry is highly competitive, with numerous competitors having greater resources and capabilities, making it challenging for the company to differentiate its service and acquire clients effectively224225 - Operating results can be adversely affected by natural disasters, public health crises (e.g., COVID-19), political crises, or other catastrophic events that disrupt operations, supply chains, and consumer spending226227228 Cybersecurity, Legal, and Regulatory Risks This section outlines potential risks related to technology infrastructure, data security, legal compliance, and evolving regulations - System interruptions or performance failures in technology infrastructure (website, mobile app, internal applications, third-party vendors) could damage the business by impairing client access and operational efficiency229 - Compromises of data security, either internally or through third-party service providers, could lead to unexpected expenses, reputational harm, litigation, and regulatory actions due to unauthorized access to personal or confidential information231232 - The use of open source software in applications may pose risks, including claims from third parties demanding code release or increased security vulnerabilities233 - Adverse litigation judgments or settlements from legal proceedings (e.g., class actions) could expose the company to monetary damages or limit its ability to operate, diverting management attention and resources234 - Failure by the company or its vendors to comply with product safety, labor, or other laws (e.g., UFLPA regarding cotton sourcing) or to provide safe factory conditions may damage reputation and harm business operations235238239 - The collection and use of personal information subject the company to evolving privacy laws (e.g., GDPR, CCPA, UK GDPR), with non-compliance potentially leading to governmental actions, fines, litigation, and reputational damage240241242243244 - Unfavorable changes or failure to comply with evolving internet and eCommerce regulations (e.g., automatic renewal laws, cookie tracking restrictions) could substantially harm business and operating results246247248 - Inability to successfully protect intellectual property (trademarks, copyrights, trade secrets, patents) or accusations of infringing third-party intellectual property rights could harm the business and competitive position249250251 Risks Relating to Taxes This section details the tax-related risks, including policy changes, sales tax liabilities, and limitations on tax attributes - Changes in U.S. tax or tariff policy regarding apparel produced in other countries (e.g., tariffs on goods from China) could adversely affect the business by increasing costs and disrupting supply chains252 - The company could be required to collect additional sales taxes or be subject to other tax liabilities from previous periods, increasing costs for clients and adversely affecting operating results253 - Federal income tax reform (e.g., Tax Cuts and Jobs Act, CARES Act) could have unforeseen effects on financial condition and results of operations254 - The company may be subject to additional tax liabilities due to disagreements with tax authorities or changes in tax laws, which could materially impact operating results255 - The ability to use net operating loss carryforwards ($152.7 million federal, $274.7 million state) and certain other tax attributes ($49.5 million federal R&D, $23.9 million California R&D) may be limited by ownership changes under Sections 382 and 383 of the Internal Revenue Code256 Risks Relating to Ownership of Our Class A Common Stock This section describes risks associated with the company's stock, including price volatility, dilution, and corporate governance structure - The market price of Class A common stock may continue to be volatile or decline steeply, regardless of operating performance, influenced by factors such as client base changes, analyst expectations, share repurchases, and market trends257258259260 - The share repurchase program, authorized for up to $150.0 million, cannot be guaranteed to be fully consummated or to enhance long-term stockholder value, and could increase stock price volatility or diminish cash reserves261 - Future sales of shares by existing stockholders or the exercise/settlement of outstanding options and restricted stock units could cause the stock price to decline due to dilution262 - The dual-class structure of common stock concentrates voting control with directors, executive officers, and their affiliates (Class B common stock has ten votes per share), limiting the influence of other stockholders and potentially depressing the Class A stock price263264 - The company does not currently intend to pay dividends on its Class A common stock, meaning investment return will depend solely on stock price appreciation265 - Delaware law and provisions in the company's certificate of incorporation and bylaws could make a merger, tender offer, or proxy contest difficult, potentially depressing the trading price of Class A common stock266267 - Exclusive forum provisions in the certificate of incorporation designate Delaware courts and federal district courts as exclusive forums for certain disputes, which could limit stockholders' ability to obtain a favorable judicial forum268270271 General Risk Factors This section covers overarching risks that could impact the company's financial stability and investor confidence - Future securities sales and issuances could result in significant dilution to stockholders and impair the market price of Class A common stock272 - Inability to maintain effective internal control over financial reporting could lead to loss of investor confidence, inaccurate financial reporting, and a decline in stock price273274275 - The company may not be able to generate sufficient capital to support and grow its business, and outside capital, if available, may be dilutive or subject to restrictive covenants276277278 - If securities or industry analysts publish inaccurate or unfavorable research, or cease coverage, the trading price or volume of Class A common stock could decline279 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds to report280 Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities to report281 Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures to report - No mine safety disclosures to report282 Item 5. Other Information This section discloses a Rule 10b5-1 trading arrangement adopted by the Chief Executive Officer, Matt Baer, for Class A common stock, including shares from restricted stock units - CEO Matt Baer adopted a Rule 10b5-1 trading arrangement on December 18, 2023, for 538,536 Class A common shares, expiring March 10, 2025283 - The trading arrangement includes 80,206 shares subject to restricted stock units that may vest and be released to Mr. Baer283 Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including certifications, XBRL documents, and corporate governance documents - Exhibits include certifications (31.1, 31.2, 32.1), Inline XBRL Instance Document (101.INS), Taxonomy Extension Schema Document (101.SCH), Calculation Linkbase Document (101.CAL), Definition Linkbase Document (101.DEF), Label Linkbase Document (101.LAB), Presentation Linkbase Document (101.PRE), and Cover Page Interactive Data File (104)284 Signatures This section contains the signatures of the Chief Financial Officer and Chief Accounting Officer, certifying the filing of the Quarterly Report on Form 10-Q - The Quarterly Report on Form 10-Q was signed by David Aufderhaar (Chief Financial Officer) and Sarah Barkema (Chief Accounting Officer) on March 5, 2024288