Stitch Fix's 2026 Q1 Earnings Call: Contradictions Emerge on Gross Margins, Advertising Strategies, and Client Acquisition

Date of Call: December 4, 2025

Financials Results

• Revenue: $342.1M, up 7.3% YOY (exceeded outlook)
• Gross Margin: 43.6%, down ~180 bps YOY, in line with FY '26 guidance range of 43%–44%

Guidance:

• Q2 revenue expected $335M–$340M; Q2 adjusted EBITDA $10M–$13M.
• FY '26 revenue expected $1.32B–$1.35B; FY adjusted EBITDA $38M–$48M; expect full‑year free cash flow positive.
• Expect active client YOY growth rates to improve in Q2 and a sequential increase in net adds in Q3.
• Full‑year gross margin ~43%–44%; advertising ~9%–10% of revenue; AI/innovation investments included in outlook.

Business Commentary:

* Revenue and Market Share Growth: - Stitch Fix reported revenue of $342.1 million for Q1, up 7.3% year-over-year. - The growth was driven by an increase in average order value (AOV) of nearly 10%, due to larger fix offerings and an improved assortment, as well as market share gains from other retailers unable to offer personalized shopping experiences.

• Client Engagement and Retention:
• The company ended Q1 with 2.3 million active clients, with year-over-year growth improving for the sixth consecutive quarter.

• This improvement was attributed to better client stylist relationships, new client engagement features, and higher engagement with reengaged clients, indicating the effectiveness of their strategy to improve client retention and lifetime value.

• Advertising and Client Acquisition:

• Advertising accounted for 9.9% of revenue in Q1, up 50 basis points year-over-year.

• The increase in advertising was part of a strategic and disciplined approach to client acquisition, focused on attracting healthy clients resulting in a 17% year-over-year increase in new client LTV.

• Strong Holiday Performance:

• Stitch Fix experienced record Freestyle sales during the Black Friday to Cyber Monday period.
• The strong performance was driven by a seasonally relevant assortment, competitive pricing, and new shopping experiences, including family accounts and gifting, which helped drive increases in client engagement and purchases.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management described Q1 as "a strong start to the year," noted revenue "exceeded our outlook" (up 7.3% YOY), raised full‑year guidance, and highlighted "record Freestyle sales" and confidence in continued market‑share gains driven by AI and assortment improvements.

Q&A:

• Question from Marcus Bellinger (William Blair): Could you provide more color on new customer behavior and stickiness metrics beyond the 30‑day LTV mentioned?
  Response: New‑client quality is improving—9 consecutive quarters of rising new‑client LTV, new clients up YoY and QoQ, reengaged clients stay longer and spend more, and dormancy hit a five‑year low, supporting confidence in sustained client base recovery.

• Question from Aneesha Sherman (Sanford C. Bernstein & Co., LLC.): Where are your market share gains coming from (other multi‑brand retailers, trade down, etc.)? Is gifting becoming a larger use case especially with freestyle and family accounts? And on advertising, might you lean in more to drive top‑line?
  Response: Gains are coming from retailers that lack personalization; brands report outsized growth with Stitch Fix; family accounts and freestyle drove unexpectedly strong gifting over the holidays; advertising is being deployed methodically within CAC/LTV targets (Q1 at 9.9%) and the company will lean in selectively where economics justify it.

• Question from David Bellinger (Mizuho Securities USA LLC): Any read on early adoption of consumer‑facing AI/visualization tools (Stitch Fix Vision)? Usage patterns?
  Response: Vision adoption exceeded expectations in beta—clients upload photos, purchase directly from generated images, share with stylists and on social media, and it's producing organic virality and acquisition.

• Question from David Bellinger (Mizuho Securities USA LLC): Can you help bridge the ~180 bps YOY gross margin decline and what to expect for Q2?
  Response: Margin decline driven mainly by higher transportation costs (USPS rate increases) and strategic mix investments into lower‑margin categories like footwear (to drive wallet share); tariffs had a small impact; contribution margin remains >30% and Q2 margins expected similar to Q1 (middle of guidance).

• Question from Jay Sole (UBS Investment Bank): Please break down the brand opportunity and quality improvement in third‑party brands and private label; drivers of RPAC (up ~5% YOY) and the active‑client trends/demographics for newer customers.
  Response: Brands are attracted to Stitch Fix's controlled, premium ecosystem and selective partnerships (sometimes exclusive); RPAC growth driven by ~10% AOV increase (more items per fix and AUR up ~3%) from expanded assortment; active‑client health is improving (new acquisition up, reengaged +8% YoY, lower dormancy) across income segments, with seasonal Q2 softness expected and a Q3 sequential inflection.

Contradiction Point 1

Gross Margin Trends and Expectations

It involves changes in financial forecasts and actual performance, specifically regarding gross margin expectations, which are critical indicators for investors.

What caused the gross margin decline and what is Q2 guidance? - David Bellinger(Mizuho Securities)

2026Q1: Gross margin decline was due to transportation expenses, lower-margin categories like footwear, and tariffs. Contribution margins remain strong at 32.5%. Q2 margins are expected to remain in the middle of our full-year range. - David Aufderhaar(CFO)

How do active clients contribute to underlying revenue growth? - David Aufderhaar(Chief Financial Officer)

2025Q4: I want to note that we did see a 280 basis point increase in our operating expenses as a percentage of net revenue for the quarter, primarily due to higher ad spend as we leaned into the holidays. - David Aufderhaar(CFO)

Contradiction Point 2

Advertising Strategy and Effectiveness

It relates to the company's approach to advertising, which directly impacts customer acquisition costs and overall financial performance.

How can advertising be leveraged to drive revenue growth? - Aneesha Sherman (Sanford C. Bernstein & Co.)

2026Q1: We leaned in on advertising this quarter, reaching the high end of our range. We're focused on CAC to LTV ratios, 2Q and 3Q are typically stronger for advertising. We've seen almost 17% year-over-year growth in new client LTV, indicating the effectiveness of our marketing efforts. - David Aufderhaar(CFO)

Are customer retention costs rising, and what’s required to reignite new customer growth? - David Bellinger (Mizuho Securities USA LLC, Research Division)

2025Q3: Additional ad spend is not required to achieve active client growth. The existing product roadmap and marketing levels are sufficient. While there is seasonality in ad spend, with Q1 and Q3 being stronger quarters for client acquisition, Stitch Fix is confident in meeting its client growth goals without increased ad spend. - David Aufderhaar(CFO)

Contradiction Point 3

Advertising Strategy and Effectiveness

It involves the company's advertising strategy and the effectiveness of its marketing efforts, which are important for driving new client acquisition and revenue growth.

How can advertising be increased to drive the top line? - Aneesha Sherman(Sanford C. Bernstein & Co.)

2026Q1: We leaned in on advertising this quarter, reaching the high end of our range. We're focused on CAC to LTV ratios, 2Q and 3Q are typically stronger for advertising. We've seen almost 17% year-over-year growth in new client LTV, indicating the effectiveness of our marketing efforts. - David Aufderhaar(CFO)

What drove the Q2 gross margin expansion and what is expected for Q3? - Unidentified Analyst(UBS)

2025Q2: We expect to leverage advertising, social media, influencer partners and our existing client base to drive new client acquisition. We are seeing strong early results with a growing client base and are encouraged by how our effective CAC is improving. - David Aufderhaar(CFO)

Contradiction Point 4

New Client Acquisition and Engagement

It involves the company's strategy and success in acquiring and engaging new clients, which are crucial for revenue growth and business sustainability.

Can you share insights on new customer behavior and retention? What metrics are you tracking beyond the 30-day LTV? - Marcus Bellinger (William Blair)

2026Q1: We're seeing strength in new client acquisition with 9 consecutive quarters of improving LTV. Reengaged clients are staying longer and spending more. We've had the lowest number of dormant clients in 5 years. Men's business returned to sequential increases in active clients. - Matt Baer(CEO)

Can you clarify the lag effect related to new customer acquisition and when total active customers might grow again? - Dylan Carden (William Blair & Company L.L.C., Research Division)

2025Q3: The focus is on acquiring high-quality clients with a strong lifetime value. Despite focusing on quality, recent quarters showed new client growth. There's strength in reengagement and a lower dormancy rate, indicating a return to active client growth in the future. - Matthew Baer(CEO)

Contradiction Point 5

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

What caused the gross margin decline, and what's expected for Q2? - David Bellinger(Mizuho Securities)

2026Q1: Contribution margins remain strong at 32.5%. Q2 margins are expected to remain in the middle of our full-year range. - David Aufderhaar(CFO)

What caused the gross margin expansion in Q2 and what's expected for Q3? - Unidentified Analyst(UBS)

2025Q2: We're comfortable with the 44%-45% full-year guidance, expecting consistent gross margins in the back half. - David Aufderhaar(CFO)