Stitch Fix, Inc. (SFIX) CEO Katrina Lake on Q4 2018 Results - Earnings Call Transcript

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About: Stitch Fix, Inc. (SFIX)
by: SA Transcripts

Stitch Fix, Inc. (NASDAQ:SFIX) Q4 2018 Results Earnings Conference Call October 1, 2018 5:00 PM ET

Executives

David Pearce - Head, Strategic Finance and IR

Katrina Lake - Founder and CEO

Paul Yee - CFO

Mike Smith - COO

Analysts

Chris Merwin - Goldman Sachs

Douglas Anmuth - JP Morgan

Mark Mahaney - RBC Capital Markets

Erinn Murphy - Piper Jaffray

Ryan Domyancic - William Blair

Ross Sandler - Barclays

Youssef Squali - SunTrust

Ike Boruchow - Wells Fargo

Edward Yruma - KeyBanc Capital Markets

Operator

Good day, everyone. Welcome to the Stitch Fix Fourth Quarter 2018 Earnings Conference Call. Today’s conference is being recorded.

At this time, I’d like to turn things over to Mr. David Pearce. Please go ahead, sir.

David Pearce

Thank you for joining us on the call today to discuss the results for our fourth quarter and full fiscal year for 2018. Joining me on today’s call are Katrina Lake, Founder and CEO of Stitch Fix; Paul Yee, our CFO; and Mike Smith, our COO. We have posted complete Q4 and full fiscal year financial results in our shareholder letter on the IR section of our website, investors.stitchfix.com. A link to the webcast of today’s conference call can also be found on our site.

We would also like to remind everyone that we will be making forward-looking statements on this call which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements except as required by law.

During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website and a replay of this call will be available on the website shortly.

I’d now like to turn the call over to Katrina.

Katrina Lake

Thanks, David and thank you for joining us. After the market closed today, we issued our quarterly shareholder letter with more details on our results, which I encourage you to read. I’ll take a moment to highlight our results from the fourth quarter and full fiscal year and discuss how we are executing against our strategic roadmap.

In the fourth quarter, we delivered net revenue at the high-end of our guidance range and adjusted EBITDA that exceeded our guidance for the quarter. We grew our active client count to 2.7 million as of July 28, 2018, an increase of 548,000 and 25% year-over-year. We generated net revenue of $318 million, representing 23% year-over-year growth. In Q4, we generated $18.3 million in net income and $11.1 million in adjusted EBITDA.

These results demonstrate our continued focus on delivering disciplined growth, while making significant investments in future categories and capabilities.

Stitch Fix is transforming the way people find what they love, one client at a time and one fix at a time. We’re proud of what we’ve accomplished in our first year as a public company and the momentum we’ve built as we enter fiscal year 2019. And we are excited about the growth opportunities ahead.

In the last year, we delivered over $1.2 billion in net revenue, reflecting 26% growth year-over-year while generating approximately $45 million in net income and $54 million in adjusted EBITDA. During this period, we also expanded our total addressable market with our July launch of Stitch Fix Kids and introduce new innovations to our core services through efforts such as Style Pass and Extras, adding flexibility and enabling us to further personalize our offering.

The capital efficiency of our model enabled us to make these investments while also generating $56 million of free cash flow in the year and end fiscal year 2018 with a cash balance of approximately $300 million and no debt.

In past quarters, we’ve discussed three growth pillars that serve as the foundation for our strategic roadmap. Firstly, expanding relationships with existing clients; secondly, acquiring new clients; and thirdly, growing our addressable market. Today, I’d like to spend a moment on the first and third pillars with updates from Q4.

First, I’ll share an update on Style Pass, a service that we rolled out in December 2017. It offers select clients unlimited styling for a $49 annual membership fees. To-date Style Pass has outperformed the results from our pilot as we continue our disciplined rollout of the program. As of Q4 2018, the number of Style Pass clients grew nearly 60% compared to the prior quarter Q3 2018. In addition, we have found that Style Pass clients spend more per fix, receive fixes more frequently, and have higher satisfaction ratings compared to non-Style Pass clients.

Services and new initiatives such as Style Pass add flexibility to our offering, allowing us to drive increased client satisfaction and also serving as a strong catalyst for client reengagement. At the time of our IPO, we shared that from the beginning of fiscal 2014 through the end of fiscal 2017, over 650,000 unique clients had been reengaged by checking out a fix after more than 16 weeks of inactivity. Updating this figure to include fiscal 2018, we’ve now successfully reengaged over 1 million unique clients.

In Q4, we also expanded our addressable market through the launch of Stitch Fix Kids. The offering allows us to effectively serve the entire household, and comprises both market and exclusive brands in the offering. To-date, we received strong interest from our existing clients who’ve signed up their children with early positive feedback on the offering. While kids remain a small portion of our business today, we look forward to providing you with updates in future quarters.

As we look ahead to fiscal year 2019, we’re excited to announce our plan to launch in the UK by the end of the fiscal year. Our successful previous category launches across Men, Plus and Kids gives us confidence and our ability to execute on this international growth opportunity.

Based on our consumer research and planning, we believe that our personalization capabilities will resonate with UK clients and that we can be a strong partner to international brands with whom we don’t already work.

Our engineering and data science capabilities will allow us to build a localized presence to effectively serve UK clients with the same, highly personalized approach we’ve used in the U.S. We look forward to sharing more information and updates on this initiative in the quarters ahead.

Now, I’ll turn it over to Mike, who will walk you through some operational highlights from the quarter.

Mike Smith

Thanks Katrina and hello to everyone joining us on today’s call. I’d like to take a moment to provide an update on our Q4 marketing initiatives and learnings as well as discuss a few ways we began using Style Shuffle data during the quarter.

One key marketing focus in Q4 was to drive channel learnings associated with TV and to better determine channel efficacy through a series of incrementality tests. To achieve this, we temporarily seized our national TV campaign for 10 weeks to measure channel of efficacy. Through this testing, we learned that TV was a more effective acquisition channel than we’ve previously modeled as measured on a cost per acquisition basis. The test also enables us to evaluate and quantify the interaction between TV and other advertising channels, which we believe will help us better determine the optimal ratio of advertising spend between TV and our other portfolio channels in future quarters.

Last quarter, we shared details on Style Shuffle, an interactive mobile and web-based game, in which participates raise an assortment of Stitch Fix merchandise. This game enables us to collect significantly more client preference data on each apparel item than we could have before the game was introduced and allows us to improve our personalization capabilities. We’ve begun leveraging the Style Shuffle data to enhance the overall client experience and drive business results. In Q4, we began incorporating the data into our women’s stylist/client matching algorithm which drove an increase in average order value as compared to the prior algorithm. Style Shuffle data not only improves outcomes for client to play the game, it also helps us better serve those who have not yet played. In Q4 of ‘18, we used the data to increased revenue per client and engagement among both playing and non-playing clients, which believe highlights the network effects of our data and the broad applicability of this Style Shuffle data.

I will now turn the call over to Paul, who will walk you through our financial performance and outlook.

Paul Yee

Thank you, Mike. In December, on our first earnings call as a public company, we shared a commitment to grow the top-line in a responsible, profitable manner to reinvest free cash flow and improving the client experience and expanding our addressable market.

Looking back at 2018, I’m proud to say that we’ve delivered on this promise. We expanded our client base and generated strong revenue growth. We drove positive adjusted EBITDA and free cash flow and we invested in talent, marketing and new categories with the long term in mind. As we look ahead to 2019, we’re committed to propelling this cycle of growth and reinvestment.

Our Shareholder Letter provides details on our financials for the fourth quarter and full year, but here are highlights. In Q4 ‘18, besides delivering another quarter of revenue growth of more than 20%, we expanded our gross margin, our adjusted EBITDA margin, our EPS, and our free cash flow year-over-year. These results reflect the cumulative benefit of the investments we’ve made over the past few years in our efforts across the Company to drive scale, efficiencies and working capital vigor.

Net revenue for the quarter was $318 million, representing 23% year-over-year growth. Our performance is primarily driven by an increase in both women’s and men’s active clients. Kids launch at the end of the quarter did not meaningfully contribute to our active client count or net revenue.

Gross margin was 44.4%, our highest quarterly gross margin in fiscal 2018 and 90 basis points higher than last year’s Q4. This improvement was driven by a decrease in inventory reserve, lower clearance expense and reductions in shrink, all reflections of our initiatives to strengthen our operations and inventory management. We also continue to scale men’s which in Q4 saw improved gross margins as we expanded from 2 to 3 warehouses and increased initial markups or IMUs across all merchandise sub-categories.

We also drove leverage in SG&A. Other SG&A excluding advertising was 32.8% of net revenue in the quarter, a 140 basis-point improvement year-over-year. Variable labor drove 90 of these basis points, reflecting warehouse efficiencies enabled by system enhancements. The balance is due to leverage of non-payroll expenses such as professional fees and facilities. These efficiencies more than offset our investments in our technology talent. We ended the fiscal year with 180 engineers and 100 data scientists.

We also drove leverage on our advertising spend this quarter, realizing a 10 basis-point improvement year-over-year as we continue to invest responsibly in our marketing programs. Adjusted EBITDA for the quarter was $11.1 million or 3.5% of net revenue. This adjusted both the high-end of our guidance range, driven by higher net revenue, gross margin expansion and variable labor savings.

Q4 net income was $18.3 million and diluted EPS is $0.18. These results reflect a credit of $9.4 million in the income tax provision line of the P&L, primarily due to stock-based compensation deductions associated with shareholder activity in the quarter. We also realized tax benefits from R&D credits and certain other deductions.

Finally, we delivered free cash flow of $55.6 million in fiscal year 2018. We finished the year with capital expenditures representing less than 1.4% of net revenue. On the working capital front, we continued to narrow the gap between our inventory growth and our revenue growth with year-end inventory up 26% year-over-year inclusive of investments in categories like Kids. For the year, we turned inventory 6 times on a merchandise cost basis.

Looking ahead to fiscal 2019, I’ll now provide our guidance for Q1 and the full-year. For Q1 ‘19, we expect net revenue in the range of $354 million to $360 million, representing growth of 20% to 22% year-over-year. We expect adjusted EBITDA in the range of $5 million to $9 million or an adjusted EBITDA margin of 1.4% to 2.5%. For full year of fiscal 2019, we expect net revenue in the range of $1.47 billion to $1.53 billion, representing growth of 20% to 25% year-over-year. We expect adjusted EBITDA in the range of $20 million to $40 million or an adjusted EBITDA margin of 1.4% to 2.6%.

Finally, we expect CapEx to represent approximately 2% of net revenue for the year as we invest further in warehouse automation, headquarter space and proprietary software. Please note, our revenue guidance does not include any impact of the UK launch, which we expect to occur at the end of the fiscal year. Our adjusted EBITDA guidance on the other hand reflects the people and infrastructure investments we’re making to support our international expansion. These investments combined with the launch of our Kids category represent the vast majority of the decrease in adjusted EBITDA year-over-year. Finally, please note that 2019 is a 53-week fiscal year and that Q4 ‘19 will include 14 weeks. Our 2019 guidance reflects the impact of this additional week.

With that we’re now ready for your questions. Operator, I’ll turn it over to you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll hear first today from Chris Merwin with Goldman Sachs.

Chris Merwin

Okay, great. Thank you very much. Just two questions for me. I think last quarter we saw the growth acceleration in the business, what are the reasons? How are you going with improving customer retention? And I was wondering if you could just talk about the underlying trends there, you’re saying for retention for quote, Women’s, and also how we should be thinking about the incremental contribution of Men’s Plus and Kids in the context of your fiscal ‘19 guidance? And then I’ve got a follow-up. Thank you.

Katrina Lake

Great. Thank you, Chris. In terms of underlying trends and retention, I think there are two data points I would point you to. One is, we saw really strong revenue per client numbers this quarter, and I think that’s really a testament to the cumulative efforts of retention and reengagement. We also shared a new reengagement number, updating our number to 1 million clients who’ve been reengaged and between 2014 and 2018. And I think both of those are testament to kind of the strength that we’re seeing in the retention side and what we’re excited about.

And I guess, in terms of like the contribution of the businesses, I can have Paul take that.

Paul Yee

Sure. So, our 20% to 25% revenue growth guidance for 2019 reflects sort of the trends we saw in 2018, which is continued strength in the core women’s business as we’ve added flexibility to the offerings as we added Style Pass to engage clients more often as well as scaling our newer businesses. So, Men’s hit a two-year anniversary this past year as well as Kids is just sort of really out the gate. So, we see sort of momentum on both fronts, and that’s reflected in the full year guidance for the year.

Chris Merwin

Got it. And just on a gross profit, I guess gross margin specifically, obviously you saw very strong quarter there. And I think you called out I guess reduction in inventory reserve and clearance expense. I guess, as we look into fiscal ‘19, should we think about a continued improvement in gross margin as you continue to scale the Men’s and Plus businesses, and become more people with those as well? What is contemplated within the guidance that you’ve given? Thank you.

Paul Yee

Sure. So, our implied guidance for 2019 reflects the same dynamics that we saw in 2018. So, underlying our businesses, we have the dilative impact of new categories. So, Men’s, Plus, now Kids have a lower gross margins today that Women’s, given that they’re still very early in the journey. But, what was exciting that we saw in Q4 and again sort of something we’re focusing on for the next year is we’re going to strive to soften those impacts in three fronts. The first is our investment management capabilities are really playing out and our ability to buy products upfront correctly and getting through to the right client has really helped us reduce clearance over time. So, those things like tools are giving our merchants to re-buy and to size imagery correctly, then also algorithms are deriving our stylist tools to match product and client.

Secondly, we’re really excited that we’re able to shrink year-over-year and quarter-over-quarter your, and that’s been a big focus for us and capability we continue to build in the year.

And then finally, while we’re investing in new category, we’re seeing scale. So, Men’s hitting a second year has allowed us to increase that margin for the business, both quarter-over-quarter and year-over-year. We had a third warehouse this past quarter for Men’s that should reduce shipping costs. So, all those dynamics are really helping us mitigate the impacts of new categories. And again, we’re excited about the TAM expansion as a result of that. And the gross margin dynamics are reflected in guidance we’ve given for 2019.

Operator

We’ll here next from Douglas Anmuth with JP Morgan.

Douglas Anmuth

Great, thanks for taking the question. I had a couple. First, I hope you could provide a little bit more clarity just on the 4Q revenue growth and the trajectory just relative to what we saw in the third quarter, 29% versus the 23%. Second, on Style Pass, Kat you talked about some of the early metrics, at least qualitatively. Just curious if that changes or perhaps accelerates in any way how you roll that out and expand it to more users. And then just third on marketing, I know you’re seeing better returns on the TV side than you expected. Any more color that you can add on kind of the plan around marketing as you go into ‘19? Thanks -- your fiscal ‘19. Thanks.

Katrina Lake

Right. I think in terms of just the overall revenue growth, I mean, we’re really focused on the full year here. And so, what we shared I guess at this point, even very consistent I think for a couple of years around kind of the 20% to 25% range. And we’re looking at that on an annual basis and really proud of the consistency that we’ve shown this year and I think reflects kind of the way that we’re thinking about next year. And so, driving this profitable growth and balancing between profitability and growth is something we’ve been committed too. And I think the results reflect that.

On your question on Style Pass, we’ve been really excited about the early results. I think these are clients who are performing in a really, really healthy way. They’re contributing a lot to the business. And I think right now, we feel like the program is rolled out to the proper audiences. But absolutely over time, as we see that our business is getting better as we see that there is ways that we can with all tides, it gets us optimism that there might be a broader opportunity for Style Pass. But for now, I think we’re really pleased with what we’ve seen with the rollout and just really excited as this has been a way to really continue to keep clients excited over a long period of time.

Lastly, on marketing. I think, what we’ve learned from the TV test is really more around how does TV actually perform in terms of delivering clients and also how does it impact other channels. And I think the way to think about that is just it’s really us fine tuning, understanding how all of our different marketing channels contribute to our portfolio. Marketing diversification is something we’ve talked about for a long time. And we always knew that TV is an important component of that, but I think having gone through this test and having really understood more granularly how TV impacts, I think we feel like it’s a really important part of the portfolio and you’ll continue to see us invest there.

Operator

From Barclays we’ll move to Ross Sandler. Mr. Sandler, you might be on mute. Hearing no response, we’ll move next to Mark Mahaney with RBC Capital Markets.

Mark Mahaney

Okay, great. Three questions. One, just a follow-up on that Doug’s advertising question. Is the idea then that you’ve already turned back on that TV advertising? I know you’ve talked about having turned it off. Is it already turned back? Secondly, in terms of the reducing the wait times for Kids that you talked about, is that challenge already been addressed or is that TBD to be figured out? And maybe the last question just in terms of the fiscal ‘19 guidance, maybe this one is for you, Paul. The guidance implies potential for acceleration as you go through the year, but you’re not including a UK contribution. Broadly, what would cause that to happen? What would cause the high-end of the growth range to be higher as you grow through the year than beginning of the year or is that just the additional week? Thank you very much.

Katrina Lake

Thanks, Mark. I’ll start out with the advertising question and then I’ll probably have Mike and Paul chime in on the other two. I got the easiest question. The answer is, we have -- we will return -- we have turned TV back on. TV is an important part of that portfolio. It is pretty easy to turn back on. And the great news is that now it’s even more measurable. We understand the contribution even deeper and you’ll see it on the air. I’ll have Mike talk about Kids.

Mike Smith

So, Mark, to your point, we have improved every week in terms of solving more demand than we expected in the Kids business. It really was focused more on older kids and girls specifically, and we’ve been able to chase in the inventory to improve that situation week-over-week. So, it’s in process, but we’re really close to having it back to the normal wait times that we expected when we started the business.

Paul Yee

And Mark, in terms of your question on FY19 guidance, the 20% to 25% growth rate reflects the impact of the 53-week, which is approximately 2 points of growth for the year. But it also reflects a whole series of initiatives we have laid out from a product and marketing perspective. And we think that growth rate is a healthy growth rate that allows us to kind of deliver great client experience and also maintain profitability and be able to invest in the geographies, like the UK. So, the ability to kind of hit the high end of the range is really to sort of the impact of those initiatives we laid out. And certainly we’ll give you an update; we’re two months in, and we’ll give you an update on future calls.

Mark Mahaney

I’m sorry. I if could, any particular reason why you chose the UK as your first international launch versus other markets?

Katrina Lake

Yes. The UK, I think there are a lot of reasons that we’re really excited and optimistic about the UK. And maybe to step back in general, international, I think, overall, it has been an opportunity that people have access quite a bit about and one that we spent a lot of time looking at, and I think internationally broadly is an opportunity we’re excited about.

And then, looking specifically to UK, there’s a couple of attributes of the UK consumer that I think are especially interesting. One is really that it’s already a very apparel e-commerce heavy audience. And so, clients there, customers there are spending more on online and in apparel than they are in the U.S. And so, that’s definitely an element that we like. It’s also an audience that is a little bit less discount-oriented than the U.S. There’s just not as much discounting there as here. And so, that is also a helpful attribute. And then lastly, I think just from a product market fit perspective, the idea of personalization, of having a personal shopping alternative to other e-commerce players, and it’s a really differentiated model in the UK and I think one that consumers are really excited about. And so, I think us being able to take an approach that truly is personalized and localized to the market allows us to greater possibility of success there. And I think we’re really excited about the market for all of those reasons.

Operator

And from Piper Jaffray we’ll move to Erinn Murphy.

Erinn Murphy

A couple questions for me. I recognize you took the TV off during the majority of the quarter. But, if you were to knowing what you know now about how effective that is, if that had been throughout the quarter, as you may have had in the past, what would customer net adds have looked like? Is there a way to kind of back into that? And then, I guess the second question, as it relates to the advertising spend, it still went up year-over-year despite not having TV? Maybe share some of the mediums or kind of other areas that you’re spending on within the ad budget?

Katrina Lake

Yes, I can take those. I mean, I think on the first question around TV and just the specifics of it, unfortunately, we don’t have that data to share. I think what we -- the TV test is really less about volume in the quarter, as much as it was really understanding and learning the impact. And from that perspective, it was really successful and really important for us to run that test in order for us to run TV with confidence in future quarters and really understand how it contributes to our business. And so, I think that’s really what we are looking for in that test.

On the latter question, year-over-year, our advertising spend was up, but actually our client growth is also, we’re at 25% net adds on the client side. And so, we’re really happy with kind of the returns that we’re seeing on the advertising and marketing side; that continues to be true. And again, just as a philosophy, like this is not a company where we are throwing all of the fuel in the kitchen sink and the fire on the marketing and advertising side. We really operate with an ROI mindset. We look for payback on those marketing dollars spent. And that still continues to be through this quarter. And certainly the learning’s that we had in this quarter help us to make sure that that’s even more accurate and true in future quarters.

Erinn Murphy

Okay. Thank you. And then, just two more, if I can. One, I guess for Paul. On the guidance for Q1, you are expecting it to decelerate a little bit further, even though you’ll have a full quarter of the impact of Kids. I guess, I’m curious if you’re being conservative on how you’re planning Kids to ramp or is it reflecting more of a deceleration in Women’s? And then, a bigger picture question, my last one for you, Katrina, is just on voice commerce. I’m curious kind of what role you see that playing and wardrobing, and is that an area of investment is that you’re thinking lead the team towards? Thank you.

Paul Yee

I’ll take the Q1 question and then turn it over to Kat. So, our 20% to 22% revenue growth guidance for Q1 fits to the broader full year guidance for 20% to 25% growth. We’ve made a series of choices in terms of the investments we’re making in our core business as well as new categories. And there’s going to be costs between quarters, but there’s nothing specific to call out to Q1 versus the rest of the year. We think it’s a good growth rate and one that I think plays out to the long-term.

Katrina Lake

And Erinn, thanks for your question on the voice side. I think the voice commerce is in the bucket of a lot of other technologies that we see that we’re certainly keeping an eye on. But, I think today, a lot of the voice commerce applications that you’ve seen have really been around the value proposition of like, cheap, fast and convenient. And I think what we found more broadly is that with apparel, there’s so much more nuance, there’s so much more to understand. And that that cheap, fast and convenient value proposition just really isn’t enough to help solve the true discovery element of how do I find clothes that fit me and my style and my occasion. And so, we look at a lot of the technologies that are being adopted out there in the market or haven’t yet been adopted in the market. And this is certainly one of them. But, I think when we think about what are the most powerful tools that help people to discover the things that they love, this isn’t one that we see as the kind of a primary tool in the toolkit yet.

Erinn Murphy

Great. Thank you, guys.

Paul Yee

Thanks Erinn.

Operator

We’ll go next to Ryan Domyancic with William Blair.

Ryan Domyancic

Good afternoon and thank you for taking my question. So, regarding the Kids launch, have you begun putting meaningful paid advertising dollars behind that new vertical yet or are you marketing to that client base? I think about a half of your client base, they currently have kids? And then, if you haven’t started putting advertising dollars behind it yet, when do you intend to put more dollars behind that new vertical throughout 2019?

Mike Smith

This is Mike. Ryan, I’ll take that. We have not put a lot of paid advertising against that. We have, as you referenced, one in two of our existing client base has kids and they understand Stitch Fix and are excited about Stitch Fix. And so, it’s not an easy sell to kind of convert them, but it’s cheaper obviously to grow organically our existing client base. We just look at the Kids business, trying to build it just like we have in all of our businesses, build it the right way, meaning from a profitability standpoint balancing growth and profitability primarily to deliver great client experience. So, unclear on when we’ll just kind of put a lot of paid against it. But, I think we’re comfortable with growth plans for Kids and really excited about the organic demand that we’re seeing in Kids.

Operator

And we’ll hear now from Ross Sandler with Barclays.

Ross Sandler

Great. Can you guys hear me this time?

Mike Smith

We can.

Ross Sandler

Okay, all right. Just two questions. First on the gross margin cadence. So, you guys have talked about how new categories take a while to kind of build up to where the core Women’s business is? Do you feel like the mix shift to Plus and Men’s is fully cycled through at this point, and we should be in a position to see steady gross margin improvement into the future kind of permanently? And given that the UK is more of a geography rollout, not a new category. And you guys have a lot of history with the existing Women’s category, how will the UK rollout impact gross margin, if at all, once that gets up and running? And then, the second question is just back to the retention kind of net adds earlier questions. So, if we will get client net adds quarter-on-quarter, they are only up about 54,000 from last quarter. That cadence was a little bit lower than the previous trend line. So, is that mostly just cutting back the TV program or is there a different mix of one and dones from these new categories that are growing fast? Any other color on the net adds would be helpful. Thanks.

Paul Yee

So, Ross, I’ll take the gross margin question. So, looking ahead to 2019, we do expect the penetration of our newer categories, namely Men’s, Plus and now Kids to be increasing at a higher rate than it was in 2018. And therefore, there will be a mix shift impact, resulting from the higher penetration. That being said, we’re really excited to see sort of the strength of men’s in particular of the scale we’re getting from that as well as offset some of that dilution from various cost efficiencies and other cogs focused areas that we’ve shown in Q4 frankly. So, certainly, we’ll see sort of those dynamics playing out.

Specific to the UK, we do expect the gross margins to be lower early on, just like Men’s and so forth. There is going to be a smaller scale business obviously early on. And so, our buys will be smaller, but also be investing in inventory upfront to make sure that we kind of really are able to serve our new clients well, and that will probably translate to higher clearance. So we have a roadmap here as we launch new businesses or new geographies, but we certainly derive our benefits over time as scale them later along the way.

Katrina Lake

And then Ross, I can take your question on retention. I think, we’re looking at kind of year-over-year rate and we saw active clients grow 25% year-over-year. We’re really happy with kind of the foundational fundamental that really helped us to achieve that higher end of our guidance range. We don’t have any of -- we wouldn’t say that this is a quality issue of like that we have more one and dones. I mean, if anything, I think this is a business where we’re really focusing on client quality and really focusing on ROI and now TV and how clients are demonstrating the value over the long term. And then more that we’re able to learn through things like the TV incrementality tests, the more we’re able to hone that and really improve that over time. And so, I think is just -- these are -- our top-line revenue is consistent with where we share that we would be and consistent with where we plan to go in the future. And I think the underlying fundamentals are ones that we’re happy with.

Operator

We’ll move on to Youssef Squali with SunTrust.

Youssef Squali

One clarification, couple of questions. So, as you expand into the UK, do we know whether you are going to be going with Women’s first or with the entire offering? That’s the first clarification, please.

Katrina Lake

Thanks for the question. We’re planning to go with Women’s and Men’s. And so, Kids is still a newer business for us. So, Women’s and Men’s will be part of the offering.

Youssef Squali

And would that include Plus as well or just Women’s and Men’s?

Katrina Lake

I think we’re a little bit early I think to share the really specific size -- the really specifics around kind of which sizes we’re going to cover. There are also sizing differences between the UK and the U.S. And so, I think we’ll probably wait to share more details around that when we get closer to market.

Youssef Squali

And then, I know you don’t break out growth by segment. But could you just help us maybe gauge the health of growth in core Women either on year-on-year basis or whichever, just to kind of get a sense of how your oldest business continues to perform? That’s one question we often get. And then, lastly, just broadly speaking on the competitive landscape, maybe you can just update us is there any changes that you’ve seen out there that may made you change your mind either on the TAM or whatever? Amazon obviously made a lot of noise last week with scale. Just for example, as you take that as an example, how much of is that to your -- to the growth in the business over time? Thank you.

Mike Smith

Yes. This is Mike. I’ll take the core Women’s question. The core metrics of the business have been healthy. And I can give a couple of categories stories I think that kind of help demonstrate that. We’ve mentioned in past quarters that we were expanding our offering in premium brands and lower price point brands. And we’re seeing increased satisfaction scores and success rates in both of those offerings. The other thing in premium brands that I continue to be excited about is this idea of evolving the conversations that we have with our premium brands. For example, over 50% of our product now in that category is exclusive to us.

And I would say, all of our conversations with contemporary brands and premium brands is around doing special product for us. So, the business is very healthy and the underlying metrics are healthy. But, we do believe there’s a TAM opportunity to continue to expand in Women’s and believe that our investments in adding assortment, as well as probably using some marketing against that will help realize that TAM expansion.

Katrina Lake

And then, to answer your question on the competition, I mean, apparel has always been a pretty competitive space, and I don’t think that’s changed too much in the seven or so years that we’ve been doing the business. In particular, I think a lot of the innovation that we’ve seen over the years has really been around this kind of cheap and fast value proposition. And we really haven’t seen anybody address the really hard part of shopping for apparel, which is the discovery element, which jeans are going to be right for me, which dress is going to be right for the occasion. And those are still things that we don’t see a ton of -- we don’t see a lot of other businesses that are really approaching it with a similar solution that’s truly personalized and really incorporating human element.

Specific to your question on Amazon, look, I mean, we obviously watch Amazon closely. They also had 8% of their total market share. And so, if you think about kind of how much market opportunity there is out there, 92% of that opportunity is out there, a lot of it is in stores, a lot of it is in a pretty disperse set of retailers. And we really think it’s differentiated to be focused on how do we help people find what they love and really applying it truly human element to this very nuance category. And so, we think we of course keep an eye on what’s going on competitively. We are very aware that it’s competitive industry. But at the same time, we have a lot of confidence in the differentiation of an approach that is a very human personalized approach.

Operator

[Operator Instructions] We’ll move next to Ike Boruchow with Wells Fargo.

Ike Boruchow

Hi, everyone. Thanks for taking my question. Two questions. First, on the UK investment. Maybe can you explain a bit what’s behind the additional spend that you’re making this year? And then, just putting some of the commentary together. Is it a fair assumption to say that all else equal without this UK push, EBITDA dollars this year would actually be higher year-over-year?

Paul Yee

Hi, Ike. This is Paul. I’ll take questions. So, as is the case with a lot of our investments, it flows to the P&L. So, with our investment in the UK and launch by the end of this year, a lot of that will be on talent. We know as a personalization company, we need to have an ability to understand our clients well. So, we are building a buying team in country and also we’ll be ultimately building a styling organization over there. So, to sort of build out that capability next year, we’ll be hiring ahead of the launch and making sure we have the right assortment and capabilities to do a very successful launch.

In terms of your question about broader EBITDA impact. As I noted in my comments, a lot of our year-over-year decline in EBITDA, as implied in my guidance, is due to the launch of the UK and to a lesser extent Kids. I would also note that as we look at marketing, we’ve really seen that’s an opportunity for us to drive returns. And in 2017, we spent 7% of revenue; we increased that to 8% in 2018; and we do see an opportunity to step further and 2019. Not only do we have a diverse set of channels in which we can communicate. Our offerings are also with Deirdre Findlay, our new CMO on board, really trying to think about brand, and how do we continue to build that love with both our existing and future clients. So, we see an opportunity to expand our marketing spend that’s also sort of embedded in that EBITDA guidance for 2019.

Ike Boruchow

Got it. And just a quick follow-up. So, sticking with the UK, how do you think about, I guess, higher level, how do you think about scaling that market relative to the U.S. market? Because I believe the UK is much smaller apparel market and online penetration rates are lower than in the U.S.? So, again, I’m just trying -- I’m just curious how you kind of frame the ultimate opportunity there versus what you guys are working on here in the U.S.?

Katrina Lake

Yes. I mean, we’ve been really -- I think, the data to us is really optimistic in terms of the size of the market. It’s a market where there’s 50 million people. Yes, that’s smaller than the U.S. But it’s a really sizable opportunity I think relative to some of the other markets out there. And actually, what we found is that there’s a lot more -- there’s a much higher penetration of e-commerce shopping in the UK than in the U.S. I think it’s a smaller country, shipping times are faster, people are much more used to shopping apparel in an e-commerce format than they are in the U.S. And so, I think both of those give us some really some positive signals that the UK is a really right kind of opportunity for us.

Operator

And we’ll hear now from Edward Yruma with KeyBanc Capital Markets.

Edward Yruma

Hey, guys. Thanks for taking my question. I guess, first on the UK spend. How should we think about the shape of the UK spend through next fiscal year? Is it backend weighted? And then, I guess second, you used to give some detailed core performance data in terms of that Women’s core Women’s spend. I guess, when you look at that core female that maybe 3 or 4 years customer at Stitch Fix, I guess kind of how has her spending changed? And are you starting to see some better results from things like extras that can include -- that can increase that take rate? Thank you.

Katrina Lake

I’ll probably let Paul start out and I’ll jump in on the cohort.

Paul Yee

Yes. I think directionally, given that a good portion of our investments to the UK is talent, it will be sort of increasing over the course of the year. We’ve hired a general manager and a head of buying. And they’ll be starting to fill up the team, now that we’ve publicly announced the launch. So you will see that ramp up over the course of the year.

Katrina Lake

Yes. And the question on cohorts. I think, when you’re looking at 3 to 4 years out, I mean firstly, we are operating on an ROI like mentality when we’re thinking about marketing. And so, we’re really looking for quick payback. And as cohorts get to those 3, 4, 5, 6-year marks, to continue to add value to the business that’s all really incremental to the spend -- kind of initial spend there, and that’s something that is really important to the business. I think revenue per client is probably one good place to look at to really think about how we’ve been able to generate more value from those clients. Actually, it definitely has something to do with that. Style Pass which we shared some enrollment numbers are kind of enrollment expectations around and being able to see a lot of in on Style Pass. And those are clients that are spending more that are higher value clients. I think, these are all initiatives that really help us certainly in those first few years but definitely in those years 3, 4 and 5, as well as we’re kind of looking at cohort health and continue to be excited about what we see there?

Edward Yruma

Great. And one final, if I may. I know that you’ve had some favorability from a shrink perspective. Is that tied to kind of how you would have initially thought the new categories would have progressed or is that against the core Women’s business? And I guess as we think about all the new categories and then soon, I guess the geography, how do we think about your opportunity to kind of continue to move that shrink number lower? Thank you.

Mike Smith

Sure. I’ll take that. So, yes, we’ve seen shrink increase over the past 1.5 years. And while as we’ve seen that across the board as we’d expanded in new categories and -- it'll be in Men’s and premium brands, we have seen a correlation there. And I think you’re seeing results of our sort of concerted efforts across the organization to be pretty tenacious on managing that through engineering work to make sure we value the credit cards as well as helping our customer service agents upfront identify clients are likely fraudulent. So, as we expand to new geographies as well as new categories, rest assured we see this as a capability. We need to continue to bolster and strengthen. But again, I think Q4 is really exciting to kind of see sort of the results of our efforts today.

Operator

And with that I’d like to turn things back to Katrina Lake, Founder and CEO.

Katrina Lake

Great. Thank you again for joining us today. We look forward to seeing you on the road and keeping you updated on our performance.

Operator

And that will conclude today’s conference. Again, thank you all for joining us.