Stitch Fix, Inc. ($SFIX)

Thank you. Hello everyone. Thank you for joining us and welcome to Stitch Fix Third Quarter 2026 Earning Results Conference Call. After today's prepared remarks, we will host a question and answer session. [Operator Instructions] I will now hand the conference over to Cherryl Valenzuela, Head of Investor Relations. Please go ahead.

Good afternoon and thank you for joining us today for the Stitch Fix Third Quarter Fiscal 2026 Earnings Call. With me on the call are Matt Baer, Chief Executive Officer, and David Aufderhaar, Chief Financial Officer. We have posted complete third quarter 2026 financial results in a press release on the Quarterly Results section of our website, investors.stitchfix.com. We would 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 an update or discussion of the factors that could cause the results to differ, in particular, our press release issued and filed today, as well as our quarterly report on Form 10-Q for the second quarter of fiscal 2026 and subsequent periodic reports filed with the SEC. 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. Please also note that fiscal 2024 was a 53-week year due to an extra week in the fourth quarter. As such, references to consecutive quarters of year-over-year revenue growth rates on this call are based on an adjusted 52-week basis, removing the impact of the extra week to provide a comparison that we believe more accurately reflects our performance. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the press release on our investor relations 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 Investor Relations website, and a replay of this call will be available on the website shortly. And now let me turn the call over to Matt.

Thanks Cherryl, and good afternoon everyone. Revenue in the quarter grew 4.7% to $340.3 million, marking our fifth consecutive quarter of year-over-year revenue growth. Active clients were 2.3 million and increased 21,000 sequentially, a significant milestone in our transformation journey. Revenue per active client, or RPAC, reached $578 in Q3, now the highest level we have reported, slightly exceeding the record we set just last quarter. These results demonstrate how we are strengthening our position as our client's retailer of choice for apparel, footwear, and accessories. As we scale, we maintain our focus on operating with financial discipline resulting in healthy profit margins. Gross margin in Q3 was 43.7% and contribution margin remained above 30% for the ninth consecutive quarter. Our adjusted EBITDA was $13.2 million, and our adjusted EBITDA margin was 3.9%, both also better than expected. Our revenue outperformance in Q3 was driven by strength in our fixed channel. Fixed average order value, or AOV, increased year over year for the 11th straight quarter primarily due to higher items per fix as a result of the expanded adoption of our larger fix offering. Growth in average unit retail, or AUR, also contributed meaningfully to the overall AOV upside, reflecting the benefits of our ongoing assortment improvements. Over the last several years, we have significantly enhanced the breadth and depth of our assortment to more fully meet client needs and capture more wallet share. Our strategy has been anchored on optimizing our portfolio of market brands, investing in our own private brands, and expanding into new categories to better offer head-to-toe outfitting. We are seeing the results of this work. Both our women's and men's businesses saw top line gains in Q3. Within our women's business, we saw robust domain for activewear and athleisure, which grew a combined 50% year over year. We also had a successful seasonal transition with strengthened sandals, skirts, and sneakers. Some of the brands that posted the strongest growth were our private brands, namely Montgomery Post, 41 Hawthorn, and Market & Spruce. Men's grew double digits year over year for the fourth straight quarter with standout performance in warm weather categories, such as shorts, short sleeve woven tops, and casual shoes, which each grew more than 30%. Some of the brands that posted the strongest growth were our private brand ALESBURY, as well as Travis Matthew, Vuori and BONOBOS. With regards to expanding into new categories, we've previously shared our belief that growing our relevance in activewear and athleisure, footwear and accessories can unlock approximately $1 billion in incremental revenue if we achieve our fair share with our existing client base, and we are pursuing this opportunity by expanding our offerings in these key categories. As an example, we recently launched women's sunglasses, introducing brands like Le Specs, AIRE, and KEEP, and we are strengthening our footwear assortment with new brands like Frye, while seeing growth in established brands such as Adidas and New Balance. We are also building on our momentum in activewear and athleisure. We recently added Outdoor Voices, Mob & Golf, Spiritual Gangster, and Cotopaxi, as well as deepened our penetration with client favorites like Varley, Roan, and our private label brand, We Wonder. We are also seeing strength in men's and kids' swimwear with the addition of brands like Fair Harbor. The improvements to our assortment are bolstering our position in the market and translating into further market share gains. According to the latest Circana data, Stitch Fix again meaningfully outperformed the total U.S. apparel, footwear, and accessories market in the most recent quarter. With our year-over-year revenue growth rate more than four times the growth of the total market. We also remain focused on the quality and durability of our client base. A central focus of our transformation has been acquiring and retaining high lifetime value, or LTV, clients who value our service and whom we are uniquely positioned to serve exceptionally well. As I noted earlier, we reached an important milestone in this work as we successfully grew our client base. We also hit our eighth consecutive quarter of year-over-year growth rate improvement in active clients and remain encouraged by this steady progress. Starting with new clients, they grew for the third consecutive quarter, up more than 10% year over year in Q3. As our marketing becomes more targeted and precise, we are seeing that rigor show up in the quality of new client cohorts. New client LTVs increased year over year for the 11th consecutive quarter and were nearly double what they were three years ago, reinforcing our belief that we are building a healthier and more durable client base. That momentum is being reinforced by the sustained adoption of family accounts, which is creating an additional organic pathway for client acquisition. As more clients adopt the feature, family accounts have become an efficient way for us to add high intent clients while also expanding family wallet share. We are also focused on reengaging former clients. Our targeted campaigns are bringing clients back to Stitch Fix, and as they return, we are focused on deepening engagement through a more personalized and flexible experience. At the same time, retention rates continue to strengthen, with steady improvement over seven straight quarters. Q3 surpassed the mark we set last quarter for our highest retention rate in four years. Engagement also remains healthy. Total active clients on recurring shipments continue to grow year over year. New clients on recurring shipments grew even faster. This is an important signal of the value clients are seeing in their fixes and the strength of the ongoing relationship we are building with them. Taken together, these trends reinforce that we are methodically building a stronger client base, and our goal remains to return to year-over-year active client growth in fiscal '27. We attribute both our progress and active clients, as well as our revenue growth, in large part to the advancements we've made to our client experience over the past two years. These improvements have been grounded in delivering on our core promise to offer the most client-centric and personalized shopping experience. We're best positioned to do this because of the uniqueness of our model, which starts with the power of our data. We know more about our clients before their first transaction with us than most retailers know over a lifetime relationship. We have billions of data points on their fit, style, and budget preferences, as well as nuanced insights on our merchandise assortment. It is the interplay of that data, our innovative and AI driven technology platform, and the human connections that our stylists build with clients every day that enable us to deliver what we believe is a superior way to shop for apparel, footwear, and accessories. Our AI-powered style visualization platform, Stitch Fix Vision, plays a plays an important role in offering this better way to shop. As a reminder, Vision provides clients with personalized imagery of their likeness in an array of shoppable outfits tailored to their style profiles and current trends. Since launching it in October, we've been pleased with our clients' response. Notably, we continue to see over a 100% lift in Freestyle spend over a 90-day period for clients who used Vision. Now, we are integrating Vision further within the client experience and are beginning to give clients more control over how they discover and visualize styles by enabling them to generate their own vision images around a look of their choosing. This is exactly the type of innovation we believe can deepen client engagement over time and reflects the broader strides we are taking to strengthen the Stitch Fix experience and the business overall. Beyond embedding AI into the client experience through features like Vision, we are We are applying AI across the enterprise. We are increasingly using these capabilities to optimize efficiency and sharpen our retail advantage in areas including inventory management, intelligent pricing, and creative marketing execution. In private brand product development, we're using AI to fundamentally transform the process, and we can now design a full assortment for an individual private brand in about one week compared to the traditional multi-month design cycle. To close, Q3 was another clear step forward for Stitch Fix. We delivered revenue and adjusted EBITDA above our outlook, achieving sequential active client growth and continue to execute with the discipline that has been central to our transformation. This is increasingly showing up in our bottom line as we drive towards net income profitability. Importantly, this performance reflects the deliberate choices we have made over the last several years to strengthen the foundation of the business, enhance how we serve clients, sharpen our focus on higher quality growth, and fully deliver the client-centric, highly personalized shopping experience that sets Stitch Fix apart. Technology and innovation has been at the core of Stitch Fix's business since day one, and as we look ahead, we will continue to capitalize on this leadership. This will enable us to build on our progress, even in a more challenging retail environment. Our model is resilient, differentiated, and uniquely equipped to navigate macroeconomic uncertainty and a more dynamic consumer backdrop. We are confident in our ability to capture further market share and wallet share and to keep building steadily toward long-term, sustainable, profitable growth. I want to thank the entire Stitch Fix team. The results we are seeing are a direct reflection of your focus, dedication, and commitment to our clients. Thank you for the work you do every day. With that, I'll turn it over to David to discuss our financial results and outlook.

Thanks, Matt, and good afternoon, everyone. As Matt highlighted, our strategic initiatives are driving clear momentum across our top line and client metrics. From a financial perspective, I'm equally pleased with how those gains translated to our bottom line. Our third quarter results demonstrate our ongoing commitment to operational efficiency, which allowed us to exceed our adjusted EBITDA outlook and generate positive cash flow. We are maintaining strong financial discipline to ensure our transformation scales profitably. Now let's turn to the numbers. Revenue was $340.3 million, up 4.7% year-over-year, exceeding our outlook. Its AOV grew 6.4%, better than expected, and was the primary reason for the outperformance. This was driven by more items per fix and higher AUR, reflecting strong demand for larger fixes and our improved assortment. We ended Q3 with 2.3 million active clients, up 21,000 or nearly 1% sequentially. Both women's and men's active clients were up sequentially, and men's active clients were up year over year for the second consecutive quarter. Net revenue per active client, or RPAC, was $578, up 6.6% year over year, marking the ninth consecutive quarter of year over year growth. We view the continued growth in RPAC as an important indicator of improving engagement and spend among our clients. It reflects the impact of the work we are doing across assortment, personalization, fixed flexibility, and the overall client experience, and reinforces the opportunity we see to grow share of wallet over time as we build the active client. We continue to deliver strong margins. Gross margin was 43.7%, again, above the midpoint of our FY '26 range of 43% to 44%, while contribution margins remain robust and north of 30% for the ninth straight quarter. Advertising was 10.2% of revenue in Q3, in line with our expectations. Q3 adjusted EBITDA came in at $13.2 million, or 3.9% margin. We have ceded our guidance due to stronger than expected revenue and disciplined expense management. We ended Q3 with $229.4 million in cash and investments and no debt, and we generated $6.5 million of free cash flow in the quarter. Our strong balance sheet and stable cash flows give us the flexibility to sustain our investments in the growth of the business, while also returning capital to shareholders when we believe it represents an attractive use of cash. During the quarter, we bought back 4.5 million shares for $15.1 million under our previously authorized share repurchase program, which leaves $104.9 million in that program. Our decision to repurchase shares reflects our confidence in the progress we are making, the durability of our financial position, and our commitment to strategic capital allocation. Inventory at the end of Q3 was $132.2 million, up 15.6% year over year, reflecting investments in our client experience and increased demand for larger fixes. Turning to our outlook for Q4 and FY '26. For Q4, we expect total revenue to be between $322 million and $327 million. We expect Q4 adjusted EBITDA to be between $7 million and $10 million. As a result, for full year FY '26, we are tightening our ranges and raising the midpoints for both revenue and adjusted EBITDA to reflect the resilience we're seeing in existing client engagement despite an increasingly challenged consumer environment. We now expect total revenue to be between $1.346 billion and $1.351 billion. We now expect total adjusted EBITDA for the year to be between $49 million and $52 million dollars. And we continue to expect to be free cash flow positive for the full year. We still expect full year gross margin to be between 43% to 44% and full year advertising costs to be between 9% to 10% of revenue. As we close out FY '26, we are encouraged by the meaningful progress we are making across the business. Active client trends are improving, AOV growth remains healthy, and we expect continued market share gains. Our financial model continues to demonstrate strong margins, disciplined expense management, positive free cash flow, and progress towards net income profitability. That performance gives us the flexibility to keep investing in the areas we believe can drive durable growth, such as strengthening the client experience, thoughtfully rebuilding our active client base, and advancing the innovation that differentiates Stitch Fix. We are confident in the path ahead, encouraged by the traction we are building, and committed to delivering further progress in the quarters to come. With that, operator, we can open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Jay Sole from UBS.

Great. I hope you can hear me. So very interesting on the AOV trends. Can you double click on those a little bit? I mean, you mentioned what's driving it, but it seems like it really outperformed in the quarter. You know, tell us maybe some of the strategies that are really the key to getting, you know, the more units perfected from some of the other drivers of AOV that you mentioned. Thank you.

Hey, Jay, it's Matt here. So appreciate the recognition. We're really proud of the work that we've done to reimagine the client experience. And through those efforts, we've been able to drive 11 consecutive quarters of average order value gains. There's a few key contributing factors to that. One, is the success that we've seen with larger fixes. As we've enabled our clients to have fixes, six, seven, or eight items, we've seen many clients self-select into those larger fixes, helping us capture additional wallet share, better provide head-to-toe outfitting, and ensure that we're able to meet or exceed needs for several additional use cases. We also see the success and average order value of those larger fixes nearly double that of a traditional fix. One of the other factors of the reimagination, the client experience is the investments that we've made to improve our portfolio of assortment. That's true in both the market brands that we carry as well as the private brands that we develop. Within the market brands, we've brought on several new brands, which we've highlighted on prior calls as well as noted in today's prepared remarks. And that's helped us improve our AURs across the board, which we're up, I believe, for a seventh consecutive quarter. We've also been investing heavily into our private brands, delivering exceptional value and quality across the board. Our clients have continued to take notice there, which has helped us again capture higher average unit retails within our private brand portfolio while not directly or not impacting average order value. Worth noting that our private brands are also delivering about 500 basis points of higher gross margin than the market brands.

Got it. And may be a matter if I can ask you about just the active client, the momentum you've gotten sequentially. I think the trend in active client growth improved for the eighth quarter in a row. I guess looking ahead to the fourth quarter, how are client acquisition and retention trends shaping up? And what's your level of confidence in being able to maintain the positive sequential momentum?

Yes, Jay, this is David. I can take that. Thanks for the question. First, to your point, we're really encouraged with the results we saw this quarter. It's just one more proof point that, that methodical approach that we've been taking to grow active clients is working. As for Q4, just a reminder that Q1 and Q3 tend to be seasonally stronger quarters for active clients. So Q4 tends to be a seasonally less strong around client acquisition and that's what we're seeing as we go into Q4. And so because of that, we actually expect Q4 to be down slightly sequentially, somewhere between about 0.5% to 1% down sequentially. With that said, to your point, we still do expect the year-over-year comps to continue to improve in Q4 as they have the last eight quarters. And because of that work, we continue to be really encouraged by the overall trends that Matt highlighted in the remarks earlier around new, re-engaged, and client retention. And that methodical approach is the one that we will continue to use to make sure that we're rebuilding a healthy and profitable client base. And that continues to be our focus in Q4. And our goal remains to return to that year over year client growth in FY '27. And, you know, these results and our guide sort of show clear progress towards that.

Got it. If I can squeeze in one more and then I'll pass it on. You know, if you can maybe just put your finger on exactly what it was to allow you to raise the adjusted EBITDA guide, you know, especially the lower end of the guide as much as you did. You know, what's happening that's allowing you to do that of all the different things that you mentioned?

Yes, certainly Jay. On the adjusted EBITDA side, I think we've talked about this quite a bit over the last few quarters. Like we continue to be very, very focused on expense discipline and leverage in the business. And it's something that we continue to focus on this quarter. It's something that we'll continue to focus on in coming quarters. A couple of data points like SG&A spend in Q3 was down over 220 basis points from last year. And it was down, I think over 800 basis points from two years ago. And part of that is also SBC expense, which I know is below EBITDA, but another area that we continue to focus on. And so I think we just continue to make sure that we are driving financial discipline while still certainly investing in growth. And that's really where we felt comfortable putting EBITDA where it is from a guide perspective.

Yes, maybe one additional build on that, Jay. And it was noted in the prepared remarks, we continue to lean in and capitalize on infusing both AI and additional initiatives in terms of the efficiencies of our operations. We continue to drive leverage throughout our fulfillment network and supply chain. We continue to drive efficiencies and leverage throughout our styling network as well. And all of those improvements are helping us continue to improve our bottom line performance.

Your next question comes from the line of Owen Rickert from Northland Capital Markets. Please go ahead.

Thanks for taking my questions here. First for me, household accounts were called out as a growth initiative. How much penetration have you seen there and what is the RPAC list associated with clients who do adopt that feature?

So, hey Owen, it's Matt. So we've been extremely pleased with the adoption of household accounts since we rolled that out. That household account feature came through the client insights that we gathered a couple of years ago, whereby our clients spoke loud and clear that we were offering a superior service that they absolutely loved, but how could we bring that not just for the primary account owner, but such that it could be used for the entire household. So when we launched that feature, we saw some pretty quick organic adoption, that adoption accelerated and has sustained since we launched. And it has made a material impact to the overall improvement in our active client count. And it's something that we're going to continue to lean into, creating awareness and consideration for the feature across the board. It's something that is now part of our core messaging throughout both our onsite experiences as well as through our CRM. In terms of how we're thinking about it. Our goal is to ensure that we're using household accounts to capture additional wallet share from that entire family. That continues to be a focus for us to ensure that we are the retailer for any and all apparel accessories and footwear needs for the entire household, such that they never have a reason to waste a day, you know, walking the cavern in a store or scrolling endlessly online. They can just use the superior service offering unparalleled convenience to have all of their needs met.

Okay, got it. That makes sense. Super helpful. And then lastly for me, maybe how are you thinking about the balance between the Fix and Freestyle as the primary growth drivers going forward? And maybe does the mix shift between the two have any meaningful margin implications?

So, yes, Owen, it's Matt again. In terms of Fix and Freestyle, one of the important things for us is to show up for the client in the best way possible. However, we can best meet their needs, whether that is through a Fix experience or a Freestyle experience. We've continued to lean into and invest in both of those channels. And also what we've started to do over the last several quarters is actually break down the barriers between those channels such that a client, for example, could be initiating their shopping journey within Freestyle, but then while in Freestyle, actually use the item that they're shopping for to become the anchor for their next Fix and work with their stylist to build an outfit around that item or to provide a few variations of that similar item. So when we're thinking about where that growth is coming from at the end of the day, we're bit indifferent. What we're looking for is how can we ensure that we continue to drive engagement and capture that wallet share overall for us. David, if there's anything to add in terms of the relative profitability of both, I think at the end of the day, they're pretty similar, and we're very comfortable just meeting the client where they are.

Next question comes from the line of Dana Telsey from Telsey Advisory Group.

The revenue per active client in terms of what you're seeing. Where do you see that going, difference between brands and private label in terms of what you're seeing and what's the category trends and how do you feel about the state of consumer? And then lastly on advertising, which was flat at, I believe 10.2%, how do you think of the trajectory of advertising spend moving forward? Thank you.

Hey Dana, I captured a few questions there. The first is in terms of our revenue per active client success and where we see that trending. The second is in terms of the performance of private brands versus market brands, which categories we're seeing success with, how we're viewing the consumer, and then finally the current trends in our advertising expense. If I start at the top, we are very encouraged given what we're seeing in the total market today for our revenue per active client to continue to set new highs for us from a reporting perspective. It is a really strong signal to us that we are delivering an exceptional service. And our goal is to continue to drive that metric as much as we can by meeting the client where they are. We feel really confident that the service that we offer is one that can meet our client's needs for nearly all of their use cases for apparel, accessories, and footwear. And our goal is to continue to drive towards that. Part of that is by the category expansion that we continue to talk to for us to continue to grow in athleisure, for us to continue to grow in accessories, for us to continue to grow in footwear. All 3 of those growing outsize relative to our total business, all of them north of 18% growth in the last quarter. We feel really confident that we're going to continue to meet our clients needs while also expanding the different use cases that we can serve them, which gives us a line of sight to future revenue per active client growth and future wallet share gains. In terms of market brands and private brands, we're seeing success in both. As we've talked about previously, we're going to be very client-led in this pursuit. For us, it's really important to have the market brands that our clients covet. It's very important for us to have market brands to fill a white space where our private brands don't have assortment today. It's very important for us to have the leading brands for certain categories and certain use cases where market brands is a reason to purchase for our clients. And it's also a really critical signal for us to ensure that our clients understand that we are the leader when it comes to style and trend. From a private brand perspective, the team has done a phenomenal job over the last couple of years, increasing the quality and value of the private brands that we offer. And our clients have absolutely taken notice. The awareness, the consideration, and the demand for those brands continues to increase. And that's why we were excited to highlight just the success that we're having with our private brands, some of which are growing now over 100% year over year, something that we take a tremendous amount of pride in. In terms of where we see the consumer today, we're really encouraged about the resilience of the Stitch Fix client. The Stitch Fix client continues to show up and in a really encouraging fashion, the Stitch Fix client at every single income cohort that we track continues to show up equally. We see the same levels -- nearly the same levels of revenue growth, no matter the household income of our clients. And we believe that's because of our ability to personalize the experience to each client, no matter what is going on with their budget in any given time. Our assortment allows us to serve a significant breadth of different price points such that if there is a budget constraint at any given time, we're able to meet that client where they are. And we also have the resilience of our business model that is something based on the recurring nature of that business model, our product and the relationship that we have with our clients continues to show up for them and is top of mind for them. So that even if they are say reducing a shopping trip or a shopping journey, the relationship that they have with us and that deep and enduring relationship that they've built with their stylists is one that transcends whatever macro impact that client might be having. And we are able to capture the remaining wallet share that they have. David, I'll let you touch on the advertising.

Yes, Dana, on the advertising, I think we've talked about this before of just strength from a seasonality perspective. And certainly this quarter is one of those quarters. And we were really comfortable with spending at the high end of the range. I think we'd actually said that in our last call that we expected to spend sort of at the high end of our range. And certainly, we're seeing strength across each area of active clients. New client acquisition was up again. Certainly quarter over quarter, but also year over year. Re-engaged clients are still incredibly healthy and a great avenue for us to bring clients back into the experience. And client retention continues to look better. And so because of that, certainly marketing plays a big part in that. And we're really comfortable with those levels of investments and continuing to spend, you know, right now, you know, our expectations to still spend within that 9% to 10% range.

Thank you. Your next question comes from the line of David Bellinger from Mizuho Securities USA.

Hey everyone, thanks for the question. I want to go back to the consumer comments you were just making. You mentioned a few times in the prepared remarks some of this increasingly dynamic spending backdrop. Can you walk us through the cadence of this quarter and anything on quarter to date that's changed or this has shown up in the business and does this have to do anything with this sequential contraction that we're looking for in fiscal Q4?

Yes, David, a couple of things. A couple of things there. In Q3, certainly, really happy with the performance. If you're talking about sort of the progression through the quarter, it was definitely interesting. We probably had a little bit of a slower start to the quarter, and that was around average order value that we were talking about earlier in the call. And then it really rebounded mid quarter. And so really saw some strength as we exited the quarter. And we expect that strength to continue in Q4. We had already had an assumption, I think we had talked about this 4% to 6% increase in AOV in the back half of the year. We had expected Q3 to be at the lower end of that range and Q4 to be at the higher end of that range. And so because of that, you know, that's why our guide stayed consistent for Q4, because we already had baked in a higher AOV for Q4. And so just really encouraged with those trends. And going into Q4, you know, we continue to see resilience with our existing clients. You know, if there's any macro headwind, we're maybe seeing a little bit of an increase in client acquisition costs from a marketing standpoint. We're seeing that across the industry. But what's really interesting, and I think it goes back to what Matt was saying, is our existing clients remain incredibly resilient. And that's true across all of our income cohorts. And so really encouraged by that, and we see that continuing in Q4. And all of that is included in our guide.

Understood. Thanks for all that. And then going forward, if you think about SG&A dollars. The last few quarters have been in this $150 million or so range. As the business gets back to growth mode, is there anything we should think about that should come into that base or some type of incremental uplift in SG&A dollars as the business returns to growth? Thank you.

Yes, David, thanks for the question. You know, for SG&A, I think it goes back, I think we touched on this a little bit earlier, but, you know, we have been really focused on driving, you know, leverage actually across the entire P&L, certainly in gross margin, but then below gross margin, to your point, SG&A, you know, a part, a big part of that is our variable labor teams, our warehouse teams, our stylist teams, and driven a lot of leverage there. And so even over the last year SG&A spend has come down 220 basis points. And so, we continue to really make sure that we are driving that leverage. And SBC, I think is something we've called out in the past as well. That's a big part of the total SG&A spend and SBC was at 3.3% of revenue this quarter, that's down 100 basis points. And so just across each one of the areas of SG&A, we wanna make sure that we are investing appropriately for growth, but that we continue to drive leverage. And we don't see any significant investment needs to turn that in the other direction. We just wanna make sure we're still driving leverage in the P&L.

Your next question comes from the line of Aneesha Sherman from Bernstein. Please go ahead.

Thank you and congrats on a great quarter. So David, I want to follow up on your comments on the prior question. It sounds like you're saying that you ended Q3 at a high point in terms of revenue growth relative to the first half of Q3. So I would imagine above the quarter's average of kind of 4.7%, what does that imply for the current trend? Are you running ahead of the kind of Q4 guide or at the top of the Q4 guidance range at the moment? And do you expect it to decelerate a little bit through the quarter to get through to that 3.5% to 5% guidance range? And then related to that, AOV, your compares get a little tougher in Q4. Are you seeing or expecting any moderation or flattening out of the AOV growth in Q4 as those compares get a bit tougher?

Yes, thanks for the question, Aneesha. On the trends, definitely what we called out holds in Q3, we were definitely a little bit slow at the beginning of the quarter and then rebounded. For Q4, I think we see something similar where there's a little bit of a slower start to the quarter from an AOV perspective and then it's already starting to come back. And so we see a little bit of the same. For AOV in Q4, though, we had already assumed that it was going to be 6% year over year. And so still really comfortable with the AOV compares in Q4. It was just in Q3 we got there faster than we had expected in being able to rebound, to be able to land just above 6% for the quarter in Q3. And that's one of the reasons why we didn't necessarily play forward the beat is because we already had the strength included in our guide for Q4 last quarter.

Okay, that makes a lot of sense. And then if I can ask one follow up on your new client LTVs, beyond the family accounts that are obviously helping there, is there any particular other mixed shift in terms of demographics amongst those new clients that's driving higher LTVs that you're seeing in your mix?

Hey, Aneesha. It's Matt. I'll take that question. First, just a point of clarification within our household accounts, we treat each of those accounts separately. So from an LTV perspective, while we're really encouraged by the results we're seeing in household accounts. The growth we've seen in new client LTVs is actually independent of that. So for us to have effectively doubled our new client LTVs from where they were just three years ago, that's really the aggregate impact of everything that we have done to improve both the experience and our assortment. Part of that is the larger fixes that we offer. Part of that is the continued improvements in our assortment. Part of that is all of the continued investments that we're making into our engagement mechanisms from Stitch Fix Vision to our AI Style Assistant to our Stylist Connect platform. And as we continue to create more opportunities for us to engage our clients, as we continue to create services that uplevel the experience for our clients, we're continuing to see that increase in spend for each of the new clients that we acquire. In terms of who's coming into this service, our marketing team continues to do a really good job getting more and more focused and methodical in terms of who we're targeting such that we are bringing in clients that have a clear resonance for the service that we offer, and also finding very specific client segments like we've discussed before that we believe will be able to serve at an exceptional level. A great example of that is the success that we've had targeting clients that are likely on a GLP-1 medication and going through a body transformation. We're able to follow them all the way through the funnel from prospect marketing that explains to them why this service is one that will help them ensure they have all of their apparel needs met as their body is transforming. They come into a landing page that really helps explain again why this service is right for them. And then their stylist can work for them to meet their needs at each stage of the body transformation journey that they're going through. And we have lots of different segments that we're able to focus on similar to that, as well as ensuring that, you know, the clients that we bring in, we just continue to serve at a really high level overall.

At this time, there are no further questions. I would now like to turn the call back to Matt Baer for closing remarks.

Okay, thank you. So to close, I just want to reiterate how proud I am of the team overall, the progress that we've delivered this quarter and the success that we've been able to drive throughout the entirety of this transformation. We're building a healthier and more durable client base. We continue to strengthen our assortment. We're deepening the engagement levels with our clients. And we continue to prove that Stitch Fix can deliver a more personal, a more convenient, and a more inspiring way to shop. I'm excited. The progress continues to show up across multiple dimensions of the business. We're growing our revenue. We're improving our active client trends. We're gaining market share. And we're doing all of this while maintaining the financial discipline that has been central to the transformation. That includes the robust margins that we're delivering, our positive free cash flow, the strategic capital allocation that David discussed, and the progress towards net income profitability. At Stitch Fix, we're operating from a position of strength and I'm confident in our ability to continue to do so. I appreciate your interest in our business and I look forward to sharing our continued progress in the future. Thank you.

This concludes today's call. Thank you all for attending. You may now disconnect.