Stitch Fix, Inc. (SFIX)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K (“Annual Report”). We use a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday that is closest to July 31 of that year. The fiscal year ending August 3, 2024 (“fiscal 2024”) consists of 53 weeks, and the fiscal years ended, July 29, 2023 (“fiscal 2023”), and July 30, 2022 (“fiscal 2022”) consisted of 52 weeks. Throughout this Annual Report, all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.

In addition, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

A discussion regarding our financial condition and results of operation for fiscal 2024, compared to fiscal 2023, and for fiscal 2023 compared to fiscal 2022, is presented below.

Business Overview

In 2011, Stitch Fix introduced an innovative approach to shopping for clothing and accessories. We were inspired by the opportunity to create a client-first styling experience, offering an alternative to impersonal, time-consuming and inconvenient traditional shopping. Clients engage with us by (1) receiving a curated shipment of items informed by our algorithms and chosen by a Stitch Fix Stylist (a “Fix”); or (2) purchasing directly from our website or mobile app based on an individualized assortment of outfit and item recommendations (“Freestyle”). Clients choose to schedule regular shipments or order a Fix on demand. Then, after receiving a Fix, they can purchase the items they want to keep and return the other items, if any.

Discontinued Operations

During the first quarter of fiscal 2024, we ceased operations of our UK business and the accounting requirements for reporting the UK business as a discontinued operation were met. Accordingly, any discussion of historical information in Management’s Discussion and Analysis below reflects the results of the UK business as a discontinued operation, and, amounts and disclosures below relate to the Company's continuing operations for all periods presented, unless otherwise noted. Refer to Note 14, “Discontinued Operations” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for further details.

Financial Overview

For fiscal 2024, we reported $1.3 billion of net revenue representing a year-over-year decline of 16.0% as compared to fiscal 2023. As of August 3, 2024, and July 29, 2023, we had approximately 2,508,000 and 3,121,000 active clients, respectively, representing a year-over-year decline of 19.6%. Refer to the section titled “Key Financial and Operating Metrics” below for information on how we define and calculate active clients.

During fiscal 2024 and fiscal 2023, we experienced a decline in net revenue year-over-year primarily due to our challenges in acquiring and retaining clients. We expect these challenges in acquiring and retaining active clients to continue having a negative compounding effect on net revenue in fiscal 2025. We remain focused on retaining current clients, improving the conversion of new clients, and enhancing our overall client experience for new and existing clients.

Net loss from continuing operations for fiscal 2024 was $118.9 million, compared to a net loss from continuing operations of $150.3 million for fiscal 2023. Despite lower revenues year-over-year, our net loss in fiscal 2024 was lower due to several restructuring actions that took place in both fiscal 2023 and fiscal 2024 as described below, which reduced fixed and variable operating expenses, in addition to a reduction in advertising expense. For more information on the components of net loss from continuing operations, refer to the section titled “Results of Operations” below.

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Restructuring

During fiscal 2024 and fiscal 2023, in furtherance of and as an expansion of the restructuring plan announced in June 2022 (the “2022 Restructuring Plan”), we undertook several restructuring actions. These actions were taken to reduce our future fixed and variable operating costs and allow us to centralize key capabilities, strengthen decision-making to drive efficiencies, and ensure we are allocating resources to our most critical priorities. In connection with activities taken for the 2022 Restructuring Plan and activities in furtherance of and as an expansion of the 2022 Restructuring Plan, described further below, we have recorded the following:

(1) Recorded in selling, general, and administrative expenses on the consolidated statements of operations and comprehensive loss.

(2) Includes impairments of both operating lease right-of-use assets and property and equipment.

(3) Recognized in cost of goods sold on the consolidated statements of operations and comprehensive loss.

Below is a summary of the restructuring actions taken to date in connection with the 2022 Restructuring Plan:

•In fiscal 2022, the 2022 Restructuring Plan reduced our then-current employee workforce by approximately 4%, including approximately 15% of our then-salaried positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2023, we implemented a plan of termination that reduced our then-current employee workforce by approximately 6%, including approximately 20% of our then-salaried positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in June 2023, we announced the closure of our fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. The Bethlehem, Pennsylvania location ceased operations during the fiscal quarter ended October 28, 2023, and the Dallas, Texas location ceased operations during the fiscal quarter ended April 27, 2024.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2024, we implemented an organization realignment that resulted in the further elimination of styling leadership and corporate positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2024, we revised our compensation model for full-time Stylists to move to a part-time only model, whereby Stylists who opted to continue with the Company received one-time restructuring bonuses. These bonuses will be paid over three quarters, with the last payment in the first quarter of fiscal 2025.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in the fourth quarter of fiscal 2024, we recorded impairments related to a portion of our corporate office space due to a change in the use of this space.

We have $3.3 million in restructuring related liabilities as of August 3, 2024, and we expect substantially all cash payments in connection with expenses incurred to date related to the 2022 Restructuring Plan will be completed in the first quarter of fiscal 2025. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for further details of restructuring actions taken.

We are continuing to evaluate other fixed and variable operating costs, including further rationalizing our real estate footprint and continuing to optimize and be disciplined in our marketing strategy to better position ourselves for profitability. However, our future results of operations will depend on our ability to successfully navigate current business challenges and the overall macroeconomic environment.

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Key Financial and Operating Metrics

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. We believe that adjusted EBITDA from continuing operations (“Adjusted EBITDA”) is frequently used by investors and securities analysts in their evaluations of companies, and that this supplemental measure facilitates comparisons between continuing operations of companies. We believe free cash flow from continuing operations (“Free Cash Flow”) is an important metric because it represents a measure of how much cash from continuing operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

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

•Adjusted EBITDA excludes interest income and net other (income) expense as these items are not components of our core business;

•Adjusted EBITDA does not reflect our provision (benefit) for income taxes, which may increase or decrease cash available to us;

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

•Adjusted EBITDA excludes the non-cash expense of stock-based compensation, which has been, and will continue to be for the foreseeable future, an important part of how we attract and retain our employees and a significant recurring expense in our business;

•Adjusted EBITDA excludes costs incurred related to discrete restructuring plans and other one-time costs attributable to our continuing operations that are fundamentally different in strategic nature and frequency from ongoing initiatives. We believe exclusion of these items facilitates a more consistent comparison of operating performance over time, however these costs do include cash outflows; and

•Free Cash Flow does not represent the total residual cash flow available for discretionary purposes and does not reflect our future contractual commitments.

Adjusted EBITDA

We define Adjusted EBITDA as net loss from continuing operations excluding interest income, other (income) expense, net, provision (benefit) for income taxes, depreciation and amortization, stock-based compensation expense, and restructuring and other one-time costs related to our continuing operations. The following table presents a reconciliation of net loss from continuing operations, the most comparable GAAP financial measure, to Adjusted EBITDA for each of the periods presented:

(1) For fiscal 2024 and 2023, depreciation and amortization excluded $12.1 million and $2.8 million, respectively, reflected in “Restructuring and other one-time costs.”

(2) For fiscal 2022, stock-based compensation expense excluded $1.1 million reflected in “Restructuring and other one-time costs.”

(3) For fiscal 2024, restructuring charges were $43.8 million and other one-time costs were $6.7 million in one-time professional services fees. For fiscal 2023, restructuring charges were $39.9 million and other one-time costs were $5.8 million in retention bonuses for continuing employees. For fiscal 2022, restructuring charges were $17.7 million and other one-time costs were $8.5 million in retention bonuses for continuing employees. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for more details.

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Free Cash Flow

We define Free Cash Flow as cash flows provided by operating activities from continuing operations, reduced by purchases of property and equipment that are included in cash flows from investing activities from continuing operations. The following table presents a reconciliation of net cash flows provided by operating activities from continuing operations, the most comparable GAAP financial measure, to Free Cash Flow for each of the periods presented:

Operating Metrics

Active Clients

We believe that the number of active clients is a key indicator of the overall health of our business. We define an active client as a client who checked out a Fix or was shipped an item via Freestyle in the preceding 52 weeks, measured as of the last day of that period. Clients check out a Fix when they indicate which items they are keeping through our mobile application or on our website. We consider each Women’s, Men’s, or Kids account as a client, even if they share the same household. We had 2,508,000 and 3,121,000 active clients as of August 3, 2024, and July 29, 2023, respectively, representing a year-over-year decline of 19.6%. The decline in active clients is due to dormant clients outpacing new client additions during the year, which we largely attribute to client conversion and retention challenges.

Net Revenue per Active Client

We believe that net revenue per active client is an indicator of client engagement and satisfaction. We calculate net revenue per active client based on net revenue over the preceding four fiscal quarters divided by the number of active clients, measured as of the last day of the period. Net revenue per active client was $533 and $510 as of August 3, 2024, and July 29, 2023, respectively, representing a year-over-year increase of 4.5%.

Factors Affecting Our Performance

Macroeconomic Environment

Our business and operating results are subject to national and global economic conditions and their impact on consumer discretionary spending. As the macroeconomic environment is experiencing inflation, rising interest rates, recessionary concerns, tightening labor markets, and general uncertainty regarding the overall future political and economic environment, we cannot predict whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business.

Inventory Management

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

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Client Acquisition and Engagement

To grow our business, we must continue to acquire clients and successfully engage and retain them. Our marketing strategy aims to preserve liquidity and achieve profitability, while simultaneously attracting long-term customers to fuel a return to growth. We utilize both digital and offline channels to attract new visitors to our website or mobile app and subsequently convert them into clients. Our marketing costs are largely composed of advertising, client referrals, and public relations expenses. At any given time, our advertising efforts may include, social media marketing, keyword search campaigns, affiliate programs, partnerships, campaigns with celebrities and influencers, display advertising, television, radio, video, content, direct mail, email, mobile “push” communications, SMS, and search engine optimization. Our marketing expenses have varied from period to period and we expect this trend to continue.

Marketing expense is recorded in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss. The largest component of our marketing expense is advertising, which was $111.4 million in fiscal 2024, compared to $111.6 million in fiscal 2023. We expect advertising expense to approximate 8% to 9% of revenue in fiscal 2025; however, we will continue to be methodical about our approach when we are making investments in advertising, and may adjust our spending up or down based on performance.

Operations and Infrastructure

We intend to leverage our data science and deep understanding of our clients’ needs to make targeted investments in technology and product. In the second quarter of fiscal 2023, we decided to close our Salt Lake City fulfillment center in order to optimize network capacity. In June 2023, we announced the intended closures of our fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. The Bethlehem, Pennsylvania location ceased operations during the fiscal quarter ended October 28, 2023 and the Dallas, Texas location ceased operations during the fiscal quarter ended April 27, 2024. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for further details.

Merchandise Mix

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

Historically, changes in our merchandise mix have not caused significant fluctuations in our gross margin; however, categories, brands, product types, and price points do have a range of margin profiles. For example, our Owned Private Label Brands have generally contributed higher margins than our third-party brands, which have generally contributed lower margins. We continue to evolve our merchandise mix to improve the client experience and attract new active clients. Shifts in merchandise mix will result in fluctuations in our gross margin from period to period.

Components of Results of Operations

Revenue

We generate revenue from the sale of merchandise through our Fix and Freestyle offerings. With our Fix offering, we charge a nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any merchandise purchased. We offer Style Pass to provide select clients with an alternative to paying a styling fee per Fix. Style Pass clients pay a nonrefundable annual fee for unlimited styling that is credited towards merchandise purchases. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout this Annual Report. We also recognize revenue resulting from estimated breakage income on gift cards.

Cost of Goods Sold

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

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) consist primarily of compensation and benefits costs, including stock-based compensation expense, for our employees including our Stylists, fulfillment center operations, data analytics, merchandising, engineering, marketing, client experience, and corporate personnel. SG&A also includes marketing and advertising costs, third-party logistics costs, facility costs for our fulfillment centers and offices, professional service fees, information technology costs, and depreciation and amortization expense. As a result of our restructuring and cost reduction actions throughout fiscal years 2024, 2023, and 2022, we expect SG&A in fiscal 2025 to decrease as compared to fiscal 2024. Our classification of certain components within SG&A may vary from other companies in our industry and may not be comparable.

Interest Income

Interest income is generated from our cash equivalents and investments in available-for-sale securities.

Provision (Benefit) for Income Taxes

Our provision (benefit) for income taxes consists of an estimate of federal and state income taxes based on enacted federal and state tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation of our net federal and state deferred tax assets.

Results of Operations

Comparison of the Fiscal Years Ended August 3, 2024, July 29, 2023, and July 30, 2022

The following table summarizes our financial results from continuing operations:

* Not meaningful

The components of our results from continuing operations as a percentage of net revenue were as follows:

Note: Due to rounding, percentages in this table may not sum to totals.

Revenue and Gross Margin

Revenue in fiscal 2024, which included a $21.6 million impact of an extra week, decreased by $255.1 million, or 16.0%, as compared to revenue in fiscal 2023. The decline in revenue was primarily attributable to a 19.6% decline in active clients from July 29, 2023 to August 3, 2024, which led to a decrease in sales of merchandise. Partially offsetting the revenue decline was an improvement in

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revenue per active client, which was driven by an increase in the average order value with the number of items kept by our clients per Fix increasing, and an extra week of revenue in the current year.

Gross margin for fiscal 2024, increased by 190 basis points as compared to fiscal 2023. The increase in gross margin was primarily driven by improved product margins and transportation leverage as our carrier mix yielded more favorable rates year over year.

Revenue in fiscal 2023 decreased by $425.3 million, or 21.1%, as compared to revenue in fiscal 2022. The decline in revenue was primarily attributable to a 13.1% decline in active clients from July 30, 2022 to July 29, 2023, which led to a decrease in sales of merchandise. Revenue was also impacted by a 9.3% decline in net revenue per active client in fiscal 2023, as compared to fiscal 2022, as clients spent less during the year.

Gross margin for fiscal 2023, decreased by 150 basis points as compared to fiscal 2022. The decrease was primarily attributable to higher product and transportation costs as a percentage of revenue in fiscal year 2023, substantially offset by our improved inventory position, as we better aligned our inventory composition, which led to lower inventory write-offs as a percentage of revenue.

Selling, General, and Administrative Expenses

SG&A in fiscal 2024, which included an extra week, decreased by $105.4 million, or 12.7%, as compared to fiscal 2023, primarily due to a $111.6 million decrease in compensation and benefits expense, including lower stock-based compensation, largely driven by our restructuring actions, and reductions in variable labor costs due to lower sales volumes. SG&A was also impacted by $19.3 million non-cash impairment charges recorded in fiscal 2024, as compared to the non-cash impairment charges of $16.9 million recorded in fiscal 2023. These decreases were partially offset by one-time professional service fees in fiscal 2024.

SG&A as a percentage of revenue increased to 54.2% in fiscal 2024, as compared to 52.2% in fiscal 2023. The increase in SG&A as a percentage of revenue was primarily driven by revenue declining at a faster rate than SG&A in fiscal year 2024.

SG&A in fiscal 2023 decreased by $240.2 million, or 22.4%, as compared to fiscal 2022, primarily due to a $147.8 million decrease in compensation and benefits expense, including lower stock-based compensation, largely driven by our restructuring actions and reductions in variable labor costs due to lower sales volumes. These decreases were partially offset by a year-over-year increase of $19.5 million in restructuring and other one-time costs. SG&A expense was also impacted by a $78.3 million reduction in our advertising expense as compared to fiscal 2022, as a result of our decision to reduce advertising spend in fiscal 2023.

SG&A as a percentage of revenue decreased to 52.2% in fiscal 2023, as compared to 53.1% in fiscal 2022. The decrease in SG&A margin was primarily related to reductions in advertising, which was 7.0% of net revenue in fiscal 2023, as compared to 9.4% of net revenue in fiscal 2022. This was partially offset by restructuring and other one-time costs, which increased as a percentage of net revenue from 1.3% in fiscal 2022 to 2.9% in fiscal 2023.

Provision for Income Taxes

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

Our effective tax rate and provision for income taxes decreased in fiscal 2024 as compared to fiscal 2023, primarily due to reserve releases in fiscal 2024 from lapses in statutes of limitation and effective settlement of prior year tax positions.

Our effective tax rate and provision for income taxes increased in fiscal 2023 as compared to fiscal 2022, primarily due to increases in federal income taxes and less reserve releases due to lapses in statutes of limitation.

Liquidity and Capital Resources

Sources of Liquidity

Our principal sources of liquidity include our cash, cash equivalents, investments, cash flows from continuing operations, and borrowing capacity under our credit facility. As of August 3, 2024, we had $162.9 million of cash and cash equivalents, which included $0.7 million held outside the U.S. in the UK, and $84.1 million of short-term investments with contractual maturities of 12 months or less. We will use our cash balances in the UK to settle the remaining liabilities attributable to our discontinued operations.

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Credit Facility

On December 4, 2023, we entered into a first lien credit agreement with Citibank, N.A., as agent and lender, which provides for a $50.0 million revolving credit facility maturing on December 4, 2026 (the “2023 Credit Facility”). The 2023 Credit Facility includes a sub-facility that provides for the issuance of letters of credit in an amount of up to $30.0 million. Availability of the 2023 Credit Facility will be based upon a borrowing base formula and periodic borrowing base certifications valuing certain of our accounts receivable, credit card receivables, and inventory as reduced by certain reserves, if any. Our borrowing availability based on balances as of August 3, 2024 was $45.0 million, and our excess availability was $25.0 million as a result of outstanding letters of credit and no outstanding borrowing.

For information on the terms of the 2023 Credit Facility, refer to Note 7, “Credit Agreement” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Uses of Cash

Our primary uses of cash include operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our business.

We believe our existing cash, cash equivalents, investment balances, and the borrowing available under our 2023 Credit Facility, if needed, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months and beyond.

Share Repurchases

In January 2022, our Board of Directors authorized a share repurchase program to repurchase up to $150.0 million of our outstanding Class A common stock, with no expiration date (the “2022 Repurchase Program”). We may repurchase shares from time to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The actual timing, number and value of shares repurchased in the future will be determined by the Company in its discretion and will depend on a number of factors, including price, trading volume, market conditions, and other general business conditions. Repurchases will be funded from the Company’s existing cash and cash equivalents or future cash flow. The repurchase program may be modified, suspended, or terminated at any time. The Company made no repurchases of Class A common stock in fiscal 2024 or fiscal 2023. As of August 3, 2024, the Company had repurchased 2,302,141 shares of Class A common stock for $30.0 million, and $120.0 million remained available under the 2022 Repurchase Program authorization.

Cash Flows

The following table summarizes our cash flows for the periods indicated below:

Cash Provided by Operating Activities from Continuing Operations

During fiscal 2024, cash provided by operating activities from continuing operations was $28.2 million, which consisted of a net loss from continuing operations of $118.9 million, adjusted by non-cash charges of $124.6 million and a $22.5 million change in net operating assets and liabilities. The non-cash charges were primarily driven by $76.8 million of stock-based compensation expense and $44.5 million of depreciation, amortization, and accretion, $19.3 million of asset impairment, partially offset by $15.1 million of changes in inventory reserves. The change in net operating assets and liabilities was primarily due to a change of $47.7 million in gross inventory balances due to a decline in inventory receipts to bring inventory balances in line with current demand.

During fiscal 2023, cash provided by operating activities from continuing operations was $73.2 million, which consisted of a net loss from continuing operations of $150.3 million, adjusted by non-cash charges of $145.0 million and a change of $78.5 million in our net operating assets and liabilities. The non-cash charges were primarily driven by $102.1 million of stock-based compensation expense, $42.1 million of depreciation and amortization, and $16.9 million in asset impairment charges. The change in net operating assets and liabilities was primarily due to a change of $76.0 million in our inventory balance due to a decline in inventory receipts to bring inventory balances in line with current demand, and a cash inflow of $53.0 million from income tax refunds, partially offset by a decrease of $60.1 million in accounts payable and accrued liabilities due to timing of payments.

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During fiscal 2022, cash provided by operating activities from continuing operations was $75.2 million, which consisted of a net loss from continuing operations of $181.6 million, adjusted by non-cash charges of $182.9 million and a change of $73.9 million in our net operating assets and liabilities. The non-cash charges were primarily driven by $126.1 million of stock-based compensation expense, $35.7 million of depreciation and amortization, $14.7 million in inventory reserves, and $6.2 million in asset impairment charges. The change in net operating assets and liabilities was primarily due to an increase of $67.4 million in accounts payable balance due to timing of inventory receipts and payments.

Cash Provided (Used in) by Investing Activities from Continuing Operations

During fiscal 2024, cash used in investing activities from continuing operations was $78.7 million. This was primarily due to the purchase of available-for-sale securities of $97.3 million and the purchases of property and equipment of $14.0 million, partially offset by the maturities of available-for-sale securities of $32.2 million.

During fiscal 2023, cash provided by investing activities from continuing operations was $64.5 million, primarily related to net cash flow from purchases, sales, and maturities of $82.5 million of highly rated available-for-sale securities, partially offset by $18.9 million in purchases of property and equipment.

During fiscal 2022, cash provided by investing activities was $11.6 million, primarily related to net cash flow from purchases, sales, and maturities of $56.6 million of highly rated available-for-sale securities, partially offset by $45.0 million in purchases of property and equipment.

Cash Used in Financing Activities from Continuing Operations

During fiscal 2024, cash used in financing activities was $15.5 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $16.1 million, partially offset by proceeds from the exercise of stock options of $1.0 million.

During fiscal 2023, cash used in financing activities from continuing operations was $15.1 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $15.1 million.

During fiscal 2022, cash used in financing activities from continuing operations was $59.6 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $31.1 million and repurchases of common stock of $30.0 million, partially offset by proceeds from the exercise of stock options of $1.5 million.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

Cash and cash equivalents at both August 3, 2024 and July 29, 2023 were impacted based on fluctuations in the exchange rate of the British pound sterling to the U.S. dollar.

Contractual Obligations and Other Commitments

Our most significant contractual obligations relate to purchase commitments of inventory and operating lease obligations on our fulfillment centers and corporate office. As of August 3, 2024, we had $132.9 million of enforceable and legally binding inventory purchase commitments, predominantly due within one year. For information on our contractual obligations for operating leases, refer to Note 4, “Leases” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies, estimates, and judgments that we believe to have the most significant impacts to our consolidated financial statements are described below.

Inventory, net

Inventory, net consists of finished goods which are recorded at the lower of cost or net realizable value using the first-in-first-out (“FIFO”) method. We establish a reserve for excess and slow-moving inventory we expect to write off or sell below cost as liquidations based on historical trends, which considers factors such as the age of the inventory and sell through rate for a particular item. In addition, we estimate and accrue shrinkage as a percentage of inventory out to the client and also accrue for damaged items and items we intend to liquidate. Estimates are made to reduce the inventory value for lost, stolen, damaged, or liquidated items to net realizable value. If actual experience differs significantly from our estimates due to changes in client merchandise preferences, client demand, or economic conditions, additional inventory write-downs may be required which could adversely affect our operating results. A 10% change in our inventory reserves estimate as of August 3, 2024 would result in a change in reserves of approximately $2.4 million.

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We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during fiscal 2024 or fiscal 2023.

Stock-Based Compensation

We grant stock options and restricted stock units (“RSUs”) to our employees and members of our Board of Directors, and recognize stock-based compensation expense based on the fair value of such awards at grant date. We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires us to use certain estimates and assumptions such as:

•Expected volatility of our common stock—based on an even blend of historical and implied volatility of our common stock;

•Expected term of our stock options—the period that our stock options are expected to be outstanding based on historical averages.

•Expected dividend yield—as we have not paid and do not anticipate paying dividends on our common stock, our expected dividend yield is 0%; and

•Risk-free interest rates—based on the U.S. Treasury zero coupon notes in effect at the grant date with maturities equal to the expected terms of the options granted.

We record stock-based compensation expense net of estimated forfeitures so that expense is recorded for only the stock options and RSUs that we expect to vest. We estimate forfeitures based on our historical forfeiture of stock options and RSUs adjusted to reflect future changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.

We will continue to use judgment in evaluating assumptions related to our stock-based compensation expense. As we continue to accumulate data related to our common stock, we may have refinements to our estimates and assumptions which could impact our future stock-based compensation expense.

Revenue Recognition

Revenue is recognized net of sales taxes, discounts, and estimated refunds. We record a refund reserve based on our historical refund patterns. The impact of our refund reserve on our operating results may fluctuate based on changes in client refund activity over time.

We also sell gift cards to clients and establish a liability based on the face value of such gift cards. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies.

We have not made any material changes to our revenue recognition accounting policies during fiscal 2024.

Recent Accounting Pronouncements

For recent accounting pronouncements, refer to Note 2, “Significant Accounting Policies” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K (“Annual Report”). We use a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday that is closest to July 31 of that year. Each fiscal year generally consists of four 13-week fiscal quarters, with each fiscal quarter ending on the Saturday that is closest to the last day of the last month of the quarter. The fiscal years ended July 29, 2023 (“fiscal 2023”), July 30, 2022 (“fiscal 2022”), and July 31, 2021 (“fiscal 2021”) consisted of 52 weeks. The fiscal year ending August 3, 2024 (“fiscal 2024”) will be 53 weeks. Throughout this Annual Report, all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.

In addition, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

A discussion regarding our financial condition and results of operation for fiscal 2023, compared to fiscal 2022, is presented below. A discussion regarding our financial condition and results of operations for fiscal 2022, compared to fiscal 2021, can be found under Item 7 in our Annual Report for fiscal 2022, filed with the SEC on September 21, 2022, which is available on the SEC’s website at www.sec.gov and on the SEC Filings section of the Investor Relations section of our website at: https://investors.stitchfix.com.

Overview

Since our founding in 2011, we have helped millions of women, men, and kids discover and buy what they love through personalized shipments of apparel, shoes, and accessories. Currently, clients can engage with us in one of two ways that, combined, form an ecosystem of personalized experiences across styling, shopping, and inspiration: (1) by receiving a personalized shipment of items informed by our algorithms and sent by a Stitch Fix stylist (a “Fix”); or (2) by purchasing directly from our website or mobile app based on a personalized assortment of outfit and item recommendations (“Freestyle”). For a Fix, clients can choose to schedule automatic shipments or order on demand after they fill out a style profile on our website or mobile app. After receiving a Fix, our clients purchase the items they want to keep and return the other items, if any. Freestyle utilizes our algorithms to recommend a personalized assortment of outfits and items that will update throughout the day and will continue to evolve as we learn more about the client.

For fiscal 2023, we reported $1.6 billion of revenue representing a year-over-year decline of 21.0% as compared to fiscal 2022. As of July 29, 2023, and July 30, 2022, we had approximately 3,297,000 and 3,795,000 active clients, respectively, representing a year-over-year decline of 13.1%. Refer to the section titled “Key Financial and Operating Metrics” below for information on how we define and calculate active clients.

During fiscal 2023 and fiscal 2022, we experienced a decline in net revenue year-over-year primarily due to our challenges in acquiring and retaining clients. We expect these challenges in acquiring and retaining active clients to continue having a negative compounding effect on net revenue in fiscal 2024. In addition, we are navigating the uncertainties presented by the current macroeconomic environment and remain focused on retaining current clients, improving the conversion of new clients, and enhancing our overall client experience for new and existing clients.

Net loss for fiscal 2023 was $172.0 million, compared to net loss of $207.1 million for fiscal 2022. Despite lower revenues year-over-year, our net loss in fiscal 2023 was lower due to several restructuring actions as described below, which reduced fixed and variable operating expenses, in addition to a reduction in advertising expense.

For more information on the components of net loss, refer to the section titled “Results of Operations” below.

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Restructuring

During fiscal 2023, in furtherance of and as an expansion of the restructuring plan announced in June 2022 (the “2022 Restructuring Plan”), we undertook several restructuring actions. These actions were taken to reduce our future fixed and variable operating costs and allow us to centralize key capabilities, strengthen decision-making to drive efficiencies, and ensure we are allocating resources to our most critical priorities. In connection with activities taken for the 2022 Restructuring Plan, described further below, we have recorded the following:

(1) Recognized in selling, general, and administrative expenses on the consolidated statements of operations and comprehensive loss.

(2) Fiscal 2023 includes impairments of both operating lease right-of-use assets and property and equipment.

(3) Recognized in cost of goods sold on the consolidated statements of operations and comprehensive loss.

(4) Primarily comprised of losses expected to arise from firm purchase commitments for future receipts of inventory.

Below is a summary of the restructuring actions taken in fiscal 2023 and fiscal 2022 in connection with the 2022 Restructuring Plan:

•In fiscal 2022, the 2022 Restructuring Plan reduced our then-current employee workforce by approximately 4%, including approximately 15% of our then-salaried positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2023, we implemented a plan of termination (the “January 2023 Reduction in Force”). The January 2023 Reduction in Force reduced our then-current employee workforce by approximately 6%, including approximately 20% of our then-salaried positions. In connection with the 2023 Reduction in Force, our then-Chief Executive Officer agreed that she would step down from her employment with the Company and from the Board of Directors, effective January 5, 2023.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in June 2023, we announced the intended closure of our fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas.

•Additionally, in June 2023, we also announced that we would enter a consultation period, in accordance with UK law, to explore exiting the market in the UK. On August 24, 2023, we ended the consultation period, and made the decision to exit our business and wind down our operations in the UK.

Related to the 2022 Restructuring Plan, we estimate we will incur between $9 million and $12 million in additional cash restructuring charges in fiscal 2024. We expect these expenses will be incurred over the first three fiscal quarters of fiscal 2024, with substantially all of these cash payments to be completed by the end of the third fiscal quarter ending April 27, 2024. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for further details of restructuring actions taken in fiscal 2023 and fiscal 2022.

We are continuing to evaluate other fixed and variable operating costs, including further rationalizing our real estate footprint and continuing to optimize and be disciplined in our marketing strategy to better position ourselves for profitability. However, our future results of operations will depend on our ability to successfully navigate current business challenges and the overall macroeconomic environment.

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Key Financial and Operating Metrics

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. We believe that adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, and that this supplemental measure facilitates comparisons between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

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

•adjusted EBITDA excludes interest income and other (income) expense, net, as these items are not components of our core business;

•adjusted EBITDA does not reflect our provision (benefit) for income taxes, which may increase or decrease cash available to us;

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

•adjusted EBITDA excludes the non-cash expense of stock-based compensation, which has been, and will continue to be for the foreseeable future, an important part of how we attract and retain our employees and a significant recurring expense in our business;

•adjusted EBITDA excludes costs incurred related to discrete restructuring plans and other one-time costs that are fundamentally different in strategic nature and frequency from ongoing initiatives. We believe exclusion of these items facilitates a more consistent comparison of operating performance over time, however these costs do include cash outflows; and

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

Adjusted EBITDA

We define adjusted EBITDA as net loss excluding interest income, other income (expense), net, provision (benefit) for income taxes, depreciation and amortization, stock-based compensation expense, and restructuring and other one-time costs. The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to adjusted EBITDA for each of the periods presented:

(1) For fiscal 2023, depreciation and amortization excluded $2.8 million reflected in “Restructuring and other one-time costs.”

(2) For fiscal 2022, stock-based compensation expense excluded $1.1 million reflected in “Restructuring and other one-time costs.”

(3) For fiscal 2023, restructuring charges were $44.7 million and other one-time costs were $5.8 million in retention bonuses for continuing employees. For fiscal 2022, restructuring charges were $17.7 million and other one-time costs were $8.5 million in retention bonuses for continuing employees. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for more details.

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Free Cash Flow

We define free cash flow as cash flows from operating activities reduced by purchases of property and equipment that are included in cash flows from investing activities. The following table presents a reconciliation of net cash flows provided by (used in) operating activities, the most comparable GAAP financial measure, to free cash flow for each of the periods presented:

Operating Metrics

Active Clients

We believe that the number of active clients is a key indicator of our growth and the overall health of our business. We define an active client as a client who checked out a Fix or was shipped an item via Freestyle in the preceding 52 weeks, measured as of the last day of that period. A client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We consider each Women’s, Men’s, or Kids account as a client, even if they share the same household. We had 3,297,000 and 3,795,000 active clients as of July 29, 2023 and July 30, 2022, respectively, representing a year-over-year decline of 13.1%. The decline in active clients is due to the addition of fewer new clients, as well as clients becoming inactive, both of which we believe have been influenced by the macroeconomic environment.

Net Revenue per Active Client

We believe that net revenue per active client is an indicator of client engagement and satisfaction. We calculate net revenue per active client based on net revenue over the preceding four fiscal quarters divided by the number of active clients, measured as of the last day of the period. Net revenue per active client was $497 and $546 as of July 29, 2023 and July 30, 2022, respectively, representing a year-over-year decrease of 9.0%, as we have observed lower spending from clients in recent periods, including lower new client activity.

Factors Affecting Our Performance

Macroeconomic Environment

Our business and operating results are subject to national and global economic conditions and their impact on consumer discretionary spending. As the macroeconomic environment is experiencing inflation, rising interest rates, recessionary concerns, tightening labor markets, and general uncertainty regarding the overall future political and economic environment, we have seen and expect to continue to see negative impacts on consumer confidence and consumer demand. As this challenging and uncertain economic environment continues, we cannot predict whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business.

Inventory Management

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

Supply chain constraints and delays have continued to ease, and the timing and amount of inventory receipts were not impacted by supply chain delays during fiscal 2023. As such, we are no longer ordering product in advance of our typical timelines.

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Client Acquisition and Engagement

To grow our business, we must continue to acquire clients and successfully engage and retain them. Our marketing strategy aims to preserve liquidity and achieve profitability, while simultaneously attracting long-term customers to fuel a return to growth. We utilize both digital and offline channels to attract new visitors to our website or mobile app and subsequently convert them into clients. Our marketing costs are largely composed of advertising, client referrals, and public relations expenses. At any given time, our advertising efforts may include, social media marketing, keyword search campaigns, affiliate programs, partnerships, campaigns with celebrities and influencers, display advertising, television, radio, video, content, direct mail, email, mobile “push” communications, SMS, and search engine optimization. Our marketing expenses have varied from period to period and we expect this trend to continue. In fiscal 2024, we expect our marketing spend as a percentage of revenue to be relatively consistent with fiscal 2023.

Marketing expense is recorded in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss, and the largest component of our marketing expense is advertising, which was $119.5 million in fiscal 2023, compared to $203.4 million in fiscal 2022. Beginning in the second quarter of fiscal 2023, we began including costs for influencer campaigns within advertising expense and have revised advertising expense for fiscal 2022 to reflect the inclusion of these costs.

Operations and Infrastructure

We intend to leverage our data science and deep understanding of our clients’ needs to make targeted investments in technology and product, and plan to prioritize investments with near-term positive returns. In the second quarter of fiscal 2023, we decided to close our Salt Lake City fulfillment center in order to optimize network capacity. In June 2023, we announced the intended closures of our fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. In addition, in June 2023, we also announced that we would enter a consultation period, in accordance with UK law, to explore exiting the market in the UK. On August 24, 2023, we ended the consultation period, and made the decision to exit our business and wind down our operations in the UK. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report for further details.

Merchandise Mix

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

Historically, changes in our merchandise mix have not caused significant fluctuations in our gross margin; however, categories, brands, product types, and price points do have a range of margin profiles. For example, our Owned Private Label Brands have generally contributed higher margins than our third-party brands, which have generally contributed lower margins. We continue to evolve our merchandise mix to improve the client experience and attract new active clients. Shifts in merchandise mix will result in fluctuations in our gross margin from period to period.

Components of Results of Operations

Revenue

We generate revenue from the sale of merchandise through our Fix and Freestyle offerings. With our Fix offering, we charge a nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any merchandise purchased. We offer Style Pass to provide select U.S. clients with an alternative to paying a styling fee per Fix. Style Pass clients pay a nonrefundable annual fee for unlimited styling that is credited towards merchandise purchases. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout this Annual Report. We also recognize revenue resulting from estimated breakage income on gift cards.

Cost of Goods Sold

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

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) consist primarily of compensation and benefits costs, including stock-based compensation expense, for our employees including our stylists, fulfillment center operations, data analytics, merchandising, engineering, marketing, client experience, and corporate personnel. SG&A also includes marketing and advertising costs, third-party logistics costs, facility costs for our fulfillment centers and offices, professional service fees, information technology costs, and depreciation and amortization expense. As a result of our restructuring and cost reduction actions throughout fiscal 2023 and fiscal 2022, we expect SG&A in fiscal 2024 to continue to decrease as compared to fiscal 2023. Our classification of certain components within SG&A may vary from other companies in our industry and may not be comparable.

Interest Income

Interest income is generated from our cash equivalents and investments in available-for-sale securities.

Income Tax Provision (Benefit)

Our provision (benefit) for income taxes consists of an estimate of federal, state, and international income taxes based on enacted federal, state, and international tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation of our net federal and state deferred tax assets.

Results of Operations

Comparison of the Fiscal Years Ended July 29, 2023, July 30, 2022, and July 31, 2021

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

* Not meaningful

The following table sets forth the components of our results of operations as a percentage of net revenue:

Note: Due to rounding, percentages in this table may not sum to totals.

Revenue and Gross Margin

Revenue in fiscal 2023 decreased by $434.4 million, or 21.0%, as compared to revenue in fiscal 2022. The decline in revenue was primarily attributable to a 13.1% decline in active clients from July 30, 2022 to July 29, 2023, which led to a decrease in sales of merchandise. Revenue was also impacted by a 9.0% decline in net revenue per active client in fiscal 2023, as compared to fiscal 2022, as we have observed clients spending less in recent periods.

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Gross margin for fiscal 2023, decreased by 160 basis points as compared to fiscal 2022. The decrease was primarily attributable to higher product and transportation costs as a percentage of revenue, substantially offset by our improved inventory position, as we better aligned our inventory composition, which has led to lower inventory write-offs as a percentage of revenue.

Selling, General, and Administrative Expenses

SG&A in fiscal 2023 decreased by $247.2 million, or 22.1%, as compared to fiscal 2022, primarily due to a $149.5 million decrease in compensation and benefits expense, including lower stock-based compensation, largely driven by our restructuring actions and reductions in variable labor costs due to lower sales volumes. These decreases were partially offset by a year-over-year increase of $24.4 million in restructuring and other one-time costs. SG&A expense was also impacted by a $83.9 million reduction in our advertising expense as compared to fiscal 2022, as a result of our decision to reduce advertising spend in fiscal 2023.

SG&A as a percentage of revenue decreased to 53.1% in fiscal 2023, as compared to 53.9% in fiscal 2022. The decrease in SG&A margin was primarily related to reductions in advertising, which was 7.3% of net revenue in fiscal 2023, as compared to 9.8% of net revenue in fiscal 2022. This was primarily offset by restructuring and other one-time costs, which increased as a percentage of net revenue from 1.3% in fiscal 2022 to 3.1% in fiscal 2023.

Provision for Income Taxes

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

We are subject to income taxes in the United States and the UK. Our effective tax rate and provision for income taxes increased in fiscal 2023 as compared to fiscal 2022, primarily due to additional foreign income taxes and less reserve releases due to lapses in statutes of limitation.

Liquidity and Capital Resources

Sources of Liquidity

Our principal source of liquidity is our cash flow from operations.

As of July 29, 2023, we had $239.4 million of cash and cash equivalents and $18.2 million of short-term investments with contractual maturities of 12 months or less.

We are party to a $100.0 million amended and restated credit agreement, entered into June 2, 2021 and amended on July 29, 2022 (the “Amended Credit Agreement”) with Silicon Valley Bank, a division of First-Citizens Bank & Trust Company (successor by purchase to the Federal Deposit Insurance Corporation as Receiver for Silicon Valley Bridge Bank, N.A. (as successor of Silicon Valley Bank)), and other lenders. The Amended Credit Agreement includes a letter of credit sub-facility of $30.0 million and a swingline sub-facility of up to $40.0 million. As of July 29, 2023, we did not have any borrowings outstanding on the revolving line of credit under the Amended Credit Agreement and we had $78.1 million in borrowing capacity as reduced by outstanding letters of credit.

Our obligations under the Amended Credit Agreement and any hedging or cash management agreements entered into with any lender thereunder are secured by substantially all of our current and future property, rights, and assets, including, but not limited to, cash, goods, equipment, contractual rights, financial assets, and intangible assets. The Amended Credit Agreement contains covenants limiting the ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make investments, in each case subject to certain exceptions. The Amended Credit Agreement also contains financial covenants requiring us to maintain minimum free cash flow and an adjusted current ratio above specified levels, measured in each case at the end of each fiscal quarter. The Amended Credit Agreement contains events of default that include, among others, non-payment of principal, interest, or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, and material judgments.

The revolving line of credit under the Amended Credit Agreement will terminate on May 31, 2024, unless the termination date is extended at the election of the lenders. Our intention is to renew or replace the line of credit before the termination date.

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For information on the terms of the Amended Credit Agreement, refer to Note 7, “Credit Agreement” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Uses of Cash

Our primary use of cash includes operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our business.

We believe our existing cash, cash equivalents, and investment balances will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months and beyond.

Share Repurchases

In January 2022, our Board of Directors authorized a share repurchase program to repurchase up to $150.0 million of our outstanding Class A common stock, with no expiration date (the “2022 Repurchase Program”). We may repurchase shares from time to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The actual timing, number and value of shares repurchased in the future will be determined by the Company in its discretion and will depend on a number of factors, including price, trading volume, market conditions, and other general business conditions. Repurchases will be funded from the Company’s existing cash and cash equivalents or future cash flow. The repurchase program may be modified, suspended, or terminated at any time. The Company made no repurchases of Class A common stock in fiscal 2023. As of July 29, 2023, the Company had repurchased 2,302,141 shares of Class A common stock for approximately $30.0 million under the 2022 Repurchase Program. We had $120.0 million remaining in share repurchase capacity as of July 29, 2023.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

Cash Provided by (Used in) Operating Activities

During fiscal 2023, cash provided by operating activities was $57.8 million, which consisted of a net loss of $172.0 million, adjusted by non-cash charges of $150.1 million and a change of $79.7 million in our net operating assets and liabilities. The non-cash charges were largely driven by $104.5 million of stock-based compensation expense, $43.3 million of depreciation, amortization, and accretion, and $18.2 million in asset impairment charges. The change in our net operating assets and liabilities was primarily due to a change of $78.4 million in our inventory balance due to a decline in inventory receipts to bring inventory balances in line with current demand, and a cash inflow of $53.0 million from income tax refunds, partially offset by a decrease of $63.4 million in our accounts payable and accrued liabilities due to timing of payments.

During fiscal 2022, cash provided by operating activities was $55.4 million, which consisted of a net loss of $207.1 million, adjusted by non-cash charges of $188.1 million and a change of $74.4 million in our net operating assets and liabilities. The non-cash charges were largely driven by $128.5 million of stock-based compensation expense, $37.2 million of depreciation, amortization, and accretion, $16.6 million in inventory reserves, and $6.2 million in asset impairment charges. The change in our net operating assets and liabilities was primarily due to an increase of $71.3 million in our accounts payable balance due to timing of inventory receipts and payments.

Cash Provided by Investing Activities

During fiscal 2023, cash provided by investing activities was $64.3 million, primarily related to net cash flow from purchases, sales, and maturities of $82.5 million in highly rated available-for-sale securities, partially offset by $19.0 million in purchases of property and equipment.

During fiscal 2022, cash provided by investing activities was $10.2 million, primarily related to net cash flow from purchases, sales, and maturities of $56.6 million in highly rated available-for-sale securities, partially offset by $46.4 million in purchases of property and equipment.

Cash Used in Financing Activities

During fiscal 2023, cash used in financing activities was $15.5 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $15.6 million.

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During fiscal 2022, cash used in financing activities was $60.3 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $31.7 million and repurchases of common stock of $30.0 million, partially offset by proceeds from the exercise of stock options of $1.5 million.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

Cash and cash equivalents at both July 29, 2023 and July 30, 2022 was impacted based on fluctuations in the exchange rate of the British pound sterling to the U.S. dollar.

Contractual Obligations and Other Commitments

Our most significant contractual obligations relate to purchase commitments of inventory and operating lease obligations on our fulfillment centers and corporate offices. As of July 29, 2023, we had $168.0 million of enforceable and legally binding inventory purchase commitments, predominantly due within one year. For information on our contractual obligations for operating leases, refer to Note 4, “Leases” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

The critical accounting policies, estimates, and judgments that we believe to have the most significant impacts to our consolidated financial statements are described below.

Inventory, net

Inventory, net consists of finished goods which are recorded at the lower of cost or net realizable value using the first-in-first-out (“FIFO”) method. We establish a reserve for excess and slow-moving inventory we expect to write off or sell below cost as clearance based on historical trends, which considers factors such as the age of the inventory and sell through rate for a particular item. In addition, we estimate and accrue shrinkage as a percentage of inventory out to the client and also accrue for damaged items and items we intend to clearance. Estimates are made to reduce the inventory value for lost, stolen, damaged, or clearanced items to net realizable value. If actual experience differs significantly from our estimates due to changes in client merchandise preferences, client demand, or economic conditions, additional inventory write-downs may be required which could adversely affect our operating results. A 10% change in our inventory reserves estimate as of July 29, 2023 would result in a change in reserves of approximately $4.2 million.

During both fiscal 2023 and fiscal 2022, we recorded additional specific reserves related to excess and slow-moving spring and summer inventory. Additionally, in fiscal 2023, in connection with the planned exit of operations in the UK, we recorded a specific inventory reserve to record anticipated losses on inventory in the UK at the lower of cost or net realizable value, based on projected sales through the exit of this business. Aside from these specific reserves, we have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during fiscal 2023 or fiscal 2022.

Stock-Based Compensation

We grant stock options and restricted stock units (“RSUs”) to our employees and members of our Board of Directors, and recognize stock-based compensation expense based on the fair value of such awards at grant date. We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires us to use certain estimates and assumptions such as:

•Expected volatility of our common stock—based on an even blend of historical and implied volatility of our common stock;

•Expected term of our stock options—the period that our stock options are expected to be outstanding based on historical averages.

•Expected dividend yield—as we have not paid and do not anticipate paying dividends on our common stock, our expected dividend yield is 0%; and

•Risk-free interest rates—based on the U.S. Treasury zero coupon notes in effect at the grant date with maturities equal to the expected terms of the options granted.

We record stock-based compensation expense net of estimated forfeitures so that expense is recorded for only the stock options and RSUs that we expect to vest. We estimate forfeitures based on our historical forfeiture of stock options and RSUs adjusted to reflect future changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.

We will continue to use judgment in evaluating assumptions related to our stock-based compensation expense. As we continue to accumulate data related to our common stock, we may have refinements to our estimates and assumptions which could impact our future stock-based compensation expense.

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Income Taxes

We are subject to income taxes in the United States and the UK. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the amount that is more likely than not to be realized. We consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future years, and other relevant factors.

Significant judgment is required in determining our uncertain tax positions. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than 50% likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.

Revenue Recognition

Revenue is recognized net of sales taxes, discounts, and estimated refunds. We record a refund reserve based on our historical refund patterns. The impact of our refund reserve on our operating results may fluctuate based on changes in client refund activity over time.

We also sell gift cards to clients and establish a liability based on the face value of such gift cards. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies.

We have not made any material changes to our revenue recognition accounting policies during fiscal 2023.

Recent Accounting Pronouncements

For recent accounting pronouncements, refer to Note 2, “Significant Accounting Policies” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K, or Annual Report. We use a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday that is closest to July 31 of that year. Each fiscal year generally consists of four 13-week fiscal quarters, with each fiscal quarter ending on the Saturday that is closest to the last day of the last month of the quarter. The fiscal years ended July 30, 2022 (“2022”) and July 31, 2021 (“2021”) consisted of 52 weeks. The fiscal year ended August 1, 2020 (“2020”) consisted of 53 weeks. Throughout this Annual Report, all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.

In addition, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

A discussion regarding our financial condition and results of operation for the fiscal year ended July 30, 2022, compared to the fiscal year ended July 31, 2021, is presented below. A discussion regarding our financial condition and results of operations for fiscal year ended July 31, 2021, compared to the fiscal year ended August 1, 2020, can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021, filed with the SEC on September 27, 2021, which is available on the SEC’s website at www.sec.gov and on the SEC Filings section of the Investor Relations section of our website at: https://investors.stitchfix.com.

Overview

Since our founding in 2011, we have helped millions of women, men, and kids discover and buy what they love through personalized shipments of apparel, shoes, and accessories. Currently, clients can engage with us in one of two ways that, combined, form an ecosystem of personalized experiences across styling, shopping, and inspiration: (1) by receiving a personalized shipment of items informed by our algorithms and sent by a Stitch Fix stylist (a “Fix”); or (2) by purchasing directly from our website or mobile app based on a personalized assortment of outfit and item recommendations (“Freestyle”). For a Fix, clients can choose to schedule automatic shipments or order on demand after they fill out a style profile on our website or mobile app. After receiving a Fix, our clients purchase the items they want to keep and return the other items, if any. Freestyle utilizes our algorithms to recommend a personalized assortment of outfit and item recommendations that will update throughout the day and will continue to evolve as we learn more about the client.

For the fiscal year ended July 30, 2022, we reported $2.1 billion of revenue representing a year-over-year decline of 1.4% from the fiscal year ended July 31, 2021. As of July 30, 2022, and July 31, 2021, we had approximately 3,795,000 and 4,165,000 active clients, respectively, representing a year-over-year decline of 8.9%.

During the first half of fiscal 2022, our year-over-year net revenue growth rate was lower than it had historically been, and during the third and fourth quarters of fiscal 2022, we experienced a decline in net revenue year-over-year. This revenue trend is primarily due to our challenges in acquiring new clients during fiscal 2022, which has had and will continue to have a negative compounding effect on net revenue in fiscal 2023. We are continuing to navigate the uncertainties presented by the current macroeconomic environment and remain focused on improving the conversion of new clients and our overall client experience.

Net loss for the fiscal year ended July 30, 2022, was $207.1 million, compared to net loss of $8.9 million for the fiscal year ended July 31, 2021.

In light of our recent business momentum and an uncertain macroeconomic environment, we announced a restructuring plan on June 9, 2022, that reduces our future fixed and variable operating costs and allows us to centralize key capabilities, strengthen decision-making to drive efficiencies, and ensure we are allocating resources to our most critical priorities. This restructuring plan reduced our workforce by approximately 15% of salaried positions and represented approximately 4% of our roles in total.

We are continuing to evaluate other fixed and variable operating costs, including rationalizing our real estate footprint, to position ourselves for profitable growth in the future. However, our future results of operations will depend on our ability to successfully navigate current business challenges and the overall macroeconomic environment. Notwithstanding this restructuring plan, we will continue to invest strategically in both product and technology, while remaining financially disciplined. In connection with the restructuring plan, we incurred $10.9 million in cash expenses related to termination benefits, $6.2 million in non-cash asset impairment charges, and $0.7 million of other non-cash costs which were recognized in the fourth quarter of fiscal 2022. We also incurred other one-time cash charges of $8.5 million related to retention bonuses for continuing employees which was recognized in the fourth quarter of fiscal 2022.

For more information on the components of net loss, refer to the section titled “Results of Operations” below.

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Key Financial and Operating Metrics

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. We believe that adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, and that this supplemental measure facilitates comparisons between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

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

•adjusted EBITDA excludes interest income and other expense, net, as these items are not components of our core business;

•adjusted EBITDA does not reflect our income tax provision (benefit), which may increase or decrease cash available to us;

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

•adjusted EBITDA excludes the non-cash expense of stock-based compensation, which has been, and will continue to be for the foreseeable future, an important part of how we attract and retain our employees and a significant recurring expense in our business; and

•adjusted EBITDA excludes costs incurred related to discrete restructuring plans and other one-time costs that are fundamentally different in strategic nature and frequency from ongoing initiatives. We believe exclusion of these items facilitates a more consistent comparison of operating performance over time, however these costs do include cash outflows;

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

Adjusted EBITDA

We define adjusted EBITDA as net loss excluding interest income, other expense, net, income tax provision (benefit), depreciation and amortization, stock-based compensation expense, and restructuring and other one-time costs. The following table presents a reconciliation of net loss, the most comparable GAAP financial measure, to adjusted EBITDA for each of the periods presented:

(1)Excludes $1.1 million of stock-based compensation expense reflected in “Restructuring and other one-time costs” for the year ended July 30, 2022.

(2)Restructuring charges consist of $17.7 million in cash and noncash charges primarily related to termination benefits and asset impairment charges in connection with our June 9, 2022, restructuring plan. Other one-time costs primarily consists of $8.5 million in retention bonuses for continuing employees and we expect to incur an additional $5.4 million in retention bonuses during the first quarter of fiscal 2023 in connection with our one-time retention program.

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Free Cash Flow

We define free cash flow as cash flows from operating activities reduced by purchases of property and equipment that are included in cash flows from investing activities. The following table presents a reconciliation of cash flows provided by (used in) operating activities, the most comparable GAAP financial measure, to free cash flow for each of the periods presented:

Operating Metrics

Active Clients

We believe that the number of active clients is a key indicator of our growth and the overall health of our business. We define an active client as a client who checked out a Fix or was shipped an item via Freestyle in the preceding 52 weeks, measured as of the last day of that period. A client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We consider each Women’s, Men’s, or Kids account as a client, even if they share the same household. We had 3,795,000 and 4,165,000 active clients as of July 30, 2022, and July 31, 2021, respectively, representing a year-over-year decline of 8.9%. The decline in active clients was driven by client conversion challenges, lower site traffic, and the lapping of our high-dollar value referral program which ended in fiscal 2021.

Net Revenue per Active Client

We believe that net revenue per active client is an indicator of client engagement and satisfaction. We calculate net revenue per active client based on net revenue over the preceding four fiscal quarters divided by the number of active clients, measured as of the last day of the period. Net revenue per active client was $546 and $505 as of July 30, 2022, and July 31, 2021, respectively, representing a year-over-year increase of 8.1%.

Factors Affecting Our Performance

Inventory Management

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

During the first six months of fiscal 2022, we experienced lower than expected inventory receipts largely due to global supply chain delays. We worked to mitigate these delays by ordering product in advance of our typical timelines. During the second half of fiscal 2022, we experienced slight easing of these supply chain delays, and coupled with our mitigating strategies, inventory receipts were less severely impacted, a trend we expect to continue in fiscal 2023. We will continue to actively manage global supply chain delays and plan to mitigate the impact of any anticipated delays on future inventory receipts.

Client Acquisition and Engagement

To grow our business, we must continue to acquire clients and successfully engage them. We believe that implementing broad-based marketing strategies that increase our brand awareness has the potential to strengthen Stitch Fix as a national consumer brand, help us acquire new clients, and drive revenue growth. We currently utilize both digital and offline channels to attract new visitors to our website or mobile app and subsequently convert them into clients. Our current marketing efforts include client referrals, affiliate programs, partnerships, campaigns with celebrities and influencers, display advertising, television, print, radio, video, content, direct

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mail, social media, email, mobile “push” communications, search engine optimization, and keyword search campaigns. The launch of Freestyle to new-to-Stitch Fix clients has opened up new marketing opportunities and channels with which we have less experience. Our marketing expenses have varied from period to period, and we expect this trend to continue as we test new channels and refine our marketing strategies.

The largest component of our marketing spend is advertising, which was $183.8 million for the fiscal year ended July 30, 2022, compared to $174.7 million for the fiscal year ended July 31, 2021.

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

Investment in our Operations and Infrastructure

To grow our client base and enhance our offering, we will incur additional expenses. We intend to leverage our data science and deep understanding of our clients’ needs to make targeted investments in technology and product.

Merchandise Mix

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

Generally, changes in our merchandise mix have not caused significant fluctuations in our gross margin to date; however, categories, brands, product types, and price points do have a range of margin profiles. For example, our Exclusive Brands have generally contributed higher margins than our third-party brands, which have generally contributed lower margins. We continue to analyze and evolve our merchandise mix and may increase or add third-party brands to improve the client experience and attract new active clients. Shifts in merchandise mix, particularly if we increase the number of third-party brands we offer, may affect or result in fluctuations in our gross margin from period to period.

Components of Results of Operations

Revenue

We generate revenue from the sale of merchandise, either through our Fix or Freestyle offerings. With our Fix offering, we charge a nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any merchandise purchased. We offer Style Pass to provide select U.S. clients with an alternative to paying a styling fee per Fix. Style Pass clients pay a nonrefundable annual fee for unlimited styling that is credited towards merchandise purchases. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout this Annual Report. We also recognize revenue resulting from estimated breakage income on gift cards.

Cost of Goods Sold

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

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) consist primarily of compensation and benefits costs, including stock-based compensation expense, for our employees including our stylists, fulfillment center operations, data analytics, merchandising, engineering, marketing, client experience, and corporate personnel. Selling, general, and administrative expenses also include marketing and advertising costs, third-party logistics costs, facility costs for our fulfillment centers and offices, professional service fees, information technology costs, and depreciation and amortization expense. As a result of our restructuring and cost reduction actions, we expect SG&A in fiscal 2023 to decrease year over year. Our classification of selling, general, and administrative expenses may vary from other companies in our industry and may not be comparable.

Interest Income

Interest income is generated from our cash equivalents and investments in available-for-sale securities.

Income Tax Provision (Benefit)

Our income tax provision (benefit) consists of an estimate of federal, state, and international income taxes based on enacted federal, state, and international tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation of our net federal and state deferred tax assets.

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Results of Operations

Comparison of the Fiscal Years Ended July 30, 2022, July 31, 2021, and August 1, 2020

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

* Not meaningful

The following table sets forth the components of our results of operations as a percentage of revenue:

Note: Due to rounding, percentages in this table may not sum to totals.

Revenue and Gross Margin

Revenue in the fiscal year ended July 30, 2022 decreased by $28.4 million, or 1.4%, from revenue in the fiscal year ended July 31, 2021. The decline in revenue was primarily attributable to a 8.9% decline in active clients from July 31, 2021 to July 30, 2022, and what we believe was a slowdown in consumer discretionary spending during our fourth quarter of fiscal 2022. The decline in active clients was primarily driven by client conversion challenges and lower site traffic, as we experienced weaker-than-expected conversion of new clients due to onboarding friction, and we experienced traffic-related challenges due in part to the ongoing effects of Apple’s iOS privacy changes. The decline in active clients was also attributable to higher attrition of clients obtained through our high-dollar value referral program that ended in fiscal 2021.

Gross margin for the fiscal year ended July 30, 2022, decreased by 130 basis points compared with the fiscal year ended July 31, 2021. The decrease was primarily attributable to an increase in inventory charges for excess spring and summer inventory in the current year.

Selling, General, and Administrative Expenses

SG&A expenses in the fiscal year ended July 30, 2022, increased by $105.5 million, compared with the fiscal year ended July 31, 2021. As a percentage of revenue, SG&A expenses increased to 53.9% for the fiscal year ended July 30, 2022, compared with 48.1% for the fiscal year ended July 31, 2021. The increase was primarily related to higher compensation and benefits expenses, including an increase in stock-based compensation of $27.8 million in fiscal 2022, primarily due to investments in technology talent. The increase was also related to restructuring and other one-time costs of $26.2 million recorded in the fourth quarter of fiscal 2022.

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Income Tax Provision (Benefit)

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

We are subject to income taxes in the United States and the UK. Our effective tax rate and benefit for income taxes decreased from the fiscal year ended July 31, 2021, to the fiscal year ended July 30, 2022, primarily due to the reversal of stock-based compensation expenses and the absence of the prior year net operating loss carryback provisions of the CARES Act that were not in effect for the current year.

Liquidity and Capital Resources

Sources of Liquidity

Our principal source of liquidity is our cash flow from operations.

As of July 30, 2022, we had $130.9 million of cash and cash equivalents and $99.8 million of investments. Our investment balance includes $82.0 million of short-term investments with contractual maturities of 12 months or less as of July 30, 2022.

We are party to a $100.0 million amended and restated credit agreement, entered into June 2, 2021 and amended on July 29, 2022 (the “Amended Credit Agreement”) with Silicon Valley Bank and other lenders. The Amended Credit Agreement includes a letter of credit sub-facility of $30.0 million and a swingline sub-facility of up to $40.0 million. As of July 30, 2022, we did not have any borrowings outstanding under the Credit Agreement.

Our obligations under the Amended Credit Agreement and any hedging or cash management agreements entered into with any lender thereunder are secured by substantially all of our current and future property, rights, and assets, including, but not limited to, cash, goods, equipment, contractual rights, financial assets, and intangible assets. The Amended Credit Agreement contains covenants limiting the ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make investments, in each case subject to certain exceptions. The Amended Credit Agreement also contains financial covenants requiring us to maintain minimum free cash flow and an adjusted current ratio above specified levels, measured in each case at the end of each fiscal quarter. The Amended Credit Agreement contains events of default that include, among others, non-payment of principal, interest, or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, and material judgments.

For information on the terms of the Amended Credit Agreement, please see “Credit Agreement” in Note 7 to the Consolidated Financial Statements included in this Annual Report.

Uses of Cash

Our primary use of cash includes operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our business. We may also use cash to repurchase shares of our common stock.

We believe our existing cash, cash equivalents, investment balances, and the borrowing available under our Amended Credit Agreement, if needed, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months and beyond.

Share Repurchases

In January 2022, our Board of Directors authorized a share repurchase program to repurchase up to $150.0 million of our outstanding Class A common stock, with no expiration date (the “2022 Repurchase Program”). We may repurchase shares from time to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The actual timing, number and value of shares repurchased in the future will be determined by the Company in its discretion and will depend on a number of factors, including price, trading volume, market conditions, and other general business conditions. Repurchases will be funded from the Company’s existing cash and cash equivalents or future cash flow. The repurchase program may be modified, suspended, or terminated at any time. During the three months ended July 30, 2022, the Company made no repurchases of Class A common stock. As of July 30, 2022, the Company has repurchased 2,302,141 shares of Class A common stock for approximately $30.0 million under the 2022 Repurchase Program. We had $120.0 million remaining in share repurchase capacity as of July 30, 2022.

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Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

Cash provided (used in) by operating activities

During the fiscal year ended July 30, 2022, cash provided by operating activities was $55.4 million, which consisted of a net loss of $207.1 million, adjusted by non-cash charges of $188.1 million and a change of $74.4 million in our net operating assets and liabilities. The non-cash charges were largely driven by $128.5 million of stock-based compensation expense, $37.2 million of depreciation, amortization, and accretion, $16.6 million in inventory reserves, and $6.2 million in asset impairment charges. The change in our net operating assets and liabilities was primarily due to an increase of $71.3 million in our accounts payable balance due to timing of inventory receipts and payments, as well as increased efficiency in the management of our working capital.

During the fiscal year ended July 31, 2021, cash used in operating activities was $15.7 million, which consisted of a net loss of $8.9 million, adjusted by non-cash charges of $135.9 million and a change of $142.7 million in our net operating assets and liabilities. The non-cash charges were largely driven by $100.7 million of stock-based compensation expense, and $29.9 million of depreciation, amortization, and accretion. The change in our net operating assets and liabilities was primarily due to an increase of $96.1 million in our inventory balance due to increased inventory purchases to support growth and selection, and a change of $31.7 million in income tax receivables primarily due to the net operating loss carryback provisions of the CARES Act.

Cash provided by (used in) investing activities

During the fiscal year ended July 30, 2022, cash provided by investing activities was $10.2 million, primarily related to net cash flow from purchases, sales, and maturities of $56.6 million in highly rated available-for-sale securities, partially offset by $46.4 million in purchases of property and equipment.

During the fiscal year ended July 31, 2021, cash provided by investing activities was $39.1 million, primarily related to net cash flow from purchases, sales, and maturities of $74.4 million in highly rated available-for-sale securities, partially offset by $35.3 million in purchases of property and equipment.

Cash used in financing activities

During the fiscal year ended July 30, 2022, cash used in financing activities was $60.3 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $31.7 million and repurchases of common stock of $30.0 million, partially offset by proceeds from the exercise of stock options of $1.5 million.

During the fiscal year ended July 31, 2021, cash used in financing activities was $38.9 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $64.3 million, partially offset by proceeds from the exercise of stock options of $25.9 million.

Effect of exchange rate changes on cash and cash equivalents

Foreign currency exchange rates for the fiscal year ended July 30, 2022, had a negative impact of $4.2 million on cash and cash equivalents. The negative impact on cash and cash equivalents was primarily due to the unfavorable impact of fluctuations in the exchange rate of the British pound sterling to the U.S. dollar.

Contractual Obligations and Other Commitments

Our most significant contractual obligations relate to purchase commitments of inventory and operating lease obligations on our fulfillment centers and corporate offices. As of July 30, 2022, we had $235.0 million of enforceable and legally binding inventory purchase commitments predominantly due within one year. For information on our contractual obligations for operating leases, please see “Leases” in Note 4 of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” to this Annual Report on Form 10-K.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

The critical accounting policies, estimates, and judgments that we believe to have the most significant impacts to our consolidated financial statements are described below.

Inventory, net

Inventory, net consists of finished goods which are recorded at the lower of cost or net realizable value using the first-in-first-out (FIFO) method. We establish a reserve for excess and slow-moving inventory we expect to write off based on historical trends, which consider factors such as the age of the inventory and sell through rate for a particular item. In addition, we estimate and accrue shrinkage as a percentage of inventory out to the client and damaged items at 100% of cost. Inventory shrinkage and damage estimates are made to reduce the inventory value for lost, stolen, or damaged items. If actual experience differs significantly from our estimates due to changes in client merchandise preferences, client demand, or economic conditions, additional merchandise inventory write-downs may be required which could adversely affect our operating results. A 10% change in our inventory reserves estimate as of July 30, 2022, would result in a change in reserves of approximately $6.0 million.

In fiscal 2022, we recorded additional reserves related to excess spring and summer inventory. Aside from these specific reserves, we have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the fiscal year ended July 30, 2022.

Stock-Based Compensation

We grant stock options and restricted stock units (“RSUs”) to our employees and members of our Board of Directors, and recognize stock-based compensation expense based on the fair value of such awards at grant date. We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires us to use certain estimates and assumptions such as:

•Expected volatility of our common stock—based on an even blend of historical and implied volatility;

•Expected term of our stock options—the period that our stock options are expected to be outstanding based on historical averages.

•Expected dividend yield—as we have not paid and do not anticipate paying dividends on our common stock, our expected dividend yield is 0%; and

•Risk-free interest rates—based on the U.S. Treasury zero coupon notes in effect at the grant date with maturities equal to the expected terms of the options granted.

We record stock-based compensation expense net of estimated forfeitures so that expense is recorded for only the stock options and RSUs that we expect to vest. We estimate forfeitures based on our historical forfeiture of stock options and RSUs adjusted to reflect future changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.

We will continue to use judgment in evaluating assumptions related to our stock-based compensation expense. As we continue to accumulate data related to our common stock, we may have refinements to our estimates and assumptions which could impact our future stock-based compensation expense. During fiscal 2022, we updated our volatility and expected term assumptions to move away from using peer based volatility and the simplified method, respectively, and began using our own historical data for these assumptions.

Income Taxes

We are subject to income taxes in the United States and the UK. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the amount that is more likely than not to be realized. We consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future years, and other relevant factors.

Significant judgment is required in determining our uncertain tax positions. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available

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evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than 50% likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.

Revenue Recognition

Revenue is recognized net of sales taxes, discounts, and estimated refunds. We record a refund reserve based on our historical refund patterns. The impact of our refund reserve on our operating results may fluctuate based on changes in client refund activity over time.

We also sell gift cards to clients and establish a liability based on the face value of such gift cards. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies.

We have not made any material changes to our revenue recognition accounting policies during the fiscal year ended July 30, 2022.

Recent Accounting Pronouncements

For recent accounting pronouncements, please see “Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K, or Annual Report. We use a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday that is closest to July 31 of that year. Each fiscal year generally consists of four 13-week fiscal quarters, with each fiscal quarter ending on the Saturday that is closest to the last day of the last month of the quarter. The fiscal years ended July 31, 2021 (“2021”) and August 1, 2020 (“2020”) consisted of 52 weeks. The fiscal year ended August 3, 2019 (“2019”) consisted of 53 weeks. Throughout this Annual Report, all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.

In addition, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs, and involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section titled “Risk Factors” included under Part I, Item 1A and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements” in this Annual Report.

A discussion regarding our financial condition and results of operation for the fiscal year ended July 31, 2021, compared to the fiscal year ended August 1, 2020, is presented below. A discussion regarding our financial condition and results of operations for fiscal year ended August 1, 2020, compared to the fiscal year ended August 3, 2019, can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended August 1, 2020, filed with the SEC on September 25, 2020, which is available on the SEC’s website at www.sec.gov and on the SEC Filings section of the Investor Relations section of our website at: https://investors.stitchfix.com.

Overview

Since our founding in 2011, we have helped millions of women, men, and kids discover and buy what they love through personalized shipments of apparel, shoes, and accessories. Currently, clients can engage with us in one of two ways that, combined, form an ecosystem of personalized experiences across styling, shopping and inspiration: (1) by receiving a personalized shipment of apparel informed by our algorithms and sent by a Stitch Fix stylist (a “Fix”); or (2) by purchasing directly from our website or mobile app based on a personalized assortment of outfit and item recommendations (“Freestyle”). For a Fix, clients can choose to schedule automatic shipments or order on demand after they fill out a style profile on our website or mobile app. After receiving a Fix, our clients purchase the items they want to keep and return the other items, if any. Freestyle utilizes our algorithms to recommend a personalized assortment of outfit and item recommendations that will update throughout the day and will continue to evolve as we learn more about the client.

For the fiscal year ended July 31, 2021, we reported $2.1 billion of revenue representing year-over-year growth of 22.8% from the fiscal year ended August 1, 2020. As of July 31, 2021, and August 1, 2020, we had approximately 4,165,000 and 3,522,000 active clients, respectively, representing year-over-year growth of 18.3%.

Net loss for the fiscal year ended July 31, 2021, was $8.9 million, compared to net loss of $67.1 million for the fiscal year ended August 1, 2020. For more information on the components of net income (loss), refer to the section titled “Results of Operations” below.

COVID-19 Update

There continues to be uncertainty around the COVID-19 pandemic as the Delta variant of COVID-19, which appears to be the most transmissible and contagious variant to date, has caused a surge in COVID-19 cases globally. The full impact of the COVID-19 crisis on our business will depend on factors such as the length of time of the pandemic; how federal, state and local governments are responding, especially in light of the recent surge in cases due to the Delta variant; vaccination rates among the population; the efficacy of the COVID-19 vaccines against the Delta variant and other variants as they emerge; the longer-term impact of the crisis on the economy and consumer behavior; and the effect on our clients, employees, vendors, and other partners.

During this time, we are focused on protecting the health and safety of our employees while seeking to continue operating our business responsibly.

In the third quarter of fiscal 2020, we temporarily closed three of our fulfillment centers to assess our ability to operate under shelter-in-place orders and develop protocols to protect the welfare of our fulfillment center employees. Those fulfillment centers reopened shortly thereafter, and all of our fulfillment centers are currently operating with safety measures in place. We have also experienced smaller, intermittent interruptions at our fulfillment centers in connection with temporary closures of certain fulfillment centers for part of a work day or for a full day. While we have only experienced intermittent and temporary closures since the third quarter of 2020, we have recently begun to experience an increase of COVID-19 cases in our fulfillment centers in connection with the surge of cases caused by the Delta variant. This recent increase in cases has affected capacity at our fulfillment centers, which could affect shipments to clients and inventory management. Additionally, we have experienced difficulty hiring employees in our fulfillment centers, which we attribute to COVID-19 concerns and to increased competition and rising wages for eCommerce fulfillment center workers as eCommerce demand accelerates.

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While we expect many employees to return to our offices later this fiscal year, the timing of such a return has been affected by the Delta variant and related surge in COVID-19 cases and could be further effected by this resurgence of COVID-19 or additional resurgences. When we return to our office, we expect many employees to continue to work in a remote capacity or a hybrid of in-person and remote work. These changes to our operations going forward present additional challenges and increased costs to ensure our offices are safe and functional for hybrid offices that enable effective collaboration of both remote and in-person colleagues.

The effect of the COVID-19 pandemic on the broader economy and consumer behavior continues to evolve. During the latter half of our third fiscal quarter of 2020, we did experience lower demand, which negatively affected net revenue per active client, and which we believe was largely attributable to consumer reactions as the COVID-19 crisis escalated during March and April of 2020. Despite the continuing impact of COVID-19 on the overall economy, we saw strong retention from our auto-ship clients and growth in new client demand from increases in first Fix shipments in the second half of fiscal 2020. We continued to see growth in new client demand and strong auto-ship retention during fiscal 2021 and believe we are benefiting from the dislocation in the retail apparel market that is resulting from the COVID-19 pandemic. For further discussion of the COVID-19 related risks facing our business, refer to the “Risk Factors” section included in Part I, Item 1A.

Although we are experiencing unprecedented challenges during this global health crisis, we continue to focus on our long-term growth and strategies that capture the changing ways people shop. While we cannot reasonably estimate the long-term impacts of the COVID-19 pandemic, we believe that our business model positions us to emerge from this crisis with a structural advantage and new opportunities to increase market share.

Key Financial and Operating Metrics

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. We believe that adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, and that this supplemental measure facilitates comparisons between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies.

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

•adjusted EBITDA excludes interest (income) expense and other (income) expense, net, as these items are not components of our core business;

•adjusted EBITDA does not reflect our tax provision (benefit), which may increase or decrease cash available to us;

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

•adjusted EBITDA excludes the non-cash expense of stock-based compensation, which has been, and will continue to be for the foreseeable future, an important part of how we attract and retain our employees and a significant recurring expense in our business; and

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

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Adjusted EBITDA

We define adjusted EBITDA as net income (loss) excluding interest (income) expense, other (income) expense, net, provision (benefit) for income taxes, depreciation and amortization, and stock-based compensation expense. The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to adjusted EBITDA for each of the periods presented:

Free Cash Flow

We define free cash flow as cash flows provided by (used in) operating activities reduced by purchases of property and equipment that are included in cash flows used in investing activities. The following table presents a reconciliation of cash flows provided by (used in) operating activities, the most comparable GAAP financial measure, to free cash flow for each of the periods presented:

Operating Metrics

(1) Fiscal year 2019 was a 53-week year, with the extra week occurring in the quarter ended August 3, 2019.

Active Clients

We believe that the number of active clients is a key indicator of our growth and the overall health of our business. We define an active client as a client who checked out a Fix or was shipped an item using our direct-buy functionality, “Freestyle,” in the preceding 52 weeks, measured as of the last day of that period. A client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We consider each Women’s, Men’s, or Kids account as a client, even if they share the same household. We had 4,165,000 and 3,522,000 active clients as of July 31, 2021, and August 1, 2020, respectively, representing year-over-year growth of 18.3%.

Net Revenue per Active Client

We believe that net revenue per active client is an indicator of client engagement and satisfaction. We calculate net revenue per active client based on net revenue over the preceding four fiscal quarters divided by the number of active clients, measured as of the last day of the period. Net revenue per active client was $505 and $486 as of July 31, 2021, and August 1, 2020, respectively, representing a year-over-year increase of 3.9%.

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Factors Affecting Our Performance

Inventory Management

We leverage our data science to buy and manage our inventory, including merchandise assortment and fulfillment center optimization. Because our merchandise assortment directly correlates to client success, we may at times optimize our inventory to prioritize long-term client success over short-term gross margin impact. To ensure sufficient availability of merchandise, we generally enter into purchase orders well in advance and frequently before apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and availability of merchandise at time of purchase. We incur inventory write-offs and changes in inventory reserves that impact our gross margins.

Our inventory investments will fluctuate with the needs of our business. For example, in the first half of fiscal 2020, we purchased inventory based on our pre-COVID-19 pandemic projections, which resulted in excess inventory levels and higher inventory reserves during our third fiscal quarter. As noted above, in March 2020, we temporarily closed three of our fulfillment centers resulting in significantly less capacity in our warehouses and in turn delayed Fix shipments and a substantial backlog, delayed return processing, extended wait times for our clients, and significant inventory management challenges. During the fourth quarter of fiscal 2020, we increased capacity at our fulfillment centers and we experienced an uptick in client demand, both of which contributed to healthier inventory levels and lower inventory reserves than in our third fiscal quarter. During fiscal 2021, we increased our inventory levels to expand our inventory assortment and support our growth and future growth projections. If we fail to effectively predict client preferences or meet future sales projections, our inventory reserves, and potentially our inventory write-offs, will increase. Additionally, capacity constraints at our fulfillment centers due to hiring challenges, increased cases of COVID-19 among fulfillment center employees, or other reasons, will affect our ability to successfully manage our inventory. Furthermore, entering new locations, expanding to new categories, offering new functionalities such as Freestyle, or adding new fulfillment centers will all require additional investments in inventory.

Client Acquisition and Engagement

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

The largest component of our marketing spend is advertising, which was $174.7 million for the fiscal year ended July 31, 2021, compared to $167.8 million for the fiscal year ended August 1, 2020.

To successfully acquire clients and increase engagement, we must also continue to improve the diversity of our offering. These efforts may include broadening our brand partnerships and expanding into new categories, product types, price points, and geographies. For example, in July 2018 we launched Stitch Fix Kids, expanding our client and vendor base, and in May 2019, we launched our services in the UK, expanding our geographic scope. In June 2019, we launched Direct Buy, predecessor to Freestyle, in the United States which provides clients the flexibility to purchase items outside of a Fix.

Investment in our Operations and Infrastructure

To grow our client base and enhance our offering, we will incur additional expenses. We intend to leverage our data science and deep understanding of our clients’ needs to inform investments in operations and infrastructure. We anticipate that our expenses will increase as we continue to hire additional personnel and further advance our technological and data science capabilities. Moreover, we intend to make capital investments in our inventory, fulfillment centers, and office space and logistics infrastructure as we launch new categories, expand internationally, and drive operating efficiencies. For example, in November 2020, we entered into an agreement to lease approximately 700,000 square feet of space to be used as a new fulfillment center in Salt Lake City, Utah, and in May 2021, we closed our South San Francisco fulfillment center, which was the smallest facility in our network. We expect to increase our spending on these investments in the future and cannot be certain that these efforts will grow our client base or be cost-effective. However, we believe these strategies will yield positive returns in the long term.

Merchandise Mix

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

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

Components of Results of Operations

Revenue

We generate revenue from the sale of merchandise, either through our Fix or Freestyle offerings. With our Fix offering, we charge a nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any merchandise purchased. We offer Style Pass to provide select U.S. clients with an alternative to paying a styling fee per Fix. Style Pass clients pay a nonrefundable annual fee for unlimited styling that is credited towards merchandise purchases. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout this Annual Report. We also recognize revenue resulting from estimated breakage income on gift cards. We expect our revenue to increase in absolute dollars as we grow our business, although our revenue growth rate may slow in future periods.

Cost of Goods Sold

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

Selling, General, and Administrative Expenses

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

Interest Income

Interest income is generated from our cash, cash equivalents, and investments in available-for-sale securities.

Provision (Benefit) for Income Taxes

Our provision (benefit) for income taxes consists of an estimate of federal, state, and international income taxes based on enacted federal, state, and international tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation of our net federal and state deferred tax assets.

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Results of Operations

Comparison of the Fiscal Years Ended July 31, 2021, August 1, 2020, and August 3, 2019

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

(1)Fiscal 2021 and 2020 included 52 weeks. Fiscal 2019 was a 53-week year.

The following table sets forth the components of our results of operations as a percentage of revenue:

Revenue and Gross Margin

Revenue in the fiscal year ended July 31, 2021 increased by $389.5 million, or 22.8%, from revenue in the fiscal year ended August 1, 2020. The increase in revenue was primarily attributable to a 18.3% increase in active clients from August 1, 2020 to July 31, 2021, which drove increased sales of merchandise.

Gross margin for the fiscal year ended July 31, 2021, increased by 1.0% compared with the fiscal year ended August 1, 2020. The increase was primarily attributable to improved product margins as we strengthened partnerships with our vendors, lower packaging costs, and improved inventory reserves year over year. The increase in gross margin was partially offset by increased shipping expenses largely due to higher rates with our carriers.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses in the fiscal year ended July 31, 2021, increased by $205.1 million, compared with the fiscal year ended August 1, 2020. As a percentage of revenue, selling, general, and administrative expenses increased to 48.1% for the fiscal year ended July 31, 2021, compared with 47.1% for the fiscal year ended August 1, 2020. The increase was primarily related to higher compensation and benefits expense including an increase in hourly wages for our full-time U.S. warehouse associates. Our average full-time hourly wage for our U.S. warehouse employees is over $17 per hour and all full-time U.S. warehouse employees start with a minimum of $16 per hour.

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Provision for Income Taxes

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

We are subject to income taxes in the United States and the UK. Our effective tax rate and provision for income taxes increased from the fiscal year ended August 1, 2020, to the fiscal year ended July 31, 2021, primarily due to the net operating loss carryback provisions of the CARES Act and excess tax benefits from stock-based compensation, partially offset by the change in valuation allowance and certain nondeductible expenses.

Liquidity and Capital Resources

Sources of Liquidity

Our principal sources of liquidity since inception have been our cash flows from operations, as well as the net proceeds we received through private sales of equity securities and our IPO.

As of July 31, 2021, we had $129.8 million of cash and cash equivalents and $160.6 million of investments. Our investment balance includes $101.5 million of short-term investments with contractual maturities of 12 months or less as of July 31, 2021.

In June 2020, we entered into a $90.0 million credit agreement (the “2020 Credit Agreement”) with Silicon Valley Bank and other lenders. On June 2, 2021, we entered into a $100.0 million amended and restated credit agreement (the “Amended Credit Agreement”) with Silicon Valley Bank and other lenders, which replaced the 2020 Credit Agreement. The Amended Credit Agreement includes a letter of credit sub-facility of $30.0 million and a swingline sub-facility of up to $50.0 million. As of July 31, 2021, we did not have any borrowings outstanding under the Credit Agreement.

Our obligations under the Amended Credit Agreement and any hedging or cash management agreements entered into with any lender thereunder are secured by substantially all of our current and future property, rights, and assets, including, but not limited to, cash, goods, equipment, contractual rights, financial assets, and intangible assets. The Amended Credit Agreement contains covenants limiting the ability to, among other things, dispose of assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make investments, in each case subject to certain exceptions. The Amended Credit Agreement also contains financial covenants requiring us to maintain minimum free cash flow and an adjusted current ratio above specified levels, measured in each case at the end of each fiscal quarter. The Amended Credit Agreement contains events of default that include, among others, non-payment of principal, interest, or fees, breach of covenants, inaccuracy of representations and warranties, cross defaults to certain other indebtedness, bankruptcy and insolvency events, and material judgments.

For information on the terms of the Amended Credit Agreement, please see “Credit Agreement” in Note 7 of the Notes to Consolidated Financial Statements included in this Annual Report.

Uses of Cash

Our primary use of cash includes operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our business growth.

We believe our existing cash, cash equivalents, investment balances, and the borrowing available under our Amended Credit Agreement, if needed, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.

Cash Flows

The following table summarizes our cash flows for the periods indicated (in thousands):

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Cash provided by operating activities

During the fiscal year ended July 31, 2021, cash used in operating activities was $15.7 million, which consisted of a net loss of $8.9 million, adjusted by non-cash charges of $135.9 million and a change of $142.7 million in our net operating assets and liabilities. The non-cash charges were largely driven by $100.7 million of stock-based compensation expense, and $29.9 million of depreciation, amortization, and accretion. The change in our net operating assets and liabilities was primarily due to an increase of $96.1 million in our inventory balance due to increased inventory purchases to support growth and selection, and a change of $31.7 million in income tax receivables primarily due to the net operating loss carryback provisions of the CARES Act.

During the fiscal year ended August 1, 2020, cash provided by operating activities was $42.9 million, which consisted of a net loss of $67.1 million, adjusted by non-cash charges of $122.7 million and a change of $12.7 million in our net operating assets and liabilities. The non-cash charges were largely driven by $67.5 million of stock-based compensation expense, a $43.2 million valuation allowance on our deferred tax assets, and $22.6 million of depreciation, amortization, and accretion, partially offset by a $20.3 million change in deferred tax expense. The change in our net operating assets and liabilities was primarily due to an increase of $15.2 million in our inventory balance due to increased inventory purchases to support our growth and an increase of $6.7 million in our prepaid expenses and other assets balance due to timing of payments made in the period. This activity was substantially offset by an increase of $8.3 million in accrued expenses related to increased advertising activity during fiscal 2020 and expenses related to our California styling organization restructuring.

Cash used in investing activities

During the fiscal year ended July 31, 2021, cash provided by investing activities was $39.1 million, primarily related to purchases, sales, and maturities of $74.4 million in highly rated available-for-sale securities, partially offset by $35.3 million in purchases of property and equipment.

During the fiscal year ended August 1, 2020, cash used in investing activities was $70.5 million, primarily related to our net investment of $40.3 million in highly rated available-for-sale securities and $30.2 million purchases of property and equipment.

Cash provided by (used in) financing activities

During the fiscal year ended July 31, 2021, cash used in financing activities was $38.9 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $64.3 million, partially offset by proceeds from the exercise of stock options of $25.9 million.

During the fiscal year ended August 1, 2020, cash used in financing activities was $1.4 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units, substantially offset by proceeds from the exercise of stock options

Contractual Obligations and Other Commitments

Our most significant contractual obligations relate to purchase commitments on inventory and operating lease obligations on our fulfillment centers and corporate offices. As of July 31, 2021, we had $397.5 million of enforceable and legally binding inventory purchase commitments predominantly due within one year. For information on our contractual obligations for operating leases, please see “Leases” in Note 4 of the Notes to Consolidated Financial Statements included in this Annual Report.

In November 2020, we entered into an agreement to lease approximately 700,000 square feet of space to be used as a fulfillment center in Salt Lake City, Utah. We expect to classify this lease as an operating lease, with a commencement date within the first quarter of fiscal 2022. The lease expires in 2031 and we expect to record fixed operating lease costs of approximately $35.6 million over the life of the lease.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our financial statements requires us to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

The critical accounting policies, estimates, and judgments that we believe to have the most significant impacts to our consolidated financial statements are described below.

Inventory

Inventory consists of finished goods, which are recorded at the lower of cost or net realizable value using the specific identification method. We establish a reserve for excess and slow-moving inventory we expect to write off based on historical trends. In addition, we estimate and accrue shrinkage as a percentage of inventory out to the client and damaged items at 100% of cost. Inventory shrinkage and damage estimates are made to reduce the inventory value for lost, stolen, or damaged items. If actual experience differs significantly from our estimates due to changes in client merchandise preferences, client demand, or economic conditions, our operating results could be adversely affected.

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We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the fiscal year ended July 31, 2021.

Stock-Based Compensation

We grant stock options and restricted stock units (RSUs) to our employees and members of our board of directors, and recognize stock-based compensation expense based on the fair value of such awards at grant date. We estimate the fair value of stock options using the Black-Scholes option-pricing model. This model requires us to use certain estimates and assumptions such as:

•Expected volatility of our common stock-based on the volatility of comparable publicly traded companies;

•Expected term of our stock options—as we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we base our expected term on the simplified method, generally calculated as the mid-point between the vesting date and the end of the contractual term;

•Expected dividend yield—as we have not paid and do not anticipate paying dividends on our common stock, our expected dividend yield is 0%; and

•Risk-free interest rates-based on the U.S. Treasury zero coupon notes in effect at the grant date with maturities equal to the expected terms of the options granted.

We record stock-based compensation expense net of estimated forfeitures so that expense is recorded for only the stock options and RSUs that we expect to vest. We estimate forfeitures based on our historical forfeiture of stock options and RSUs adjusted to reflect future changes in facts and circumstances, if any. We will revise our estimated forfeiture rate if actual forfeitures differ from our initial estimates.

We will continue to use judgment in evaluating assumptions related to our stock-based compensation expense. As we continue to accumulate data related to our common stock, we may have refinements to our estimates and assumptions which could impact our future stock-based compensation expense. We have not made any material changes to our assumptions and estimates related to our stock-based compensation during the fiscal year ended July 31, 2021.

Income Taxes

We are subject to income taxes in the United States and the UK. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled.

Deferred tax assets are evaluated for future realization and reduced by a valuation allowance to the amount that is more likely than not to be realized. We consider many factors when assessing the likelihood of future realization, including our recent cumulative loss, earnings expectations in earlier future years, unsettled economic disruption of the COVID-19 pandemic, and other relevant factors.

Significant judgment is required in determining our uncertain tax positions. We continuously review issues raised in connection with all ongoing examinations and open tax years to evaluate the adequacy of our tax liabilities. We evaluate uncertain tax positions under a two-step approach. The first step is to evaluate the uncertain tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination based on its technical merits. The second step is, for those positions that meet the recognition criteria, to measure the tax benefit as the largest amount that is more than 50% likely of being realized. We believe our recorded tax liabilities are adequate to cover all open tax years based on our assessment. This assessment relies on estimates and assumptions and involves significant judgments about future events. To the extent that our view as to the outcome of these matters changes, we will adjust income tax expense in the period in which such determination is made. We classify interest and penalties related to income taxes as income tax expense.

Revenue Recognition

While our revenue recognition does not involve significant judgment, it represents an important accounting policy. Revenue is recognized net of sales taxes, discounts, and estimated refunds. For a Fix, we generate revenue when clients purchase merchandise, at which point we apply the nonrefundable upfront styling fee against the price of merchandise purchased. If none of the items within the Fix are purchased, we recognize the nonrefundable upfront styling fee as revenue at that time. For Style Pass clients, we recognize revenue at the earlier of the time the annual Style Pass fee is applied against the price of merchandise purchased or the expiry of the annual period. For Freestyle transactions, we generate revenue when the item is shipped to the client. If a client would like to exchange an item, we recognize revenue at the time the exchanged item is shipped, which coincides with the transfer of control to the customer. Sales tax collected from clients is not considered revenue and is included in accrued liabilities until remitted to the taxing authorities. Discounts are recorded as a reduction to revenue when merchandise is purchased. We record a refund reserve based on our historical refund patterns. The impact of our refund reserve on our operating results may fluctuate based on changes in client refund activity over time.

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We sell gift cards to clients and establish a liability based on the face value of such gift cards. The liability is relieved and we recognize revenue upon redemption by our clients. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies.

We have not made any material changes to our revenue recognition accounting policies during the fiscal year ended July 31, 2021.

Recent Accounting Pronouncements

For recent accounting pronouncements, please see “Significant Accounting Policies” in Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report.