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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
30, 2021
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Stitch Fix, Inc.
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| Delaware | 27-5026540 | ||||||||||
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| Name of Each Exchange on Which Registered | ||||||||||||
| Class A common stock, par value $0.00002 per share | SFIX | Nasdaq Global Select Market | ||||||||||||
(415) 882-7765
(Registrant’s Telephone Number, Including Area Code)
| Large accelerated filer | ☒ |
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Non-accelerated filer | ☐ |
| Smaller reporting company | ☐ | |||||||||||||||
| Emerging growth company |
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January 27, 2018 July 29, 2017 Assets Current assets: Cash $ 266,374 $ 110,608 Restricted cash — 250 Inventory, net 80,094 67,592 Prepaid expenses and other current assets 11,653 19,312 Total current assets 358,121 197,762 Property and equipment, net 30,875 26,733 Deferred tax assets 14,493 19,991 Restricted cash, net of current portion 9,100 9,100 Other long-term assets 3,813 3,619 Total assets $ 416,402 $ 257,205 Liabilities, Convertible Preferred Stock and Stockholders’ Equity Current liabilities: Accounts payable $ 55,145 $ 44,238 Accrued liabilities 51,077 46,363 Preferred stock warrant liability — 26,679 Gift card liability 8,151 5,190 Deferred revenue 10,433 7,150 Other current liabilities 4,953 4,298 Total current liabilities 129,759 133,918 Deferred rent, net of current portion 10,752 11,781 Other long-term liabilities 4,794 7,423 Total liabilities 145,305 153,122 Commitments and contingencies (Note 6) Convertible preferred stock, $0.00002 par value – zero and 60,577,280 shares authorized as of January 27, 2018 and July 29, 2017, respectively; zero and 59,511,055 shares issued and outstanding as of January 27, 2018 and July 29, 2017, respectively; aggregate liquidation preference of $42,389 as of July 29, 2017 — 42,222 Stockholders’ equity: Preferred stock, $0.00002 par value – 20,000,000 and zero shares authorized as of January 27, 2018 and July 29, 2017, respectively; zero shares issued and outstanding as of January 27, 2018 and July 29, 2017 — — Class A common stock, $0.00002 par value – 2,000,000,000 and zero shares authorized as of January 27, 2018 and July 29, 2017, respectively; 9,175,557 and zero shares issued and outstanding as of January 27, 2018 and July 29, 2017, respectively — — Class B common stock, $0.00002 par value – 100,000,000 shares authorized as of January 27, 2018 and July 29, 2017; 87,885,193 and 26,834,535 shares issued and outstanding as of January 27, 2018 and July 29, 2017, respectively (1) 2 1 Additional paid-in capital 219,108 27,002 Retained earnings 51,987 34,858 Total stockholders’ equity 271,097 61,861 Total liabilities, convertible preferred stock and stockholders’ equity $ 416,402 $ 257,205 (1) Shares authorized, issued and outstanding as of July 29, 2017 includes common stock prior to our initial public offering. Please see Note 1 for additional details. (Loss) For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Revenue, net $ 295,906 $ 237,775 $ 591,469 $ 473,779 Cost of goods sold 168,523 131,053 335,071 256,979 Gross profit 127,383 106,722 256,398 216,800 Selling, general and administrative expenses 111,771 105,835 231,242 189,385 Operating income 15,612 887 25,156 27,415 Remeasurement of preferred stock warrant liability (1,614 ) 1,146 (10,685 ) 2,649 Other income, net (18 ) (6 ) (35 ) (13 ) Income (loss) before income taxes 17,244 (253 ) 35,876 24,779 Provision for (benefit from) income taxes 13,603 (486 ) 18,747 11,303 Net income and comprehensive income $ 3,641 $ 233 $ 17,129 $ 13,476 Earnings per share attributable to common stockholders: Basic $ 0.04 $ — $ 0.18 $ 0.14 Diluted $ 0.02 $ — $ 0.06 $ 0.14 Weighted-average shares used to compute earnings per share attributable to common stockholders: Basic 82,439,351 — 54,377,466 24,546,556 Diluted 87,954,656 — 60,599,568 29,134,729 Convertible Preferred Stock Common Stock Additional Paid-In Retained Total Stockholders' Shares Amount Shares Amount Capital Earnings Equity Balance as of July 29, 2017 59,511,055 $ 42,222 26,834,535 $ 1 $ 27,002 $ 34,858 $ 61,861 Issuance of Class A common stock upon initial public offering, net of offering costs — — 9,175,557 — 127,033 — 127,033 Issuance of Class B common stock upon conversion of convertible preferred stock (59,511,055 ) (42,222 ) 59,511,055 1 42,221 — 42,222 Reclassification of warrant liability to additional paid-in capital upon the initial public offering — — 1,066,225 — 15,994 — 15,994 Issuance of Class B common stock upon exercise of stock options — — 492,857 — 1,006 — 1,006 Repurchase of Class B common stock related to early exercised options — — (19,479 ) — — — — Vesting of early exercised options — — — — 456 — 456 Stock-based compensation — — — — 5,396 — 5,396 Net income — — — — — 17,129 17,129 Balance as of January 27, 2018 — $ — 97,060,750 $ 2 $ 219,108 $ 51,987 $ 271,097 For the Six Months Ended January 27, 2018 January 28, 2017 Cash Flows from Operating Activities Net income $ 17,129 $ 13,476 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 5,498 (847 ) Remeasurement of preferred stock warrant liability (10,685 ) 2,649 Inventory reserves 7,027 3,177 Compensation expense related to certain stock sales by current and former employees — 9,699 Stock-based compensation expense 5,135 1,362 Depreciation and amortization 4,888 3,385 Loss on disposal of property and equipment 131 (7 ) Change in operating assets and liabilities: Inventory (19,529 ) (10,470 ) Prepaid expenses and other assets 5,078 (9,417 ) Accounts payable 10,843 13,629 Accrued liabilities 4,484 14,914 Deferred revenue 3,283 1,321 Gift card liability 2,961 3,588 Other liabilities (2,508 ) 3,073 Net cash provided by operating activities 33,735 49,532 Cash Flows from Investing Activities Purchase of property and equipment (8,232 ) (11,367 ) Net cash used in investing activities (8,232 ) (11,367 ) Cash Flows from Financing Activities Proceeds from initial public offering, net of underwriting discounts paid 129,046 — Proceeds from the exercise of stock options 1,006 922 Repurchase of Class B common stock related to early exercised options (39 ) (3,557 ) Net cash provided by (used in) financing activities 130,013 (2,635 ) Net increase in cash and restricted cash 155,516 35,530 Cash and restricted cash at beginning of period 119,958 101,492 Cash and restricted cash at end of period $ 275,474 $ 137,022 Components of cash and restricted cash Cash $ 266,374 $ 127,672 Restricted cash – current portion — — Restricted cash – long-term portion 9,100 9,350 Total cash and restricted cash $ 275,474 $ 137,022 Supplemental Disclosure Cash paid for income taxes $ 3,091 $ 18,517 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 780 $ 208 Capitalized stock-based compensation $ 261 $ 45 Vesting of early exercised options $ 456 $ 488 Deferred offering costs included in accounts payable and accrued liabilities $ 134 $ — Conversion of preferred stock upon initial public offering $ 42,222 $ — Reclassification of preferred stock warrant liability upon initial public offering $ 15,994 $ — Deferred offering costs paid in prior year $ 1,879 $ — Basis of Presentation September 25, 2020 (the “2020 Annual Report”). Significant estimates and assumptions are used for inventory, stock-based compensation expense, average, gift cards are used within a one-year period. Similarly, referral credits that are considered incremental costs of obtaining a contract with a customer are recognized in SG&A when issued, as on average, referral credits are used within a one-year period. February 1, 2020, respectively. liabilities on our consolidated balance sheet. Level 3: Unobservable inputs that are significant to the measurement of thefair value of the assets or liabilities that are supported by little or no market data. value of available-for-sale securities by contractual maturity as of January 30, 2021, and August 1, 2020: July 29, 2017 Level 1 Level 2 Level 3 Total Financial Liabilities: Preferred stock warrant liability $ — $ — $ 26,679 $ 26,679 Total $ — $ — $ 26,679 $ 26,679 July 29, 2017 Expected term (in years) 2.0 Fair value of underlying shares $ 25.09 Volatility 43.8 % Risk free interest rate 1.3 % Dividend yield — % For the Six Months Ended January 27, 2018 Balance at July 29, 2017 $ 26,679 Change in fair value (10,685 ) Reclassification of warrant liability to additional paid-in capital upon the initial public offering (15,994 ) Ending Balance at January 27, 2018 $ — January 27, 2018 July 29, 2017 Inventory purchases $ 12,633 $ 11,186 Compensation and related benefits 9,615 9,632 Advertising 7,857 9,995 Shipping and freight 5,873 3,390 Sales taxes 4,786 3,702 Other 10,313 8,458 Total accrued liabilities $ 51,077 $ 46,363 the grant of Class A nonqualified stock options and RSU awards to individuals who satisfy the standards for inducement grants under the relevant Nasdaq Stock Market rules. The number of shares authorized for issuance under the 2019 Plan was 4,750,000 as of January 30, 2021. Options Outstanding Number of Options Weighted- Average Exercise Price Weighted- Average Remaining Contractual Life (in Years) Aggregate Intrinsic Value (In thousands) Balance – July 29, 2017 10,218,912 $ 7.12 8.53 $ 166,670 Granted 1,608,698 $ 20.81 Exercised (492,857 ) $ 2.04 Cancelled (824,629 ) $ 4.90 Balance – January 27, 2018 10,510,124 $ 9.63 8.35 $ 128,355 Class A Common Stock Weighted- Average Grant Date Fair Value Unvested at July 29, 2017 $ — $ — Granted 426,056 $ 18.87 Forfeited (6,000 ) $ 15.00 Unvested at January 27, 2018 $ 420,056 $ 18.92 We record stock-based compensation of stock options granted to employees by estimating the fair value of stock-based awards using the Black-Scholes option pricing model and amortizing the fair value of the stock-based awards granted over the applicable vesting period of the awards on a straight-line basis. The fair value of stock options granted to employees was estimated at the grant date using the For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Income before income taxes $ 17,244 $ (253 ) $ 35,876 $ 24,779 Provisions for income taxes 13,603 (486 ) 18,747 11,303 Effective tax rate 78.9 % 192.1 % 52.3 % 45.6 % allowable credits and excess tax benefits from stock-based compensation. share of Class A common stock is entitled to For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Class A Class B Class B Class A Class B Class B Numerator: Net income $ 312 $ 3,329 $ 233 $ 1,114 $ 16,015 $ 13,476 Less: noncumulative dividends to preferred stockholders (11 ) (122 ) (233 ) (50 ) (718 ) (1,270 ) Less: undistributed earnings to participating securities (41 ) (431 ) — (427 ) (6,140 ) (8,701 ) Net income attributable to common stockholders - basic 260 2,776 — 637 9,157 3,505 Less: change in fair value of preferred stock warrant liability (net of tax) (1,614 ) (1,614 ) — (10,685 ) (10,685 ) — Add: adjustments to undistributed earnings to participating securities 231 211 — 4,421 4,133 443 Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares 2,776 — — 9,157 — — Reallocation of undistributed earnings to Class B shares — 147 — — 719 — Net income attributable to common stockholders - diluted 1,653 1,520 — 3,530 3,324 3,948 Denominator: Weighted-average shares of common stock - basic 7,075,605 75,363,746 24,742,682 3,537,803 50,839,664 24,546,556 Conversion of Class B to Class A common shares outstanding 75,363,746 — — 50,839,664 — — Effect of dilutive stock options and restricted stock units 5,295,401 5,271,550 — 5,584,167 5,581,484 4,588,173 Effect of potentially dilutive preferred stock warrants 219,904 219,904 — 637,934 637,934 — Weighted-average shares of common stock - diluted 87,954,656 80,855,200 24,742,682 60,599,568 57,059,082 29,134,729 Earnings per share attributable to common stockholders: Basic $ 0.04 $ 0.04 0.00 $ 0.18 $ 0.18 $ 0.14 Diluted $ 0.02 $ 0.02 0.00 $ 0.06 $ 0.06 $ 0.14 For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Convertible preferred stock — 59,511,055 — 59,511,055 Preferred stock warrants — 1,066,225 — 1,066,225 Restricted stock units 177,180 — 276,769 — Stock options to purchase Class B common stock 762,918 229,902 927,366 529,495 Total 940,098 60,807,182 1,204,135 61,106,775 You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes if any, at no additional charge. In strategies that capture the changing ways people shop. While we cannot reasonably estimate the long-term impacts of the COVID-19 pandemic, we believe that our business model positions us to emerge from this crisis with a structural advantage and new opportunities to increase market share. •adjusted EBITDA does not reflect our tax provision (benefit), which •free cash flow does not represent the total residual cash flow available for discretionary purposes and does not reflect our future contractual commitments. For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Adjusted EBITDA reconciliation: Net income $ 3,641 $ 233 $ 17,129 $ 13,476 Add (deduct): Other income, net (18 ) (6 ) (35 ) (13 ) Provision for income taxes 13,603 (486 ) 18,747 11,303 Depreciation and amortization 2,618 1,924 4,888 3,385 Remeasurement of preferred stock warrant liability (1,614 ) 1,146 (10,685 ) 2,649 Compensation expense related to certain stock sales by current and former employees — 21,283 — 21,283 Adjusted EBITDA $ 18,230 $ 24,094 $ 30,044 $ 52,083 For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Non-GAAP net income (loss) reconciliation: Net income $ 3,641 $ 233 $ 17,129 $ 13,476 Add (deduct): Remeasurement of preferred stock warrant liability (1,614 ) 1,146 (10,685 ) 2,649 Compensation expense related to certain stock sales by current and former employees — 21,283 — 21,283 Tax impact of non-GAAP adjustments — (8,890 ) — (8,890 ) Impact of Tax Act (1) 4,730 - 4,730 — Non-GAAP net income $ 6,757 $ 13,772 $ 11,174 $ 28,518 1) As discussed in Note 8 to the condensed consolidated financial statements included in this Quarterly Report, the U.S. government enacted comprehensive tax legislation in December 2017. This resulted in a net charge of $4.7 million for the three and six months ended January 27, 2018, due to the remeasurement of our net deferred tax assets for the reduction in tax rate from 35% to 21%. The adjustment to non-GAAP net income only includes this transitional impact. It does not include the ongoing impacts of the lower U.S. statutory rate on current year earnings. For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Non-GAAP earnings per share - diluted reconciliation: Earnings per share attributable to common stockholders - diluted $ 0.02 $ — $ 0.06 $ 0.14 Per share impact of the remeasurement of preferred stock warrant liability(1) $ — $ 0.04 $ — $ 0.08 Per share impact of compensation expense related to certain stock sales by current and former employees $ — $ 0.66 $ — $ 0.61 Per share impact from tax effect of non-GAAP adjustments $ — $ (0.28 ) $ — $ (0.26 ) Per share impact from Tax Act(2) $ 0.05 $ — $ 0.08 $ — Non-GAAP earnings per share attributable to common stockholders - diluted $ 0.07 $ 0.42 $ 0.14 $ 0.57 1) For the three and six months ended January 27, 2018, the preferred stock warrant liability was dilutive and included in earnings per share attributable to common stockholders - diluted. Therefore, it is not an adjustment to arrive at non-GAAP EPS - diluted. 2) As discussed in Note 8 to the condensed consolidated financial statements included in this Quarterly Report, the U.S. government enacted comprehensive tax legislation in December 2017. This resulted in a net charge of $4.7 million for the three and six months ended January 27, 2018, due to the remeasurement of our net deferred tax assets for the reduction in tax rate from 35% to 21%. The adjustment to non-GAAP earnings per share attributable to common stockholders - diluted only includes this transitional impact. It does not include the ongoing impacts of the lower U.S. statutory rate on current year earnings. Free Cash Flow For the Six Months Ended January 27, 2018 January 28, 2017 Free cash flow reconciliation: Cash flows from operating activities $ 33,735 $ 49,532 Deduct: Purchase of property and equipment (8,232 ) (11,367 ) Free cash flow $ 25,503 $ 38,165 Cash flows from investing activities $ (8,232 ) $ (11,367 ) Cash flows from financing activities $ 130,013 $ (2,635 ) While we expect to continue to make significant marketing investments to grow our business in the long run, our marketing expenses may vary from period to period. For example, in July 2018 we launched Stitch Fix Kids, expanding our client and vendor base, and in May 2019, we launched our services in the UK, expanding our geographic scope. In June 2019, we introduced direct-buy functionality to clients in the United States and, over the next several months, expanded direct buy with the launch of new offerings. We started with Buy It Again, allowing clients to buy previously purchased items in new colors, prints, and sizes. Then, in February 2020, we launched Complete Your Looks, which presents clients a personalized set of algorithmically generated items for direct purchase based on items they have already bought from us. In June 2020, we introduced Trending For You, which allows Men’s and Women’s clients to shop personalized looks based on their style profiles. Most recently, in November 2020, we launched a beta of our next direct-buy offering, Shop by Category, which uses the data a client shares with us to create a highly personalized digital shopping feed for that client based on their category preferences. available-for-sale securities. February 1, 2020 For the Three Months Ended % For the Six Months Ended % January 27, 2018 January 28, 2017 Change January 27, 2018 January 28, 2017 Change Revenue, net $ 295,906 $ 237,775 24.4 % $ 591,469 $ 473,779 24.8 % Cost of goods sold 168,523 131,053 28.6 % 335,071 256,979 30.4 % Gross profit 127,383 106,722 19.4 % 256,398 216,800 18.3 % Selling, general and administrative expenses 111,771 105,835 5.6 % 231,242 189,385 22.1 % Operating income 15,612 887 1,660.1 % 25,156 27,415 (8.2 )% Remeasurement of preferred stock warrant liability (1,614 ) 1,146 (240.8 )% (10,685 ) 2,649 (503.4 )% Other income, net (18 ) (6 ) 200.0 % (35 ) (13 ) 169.2 % Income (loss) before income taxes 17,244 (253 ) (6,915.8 )% 35,876 24,779 44.8 % Provision for income taxes 13,603 (486 ) (2,899.0 )% 18,747 11,303 65.9 % Net income $ 3,641 $ 233 1,462.7 % $ 17,129 $ 13,476 27.1 % For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Revenue, net 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 57.0 % 55.1 % 56.7 % 54.2 % Gross margin 43.0 % 44.9 % 43.3 % 45.8 % Selling, general and administrative expenses 37.8 % 44.5 % 39.1 % 40.0 % Operating income 5.2 % 0.4 % 4.2 % 5.8 % Remeasurement of preferred stock warrant liability (0.6 )% 0.5 % (1.8 )% 0.6 % Other income, net 0.0 % 0.0 % 0.0 % 0.0 % Income before income taxes 5.8 % (0.1 )% 6.0 % 5.2 % Provision for income taxes 4.6 % (0.2 )% 3.1 % 2.4 % Net income 1.2 % 0.1 % 2.9 % 2.8 % targeted for near-term clearance. For the Three Months Ended For the Six Months Ended January 27, 2018 January 28, 2017 January 27, 2018 January 28, 2017 Income before income taxes $ 17,244 $ (253 ) $ 35,876 $ 24,779 Provisions for income taxes 13,603 (486 ) 18,747 11,303 Effective tax rate 78.9 % 192.1 % 52.3 % 45.6 % certain nondeductible expenses. compensation. initial public offering in 2017. Our primary use of cash includes operating costs such as merchandise purchases, compensation and benefits, marketing, and other expenditures necessary to support our business growth. For the Six Months Ended January 27, 2018 January 28, 2017 Net cash provided by operating activities $ 33,735 $ 49,532 Net cash used in investing activities (8,232 ) (11,367 ) Net cash provided by (used in) financing activities 130,013 (2,635 ) Net increase in cash and restricted cash $ 155,516 $ 35,530 partially offset by a change of $15.3 million in accrued liabilities and a change of $5.2 million in prepaid expenses and other assets related to increased business activity and timing of payments. was primarily related to purchases of property and equipment of $11.4 million and our investment of $129.9 million in highly rated available-for-sale securities, partially offset by maturities of available-for-sale securities of $81.7 million. vesting of restricted stock units. the life of the lease. fiscal year ended August 1, 2020 (“2020 Annual Report”). Report. Based on the evaluation of our disclosure controls and procedures as of January We will continue to monitor and assess the impact of COVID-19 on our internal controls. nonexempt employees, many of whom work in our fulfillment centers, we could be subject to legal risk, including claims for back wages, unpaid overtime pay, and missed meal and rest periods, which could be on a class or representative basis. Any such issues may result in delays in shipping times, reduced packing quality, or costly litigation, and our reputation and operating results may be harmed. •cost-effectively acquire new clients and engage with existing clients; •increase our market share; •anticipate and respond to changing style trends and consumer preferences; •manage our inventory effectively; •compete effectively; •avoid interruptions in our business from information technology downtime, cybersecurity breaches, or labor stoppages; •continue to enhance our personalization capabilities; •develop new features to enhance the client experience; and •retain our existing merchandise vendors and attract new vendors. If we fail to address the risks and difficulties that we face, including those associated with the challenges listed above as well as those described elsewhere in this “Risk Factors” section, our business and our operating results will be adversely affected. categories. cost effective. profitable in future periods. Our business depends on a strong brand and we may not be able to maintain our brand and reputation. If we fail to attract and retain key personnel, class or representative basis. Our business, including our costs and supply chain, is subject to risks associated with sourcing raw materials and manufacturing. third parties demanding the release or license of the open source software or derivative works that we developed from such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. In addition, our use of open source software may present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our website and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have an adverse effect on our business and operating results. We currently have results of operations If we are unable to make acquisitions and investments, or successfully integrate them into our business, our business could be harmed. •difficulties in integrating the technologies, operations, existing contracts, and personnel of an acquired company; •difficulties in supporting and transitioning clients and suppliers, if any, of an acquired company; •diversion of financial and management resources from existing operations or alternative acquisition opportunities; •failure to realize the anticipated benefits or synergies of a transaction; •failure to identify all of the problems, liabilities, or other shortcomings or challenges of an acquired company or technology, including issues related to intellectual property, regulatory compliance practices, revenue recognition or other accounting practices, or employee or client issues; •risks of entering new markets in which we have limited or no experience; •potential loss of key employees, clients, vendors, and suppliers from either our current business or an acquired company’s business; •inability to generate sufficient revenue to offset acquisition costs; •additional costs or equity dilution associated with funding the acquisition; and •possible write-offs or impairment charges relating to acquired businesses. If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business, or our market, or if they change their recommendations regarding our common stock adversely, the trading price or trading volume of our Class A common stock could decline. Future securities sales and issuances could result in significant dilution to our stockholders and impair the market price of our Class A common stock. Exhibit Number Description of Document Incorporation By Reference Form Sec File No. Exhibit Filing Date Filed Herewith 3.1 Amended and Restated Certificate of Incorporation of Stitch Fix, Inc. 8-K 001-38291 3.1 11/21/2017 3.2 8-K 001-38291 3.2 11/21/2017 4.1 S-1/A 333-221014 4.1 11/6/2017 4.2 S-8 333-221650 4.6 11/17/2017 10.1 X 10.2 X 10.3 8-K 001-38291 10.1 2/2/2018 31.1 X 31.2 X 32.1* X 101.INS XBRL Instance Document Chief Financial Officer (Principal Financial and Accounting Officer)Page No.67152424262626424243434345FINANCIALFINANCIAL INFORMATIONJanuary 30, 2021 August 1, 2020 Assets Current assets: Cash and cash equivalents $ 140,031 $ 143,455 Short-term investments 166,957 143,037 Inventory, net 182,422 124,816 Prepaid expenses and other current assets 49,911 55,002 Total current assets 539,321 466,310 Long-term investments 62,395 95,097 Federal income tax receivable 44,896 742 Property and equipment, net 73,576 70,369 Operating lease right-of-use assets 130,291 132,615 Other long-term assets 5,543 4,296 Total assets $ 856,022 $ 769,429 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 96,788 $ 85,177 Operating lease liabilities 25,718 24,333 Accrued liabilities 116,647 77,590 Gift card liability 12,259 8,590 Deferred revenue 14,953 13,059 Other current liabilities 8,344 3,406 Total current liabilities 274,709 212,155 Operating lease liabilities, net of current portion 134,341 140,175 Other long-term liabilities 13,438 16,062 Total liabilities 422,488 368,392 Commitments and contingencies (Note 6) 0 0 Stockholders’ equity: Class A common stock, $0.00002 par value – 2,000,000,000 shares authorized as of January 30, 2021, and August 1, 2020; 66,314,820 and 58,440,930 shares issued and outstanding as of January 30, 2021, and August 1, 2020, respectively 1 1 Class B common stock, $0.00002 par value – 100,000,000 shares authorized as of January 30, 2021, and August 1, 2020; 39,992,920 and 45,314,577 shares issued and outstanding as of January 30, 2021, and August 1, 2020, respectively 1 1 Additional paid-in capital 392,205 348,750 Accumulated other comprehensive income (loss) 3,268 2,728 Retained earnings 38,059 49,557 Total stockholders’ equity 433,534 401,037 Total liabilities and stockholders’ equity $ 856,022 $ 769,429 For the Three Months Ended For the Six Months Ended January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Revenue, net $ 504,087 $ 451,784 $ 994,510 $ 896,599 Cost of goods sold 287,744 249,597 558,716 493,110 Gross profit 216,343 202,187 435,794 403,489 Selling, general, and administrative expenses 256,694 193,689 495,678 394,831 Operating income (loss) (40,351) 8,498 (59,884) 8,658 Interest (income) expense (642) (1,477) (1,803) (3,130) Other (income) expense, net 107 28 312 862 Income (loss) before income taxes (39,816) 9,947 (58,393) 10,926 Provision (benefit) for income taxes (18,777) (1,484) (46,895) (327) Net income (loss) $ (21,039) $ 11,431 $ (11,498) $ 11,253 Other comprehensive income (loss): Change in unrealized gain (loss) on available-for-sale securities, net of tax (388) 247 (1,051) 75 Foreign currency translation 1,929 651 1,591 2,406 Total other comprehensive income (loss), net of tax 1,541 898 540 2,481 Comprehensive income (loss) $ (19,498) $ 12,329 $ (10,958) $ 13,734 Net income (loss) attributable to common stockholders: Basic $ (21,039) $ 11,431 $ (11,498) $ 11,253 Diluted $ (21,039) $ 11,431 $ (11,498) $ 11,253 Earnings (loss) per share attributable to common stockholders: Basic $ (0.20) $ 0.11 $ (0.11) $ 0.11 Diluted $ (0.20) $ 0.11 $ (0.11) $ 0.11 Weighted-average shares used to compute earnings (loss) per share attributable to common stockholders: Basic 105,544,515 102,045,087 104,840,283 101,801,666 Diluted 105,544,515 104,637,548 104,840,283 104,018,782 Convertible Preferred Stock and Stockholders’ EquityFor the Three Months Ended January 30, 2021 Common Stock Additional
Paid-In
CapitalAccumulated Other Comprehensive Income (Loss) Retained
EarningsTotal
Stockholders’
Equity Shares Amount Balance as of October 31, 2020 104,721,741 $ 2 $ 367,760 $ 1,727 $ 59,098 $ 428,587 Issuance of common stock upon exercise of stock options 1,076,410 — 15,433 — — 15,433 Issuance of common stock upon settlement of restricted stock units, net of tax withholdings 509,589 — (17,114) — — (17,114) Stock-based compensation — — 26,126 — — 26,126 Net income (loss) — — — — (21,039) (21,039) Other comprehensive income (loss), net of tax — — — 1,541 — 1,541 Balance as of January 30, 2021 106,307,740 $ 2 $ 392,205 $ 3,268 $ 38,059 $ 433,534 For the Three Months Ended February 1, 2020 Common Stock Additional
Paid-In
CapitalAccumulated Other Comprehensive Income (Loss) Retained
EarningsTotal
Stockholders’
Equity Shares Amount Balance as of November 2, 2019 101,708,646 $ 2 $ 290,720 $ 1,396 $ 116,496 $ 408,614 Issuance of common stock upon exercise of stock options 503,891 — 5,140 — — 5,140 Issuance of common stock upon settlement of restricted stock units, net of tax withholdings 231,638 — (3,044) — — (3,044) Stock-based compensation — — 15,871 — — 15,871 Net income (loss) — — — — 11,431 11,431 Other comprehensive income (loss), net of tax — — — 898 — 898 Balance as of February 1, 2020 102,444,175 $ 2 $ 308,687 $ 2,294 $ 127,927 $ 438,910 For the Six Months Ended January 30, 2021 Common Stock Additional
Paid-In
CapitalAccumulated Other Comprehensive Income (Loss) Retained
EarningsTotal
Stockholders’
EquityShares Amount Balance as of August 1, 2020 103,755,507 2 348,750 2,728 49,557 $ 401,037 Issuance of common stock upon exercise of stock options 1,601,726 — 20,539 — — 20,539 Issuance of common stock upon settlement of restricted stock units, net of tax withholdings 950,507 — (24,116) — — (24,116) Stock-based compensation — — 47,032 — — 47,032 Net income (loss) — — — — (11,498) (11,498) Other comprehensive income (loss), net of tax — — — 540 — 540 Balance as of January 30, 2021 106,307,740 $ 2 $ 392,205 $ 3,268 $ 38,059 $ 433,534 For the Six Months Ended February 1, 2020 Common Stock Additional
Paid-In
CapitalAccumulated Other Comprehensive Income (Loss) Retained
EarningsTotal
Stockholders’
Equity Shares Amount Balance as of August 3, 2019 101,397,480 $ 2 $ 279,511 $ (187) $ 116,674 $ 396,000 Issuance of common stock upon exercise of stock options 626,559 — 5,658 — — 5,658 Issuance of common stock upon settlement of restricted stock units, net of tax withholdings 420,136 — (5,256) — — (5,256) Stock-based compensation — — 28,774 — — 28,774 Net income (loss) — — — — 11,253 11,253 Other comprehensive income (loss), net of tax — — — 2,481 — 2,481 Balance as of February 1, 2020 102,444,175 $ 2 $ 308,687 $ 2,294 $ 127,927 $ 438,910 For the Six Months Ended January 30, 2021 February 1, 2020 Cash Flows from Operating Activities Net income (loss) $ (11,498) $ 11,253 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Deferred income taxes 0 (4,865) Inventory reserves 4,619 2,831 Stock-based compensation expense 44,684 27,881 Depreciation, amortization, and accretion 14,206 10,347 Other 214 71 Change in operating assets and liabilities: Inventory (62,024) (31,586) Prepaid expenses and other assets 2,524 5,167 Long-term federal income tax receivable (44,154) 0 Operating lease right-of-use assets and liabilities (793) 141 Accounts payable 11,261 (4,870) Accrued liabilities 38,763 15,254 Deferred revenue 1,884 (729) Gift card liability 3,669 3,160 Other liabilities 2,311 4,187 Net cash provided by (used in) operating activities 5,666 38,242 Cash Flows from Investing Activities Purchases of property and equipment (13,894) (11,446) Purchases of securities available-for-sale (112,646) (129,925) Sales of securities available-for-sale 29,317 14,095 Maturities of securities available-for-sale 90,439 81,675 Net cash provided by (used in) investing activities (6,784) (45,601) Cash Flows from Financing Activities Proceeds from the exercise of stock options, net 20,539 5,658 Payments for tax withholding related to vesting of restricted stock units (24,116) (5,256) Net cash provided by (used in) financing activities (3,577) 402 Net increase (decrease) in cash and cash equivalents (4,695) (6,957) Effect of exchange rate changes on cash 1,271 2,014 Cash and cash equivalents at beginning of period 143,455 170,932 Cash and cash equivalents at end of period $ 140,031 $ 165,989 Supplemental Disclosure Cash paid for income taxes $ 227 $ 90 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Purchases of property and equipment included in accounts payable and accrued liabilities $ 5,530 $ 4,474 Capitalized stock-based compensation $ 2,348 $ 893 Leasehold improvements paid by landlord $ 0 $ 7,406 1.Description of Business“the Company”the “Company”) delivers one-to-one personalization to our clients through the combination of data science and human judgment. Our stylists hand select items from a broad selectionrange of merchandise. Stylists pair their own judgment with our analysis of client and merchandise data to provide a personalized shipment of apparel, shoes, and accessories suited to each client’s needs. We call each of these unique shipments a Fix. After receiving a Fix, our clients purchase the items they want to keep and return the other items. We also provide a direct-buy offering that allows clients the flexibility of purchasing items outside of a Fix. Through direct buy, clients are offered previously purchased items in different colors, sizes, or prints, as well as a personalized set of algorithmically generated items based on their prior purchases or style preferences. We are incorporated in Delaware and operatehave operations in the United States.Initial Public OfferingOn November 16, 2017, we completed an initial public offeringStates and the United Kingdom (“IPO”UK”).In connection withIPO, we authorized two new classes of common stock: Class A common stock and Class B common stock. The rightseffects of the holdersongoing coronavirus (“COVID-19”) outbreak and its impact on our business. The full impact of Class Athe COVID-19 crisis on our business will depend on factors such as the length of time of the pandemic; how federal, state and Class B common stocklocal governments are identical, exceptresponding; the efficacy of the COVID-19 vaccines, the efficiency of vaccines roll-outs and timing of when these vaccines will be widely available to our employees and the general population; the longer-term impact of the crisis on the economy and consumer behavior; and the effect on our clients, employees, vendors, and other partners. As a result of the COVID-19 pandemic, in the third quarter of fiscal 2020 we temporarily closed three of our eight fulfillment centers, operated at significantly reduced capacity for much of the third quarter as a result of such temporary closures, and reduced our marketing in light of this reduced capacity. During the fourth quarter of fiscal 2020, our fulfillment centers returned to higher capacity levels. In the first and second quarters of fiscal 2021, we experienced smaller, intermittent interruptions at our fulfillment centers when we temporarily closed for part of a work day or for a full day to perform safety and cleaning procedures following an employee testing positive for COVID-19.voting, conversionlong-lived assets or short-term and transfer rights. Each sharelong-term investments that would have a material impact on our financial statements.Class A common stock is entitledtaxable income for tax years beginning before 2021 and allows NOLs incurred in 2018, 2019, and 2020 to one vote per share andbe carried back to each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one sharefive preceding taxable years to generate a refund of Class A common stock and has no expiration date. The Class B common stock automatically converts to Class A common stock upon transfers or any sale. In our IPO, we issued and sold 8,000,000 shares of our Class A common stock at a public offering price of $15.00 per share.previously paid income taxes. We received $110.4 million in net proceeds after deducting $6.2 million of underwriting discounts and $3.4 million in offering costs. Upon the closingprovided for an estimated effect of the IPO, allCARES Act in our financial statements for the period ended January 30, 2021.the then outstanding shares of common stock were reclassified into Class B common stock, all of the outstanding shares of convertible preferred stock automatically converted into 59,511,055 shares of Class B common stock and all of the outstanding preferred stock warrants were automatically exercised into 1,066,225 shares of Class B common stock. Subsequent to the closing of the IPO, there were no shares of preferred stock or preferred stock warrants outstanding.In December 2017, we issued an additional 1,175,557 shares of Class A common stock at a price of $15.00 per share following the underwriters’ exercise of their option to purchase additional shares and received $16.7 million in net proceeds after deducting underwriting discounts and expenses.2.Summary of Significant Accounting Policiesendedending July 29, 201731, 2021 (“2017”2021”), and July 28, 2018August 1, 2020 (“2018”2020”) each, consist of 52 weeks.following the requirements of the U.S. Securities and Exchange Commission (“SEC”(the “SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as our annual consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending July 28, 201831, 2021, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation. and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended July 29, 2017 containedAugust 1, 2020, included in our prospectusthe Company’s Annual Report on Form 10-K filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the SEC on November 17, 2017.common stock valuation preceding our IPO, remeasurement of preferred stock warrant liability preceding our IPO,income taxes, leases, and revenue recognition and income taxes.recognition. Actual results could differ from those estimates and such differences may be material to the condensed consolidated financial statements.Restricted CashRestricted cash represents cash balances heldsegregated accounts collateralizing lettersapplying accounting policies. While there is a greater degree of uncertainty in applying these judgments in light of this crisis, we believe reasonable estimates have been used in preparing the unaudited condensed consolidated financial statements.forloss model. For debt securities with an amortized cost basis in excess of estimated fair value, we determine what amount of that deficit, if any, is caused by expected credit losses. The portion of the deficit attributable to expected credit losses is recognized in other (income) expense, net on our leased propertiescondensed consolidated statements of income. During the three and six months ended January 30, 2021, we did not record any expected credit losses on our available-for-sale debt securities.27, 201830, 2021, and July 29, 2017.Deferred Offering CostsDeferred offeringwas recorded in prepaid expenses and other current assets. We have also elected to exclude accrued interest receivable from the estimation of expected credit losses on our available-for-sale securities and reverse accrued interest receivable through interest income (expense) when amounts are determined to be uncollectible. We did not write off any accrued interest receivable during the three and six months ended January 30, 2021.whichpaid or incentives received.direct incremental legal, consulting, bankingone performance obligation, which is the option to purchase merchandise. The upfront styling fee is not a performance obligation as the styling activity is not distinct within the context of the contract. Similarly, the right to receive multiple options under Style Pass does not provide the customer with material stand-alone value and accounting fees relatingtherefore does not give rise to a separate performance obligation. Both the upfront styling fee and Style Pass annual fee are included in deferred revenue until the performance obligation is satisfied when the client exercises his or her option to purchase merchandise (i.e., upon checkout of a Fix) or when the option(s) to purchase merchandise expire(s).IPO were capitalizedclient. For a Fix, control is transferred when the client accepts or rejects the offer to purchase merchandise. Upon acceptance by purchasing one or more items within the Fix at checkout, the total amount of the order, including the upfront styling fee, is recognized as revenue. If none of the items within the Fix are accepted at checkout, the upfront styling fee is recognized as revenue at that time. The Style Pass annual fee is recognized at the earlier of (i) the time at which a client accepts and offset against proceedsapplies the Style Pass fee to an offer to purchase merchandise or (ii) upon expiry of the annual period. Under Style Pass arrangements, if a client does not accept any items within the Fix, the annual fee will continue to be deferred until it is applied to a future purchase or upon expiry of the annual period. If a client would like to exchange an item, we recognize revenue at the time the exchanged item is shipped, which coincides with the transfer of control to the customer. For a direct purchase, control is transferred when the item is shipped to the client.consummationearlier of application to a merchandise purchase or expiry of the IPO,offer, (ii) cash collections of Style Pass annual fees, which became effectiveare included in deferred revenue and are recognized upon the earlier of application to a merchandise purchase or expiry of the Style Pass annual period, (iii) unredeemed gift cards, which are included in gift card liability and recognized as revenue upon usage or inclusion in gift card breakage estimates, (iv) referral credits, which are included in other current liabilities and are recognized as revenue when used, and (v) cash collections of direct purchases, which are included in deferred revenue and are recognized as revenue upon shipment.November 16, 2017 (See Note 1).(in thousands) January 30, 2021 August 1, 2020 Deferred revenue Upfront styling fees $ 10,327 $ 9,119 Style Pass annual fees 3,103 2,711 Direct order 1,523 $ 1,229 Total deferred revenue $ 14,953 $ 13,059 Gift card liability $ 12,259 $ 8,590 Other current liabilities Referral credits $ 7,199 $ 2,577 (in thousands) Revenue Recognized From Amounts Previously Included in Deferred Balances at August 1, 2020 Upfront styling fees 9,110 Style Pass annual fees 1,581 Direct order 947 Gift card liability 2,245 Referral credits 1,732 threetwo financial institutions within the United States. Our cash balances held by these institutions may exceed federally insured limits. The associated risk of concentration for cash is mitigated by banking with credit-worthy institutions. The associated risk of concentration for cash equivalents and investments is mitigated by maintaining a diversified portfolio of highly rated instruments. 27, 201830, 2021, and January 28, 2017.May 2014,December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. This update amends and simplifies the accounting for income taxes by eliminating certain exceptions in existing guidance related to performing intraperiod tax allocation, calculating interim period taxes, and recognizing deferred taxes for investments. The update also provides new guidance to reduce complexity in certain areas. This standard is effective beginning in our first fiscal quarter of 2022 with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.Accounting Standards Update (“ASU”)ASU No. 2014-09, Revenue from Contracts with Customers2016-13, Financial Instruments—Credit Losses (Topic 606), or ASU 2014-09, which amended326): Measurement of Credit Losses on Financial Instruments. The standard requires entities to use a financial instrument impairment model based on expected losses, known as the existing FASB Accounting Standards Codification. ASU 2014-09 establishes a principlecurrent expected credit loss model, rather than incurred losses. Under the new guidance, an entity recognizes an allowance for recognizing revenueestimated credit losses upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services and also provides guidance on the recognition of costs related to obtaining and fulfilling customer contracts. the financial instrument. The new guidance may be applied retrospectivelyalso changes the impairment model for available-for-sale debt securities, requiring the use of an allowance to each prior period presented or retrospectively withrecord estimated credit losses and subsequent recoveries. We adopted this standard in the cumulative effect recognized as of the date of adoption (“modified retrospective method”). We plan to apply the modified retrospective method upon adoption in our first quarter of fiscal 2019. We doyear 2021. The adoption of this standard did not anticipate thehave a material impact to be material toon our consolidated financial statements., or (“ASU 2016-02,2016-02”), which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice.Accounting Standards Codification (“ASC”) 840. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-useright-of-use asset for the right to use the underlying asset for the lease term. We expect to adoptPresentation of leases within the consolidated statements of operations and comprehensive income and consolidated statements of cash flow is generally consistent with ASC 840. However, this standard in our first quarter of fiscal 2020. We are currently evaluating the impact that this standard will have on our consolidated financial statements but we expect that it will resultresulted in a substantial increase in our long-term assets and liabilities.October 2016,June 2018, the FASB issued ASU No. 2016-162018-07, Income Taxes: Intra-Entity TransfersCompensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). Under ASU 2018-07, the accounting for awards issued to nonemployees will be similar to the accounting for employee awards. This includes allowing for the measurement of Assets Other Than Inventory (Topic 740), which amends existing guidance onawards at the grant date and recognition of awards with performance conditions when those conditions are probable, both of which are earlier than under current and deferred income tax impactsguidance for intra-entity asset transfers other than inventory. This amendment should be applied on a modified retrospective basis.nonemployee awards. We expect to adoptadopted this standard in the first quarter of fiscal 2019 and are currently evaluating theyear 2020. The standard did not have a material impact that it will have on our consolidated financial statements.3.Fair Value Measurementsliabilities and the preferred stock warrant liability.liabilities. At January 27, 201830, 2021, and July 29, 2017,August 1, 2020, the carrying values of cash and cash equivalents, accounts payable, and accrued liabilities approximated fair value due to their short-term maturities. In November 2017, in connection withmaturities.IPO, all outstanding preferred stock warrants were automatically exercised into Class B common stock. As a result, we remeasuredshort-term and reclassified the preferred stock warrant liability to additional paid-in capital upon the closing of the IPO. Aslong-term investments accounted for as available-for-sale securities as of January 27, 2018,30, 2021, and August 1, 2020:January 30, 2021 August 1, 2020 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Financial Assets: Investments: U.S. Treasury securities $ 70,193 $ 204 $ 0 $ 70,397 $ 67,335 $ 516 $ (1) $ 67,850 Certificates of deposit 11,350 0 0 11,350 6,150 0 0 6,150 Commercial paper 41,987 0 0 41,987 35,331 0 0 35,331 Asset-backed securities 22,832 118 (4) 22,946 44,854 410 (4) 45,260 Corporate bonds 82,398 276 (2) 82,672 82,821 723 (1) 83,543 Total $ 228,760 $ 598 $ (6) $ 229,352 $ 236,491 $ 1,649 $ (6) $ 238,134 Company did not have any financial instruments measured at fair value.January 30, 2021 August 1, 2020 (in thousands) One Year or Less Over One Year Through Five Years Over Five Years Total One Year or Less Over One Year Through Five Years Over Five Years Total Financial Assets: Investments: U.S. Treasury securities $ 70,397 $ 0 $ 0 $ 70,397 $ 38,794 $ 29,056 $ 0 $ 67,850 Certificates of deposit 11,350 0 0 11,350 6,150 0 0 6,150 Commercial paper 41,987 0 0 41,987 35,331 0 0 35,331 Asset-backed securities 6,095 16,851 0 22,946 6,657 38,603 0 45,260 Corporate bonds 37,128 45,544 0 82,672 56,105 27,438 0 83,543 Total $ 166,957 $ 62,395 $ 0 $ 229,352 $ 143,037 $ 95,097 $ 0 $ 238,134 financial instrumentscash equivalents, and short-term and long-term investments accounted for as available-for-sale securities that were measured at fair value on a recurring basis based on the fair value hierarchy as of July 29, 2017 (in thousands):January 30, 2021, and August 1, 2020: January 30, 2021 August 1, 2020 (in thousands) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Financial Assets: Cash equivalents: Money market funds $ 4,504 $ 0 $ 0 $ 4,504 $ 2,394 $ 0 $ 0 $ 2,394 U.S Treasury securities 7,228 0 0 7,228 0 0 0 0 Investments: U.S. Treasury securities 70,397 0 0 70,397 67,850 0 0 67,850 Certificates of deposit 0 11,350 0 11,350 0 6,150 0 6,150 Commercial paper 0 41,987 0 41,987 0 35,331 0 35,331 Asset-backed securities 0 22,946 0 22,946 0 45,260 0 45,260 Corporate bonds 0 82,672 0 82,672 0 83,543 0 83,543 Total $ 82,129 $ 158,955 $ 0 $ 241,084 $ 70,244 $ 170,284 $ 0 $ 240,528 27, 201830, 2021, and January 28, 2017. The key assumptions used in the Black-Scholes option-pricing model for the valuation of the preferred stock warrant liability upon remeasurement were as follows as of July 29, 2017:February 1, 2020.The following table sets forth a summary of the changes in the fair value of the preferred stock warrant liability (in thousands):4.Accrued Liabilitiesfollowing (in thousands):following:(in thousands) (in thousands) January 30, 2021 August 1, 2020 Compensation and related benefits $ 12,368 $ 11,987 Advertising 24,020 14,979 Sales taxes Sales taxes 12,002 7,134 Shipping and freight 19,163 8,624 Accrued accounts payable Accrued accounts payable 10,135 5,892 Inventory purchases Inventory purchases 19,341 15,427 Other 19,618 13,547 Total accrued liabilities $ 116,647 $ 77,590
California Styling Organization5.Preferred Stock Warrant LiabilityIn 2012 and 2013, in connection with financing arrangements,issued warrantsannounced a restructuring plan to purchase shareseliminate substantially all of our convertible preferred stock. ForStyling team based in California. As a result of this restructuring, we recognized aggregate charges of $4.8 million for termination benefits within selling, general, and administrative expenses during 2020. Cash payments of $3.1 million and $1.7 million occurred during 2021 and 2020, respectively, with no outstanding liability as of January 30, 2021. Other costs such as relocation assistance were expensed as incurred.financing arrangements, we issued warrants to purchase 375,230 shareslenders under the Credit Agreement.Series Seed convertible preferredstock at an exercise price of $0.1066 per share and 66,265 shares of Series A convertible preferred stock at an exercise price of $0.22636 per share. For the second financing arrangement, we issued warrants for the purchase of,Credit Agreement, revolving loans may be either Eurodollar Loans or ABR Loans. Outstanding Eurodollar Loans incur interest at the warrant holder’s option,Eurodollar Rate, which is defined in the Credit Agreement as LIBOR (or any successor thereto), plus a margin of either 2.25% or 2.50%, depending on usage. Outstanding ABR Loans incur interest at the highest of (a) 624,730 sharesthe Prime Rate, as published by the Wall Street Journal, (b) the federal funds rate in effect for such day plus 0.50%, and (c) the Eurodollar Rate plus 1.00%, in each case plus a margin of Series A-1 convertible preferred stockeither 1.25% or 1.50%, depending on usage. We will be charged a commitment fee of either 0.25% or 0.30% per year, depending on usage, for committed but unused amounts. The Credit Agreement will terminate on June 2, 2021, unless the termination date is extended at an exercise pricethe election of $0.2401 per share or (b) 308,315 sharesthe lenders. We capitalized $0.7 million of Series B convertible preferred stock at an exercise price of $0.486516 per share. Prior to their automatic exerciseissuance costs in connection with the IPO,Credit Agreement.described below, the warrants were exercisable for and expired ten years from thea fulfillment center in Salt Lake City, Utah. We expect to classify this lease as an operating lease, with a commencement date of issuance. In November 2017,late fiscal 2021 or early fiscal 2022. The lease expires in connection with our IPO,2030 and we expect to record fixed operating lease costs of approximately $33.1 million over the preferred stock warrants were automatically exercised into Class B common stock andlife of the preferred stock warrant liability was reclassified to additional paid-in capital.lease.6.Commitments and ContingenciesFor the Three Months Ended January 30, 2021 For the Three Months Ended February 1, 2020 (in thousands) Available-for-sale Securities Foreign Currency Translation Total Available-for-sale Securities Foreign Currency Translation Total Beginning balance $ 550 $ 1,177 $ 1,727 $ 219 $ 1,177 $ 1,396 (389) 1,929 1,540 249 651 900 Amounts reclassified from AOCI 1 0 1 (2) 0 (2) Net change in AOCI (388) 1,929 1,541 247 651 898 Ending balance $ 162 $ 3,106 $ 3,268 $ 466 $ 1,828 $ 2,294 For the Six Months Ended January 30, 2021 For the Six Months Ended February 1, 2020 (in thousands) Available-for-sale Securities Foreign Currency Translation Total Available-for-sale Securities Foreign Currency Translation Total Beginning balance $ 1,213 $ 1,515 $ 2,728 $ 391 $ (578) $ (187) (937) 1,591 654 77 2,406 2,483 Amounts reclassified from AOCI (114) 0 (114) (2) 0 (2) Net change in AOCI (1,051) 1,591 540 75 2,406 2,481 Ending balance $ 162 $ 3,106 $ 3,268 $ 466 $ 1,828 $ 2,294 7.Stock-Based Compensationgrantinggrant of stock-based awards to employees, including directors, and non-employeesnonemployees under terms and provisions established by the board of directors.As of January 27, 2018, we had only grantedOnly incentive and nonqualified stock options were granted under the 2011 Plan. Employee stock optionsoption awards generally vest 25% on the first anniversary of the grant date with the remaining shares subject to the option vesting ratably over the next three years. Options generally expire after 10 years. Effective upon our IPO,initial public offering in 2017, the 2011 Equity Incentive Plan has beenwas replaced by the 2017 Incentive Plan.theour 2011 Plan became reserved for issuance under the 2017 Plan.Plan. Our 2017 Plan provides for the grant of Class A incentive stock options to employees, including employees of any parent or subsidiary, and for the grant of nonstatutorynonqualified stock options, stock appreciation rights, restricted stock (“RSU”) awards, restricted stock unit awards, performance stock awards, performance cash awards, and other forms of stock awards to employees, directors, and consultants, including employees and consultants of our subsidiaries. Employee stock option awards generally vest 25% on the first anniversary of the grant date with the remaining shares subject to the option vesting ratably over the next three years. Options generally expire after 10 years. RSU awards generally vest 25% on the first anniversary of the grant date with the remaining RSU awards vesting ratably over the next three years. The number of shares authorized for issuance under the 2017 Plan was 28,423,37427,395,455 as of January 27, 2018,30, 2021.which 6,038,778 were availabledirectors adopted our 2019 Inducement Plan (the “2019 Plan”). Our 2019 Plan provides for grant.2017 Plans2019 Plan is as follows: Options Outstanding Number of
OptionsWeighted-
Average
Exercise
PriceWeighted-
Average
Remaining
Contractual
Life (in Years)Aggregate
Intrinsic
Value
(in thousands)Balance – August 1, 2020 Balance – August 1, 2020 6,817,196 $ 17.10 7.41 $ 40,252 Granted 392,000 $ 56.50 Exercised (1,601,726) $ 12.82 Cancelled (1,054,611) $ 22.19 Balance – January 30, 2021 Balance – January 30, 2021 4,552,859 $ 20.82 7.33 $ 339,750 (RSU)(“RSU”) award activity under the 2017 IncentivePlan and 2019 Plan:Unvested RSUs Class A Common Stock Weighted-
Average
Grant Date
Fair ValueUnvested at August 1, 2020 Unvested at August 1, 2020 9,123,341 $ 20.11 Granted 4,727,643 $ 31.87 Vested Vested (950,507) $ 22.05 Forfeited (1,468,261) $ 21.62 Unvested at January 30, 2021 Unvested at January 30, 2021 11,432,216 $ 24.62 $3.1$24.8 million and $5.1$44.7 million for the three and six months ended January 27, 2018,30, 2021, respectively, and $0.7$15.8 million and $1.2 $27.9 million for the three and six months ended January 28, 2017,ended February 1, 2020, respectively. Stock-based compensation expense is included in selling, general, and administrative expenses in our condensed consolidated statements of operations.27, 201830, 2021, was $7.65 $28.46 per share. The weighted-average grant date fair value of options granted during the six months ended January 28, 2017 February 1, 2020, was $2.84 $11.59 per share. As of January 27, 2018,30, 2021, the total unrecognized compensation expense related to unvested options and RSU’s,RSUs, net of estimated forfeitures, was $40.8$275.3 million, which we expect to recognize over an estimated weighted average period of 3.492.6 years.Black- ScholesBlack-Scholes option-pricing model with the following assumptions:For the Three Months EndedFor the Six Months EndedJanuary 27, 2018January 28, 2017January 27, 2018January 28, 2017Expected term (in years)5.4 - 6.65.5 - 6.15.4 - 6.65.4 - 6.5Volatility41.4 - 43.5%42.7 - 42.8%41.4 - 43.5%44.4 - 46.0%Risk free interest rate2.1 - 2.5%2.2 - 2.3%1.9 - 2.5%1.3 - 2.3%Dividend yield—%—%—%—% For the Three Months Ended For the Six Months Ended January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Expected term (in years) 5.3 - 6.3 5.5 - 6.1 5.3 - 6.3 5.5 - 6.2 Volatility 55.5 % 50.1% 55.5% - 55.9% 50.1% - 51.2% Risk free interest rate 0.4% - 0.5% 1.6% 0.3% - 0.5% 1.6% - 1.7% Dividend yield 0 % 0 % 0 % 0 % In July 2017, we granted options to certain members of our executive management team to purchase an aggregate of 1,097,463 shares of Class B common stock which had both a service-based condition and a liquidity event-related performance condition. Such options vest ratably over the 24-month period following the fourth anniversary of the grant date, subject to an IPO occurring within 12 months of the grant date and the option holder’s continuous service through each vesting date. The aggregate grant-date fair value of such option awards was $14.0 million.Since an IPO is not deemed probable until such event occurs, no compensation cost related to the performance condition was recognized prior to the consummation of our IPO in November 2017. Subsequently, we recorded stock based compensation expense of $0.5 million related to periods prior to the IPO.8.presented (in thousands):presented: For the Three Months Ended For the Six Months Ended (in thousands) January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Income (loss) before income taxes $ (39,816) $ 9,947 $ (58,393) $ 10,926 Provision (benefit) for income taxes (18,777) (1,484) (46,895) (327) Effective tax rate 47.2 % (14.9) % 80.3 % (3.0) % On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (“Tax Act”), which significantly changed U.S. tax law. The Tax Act contains several key tax provisions including the reduction of the corporatetax rate from 35% to 21%, as well as a variety of other changes including the acceleration of expensing of certain business assets and reductionstaxes in the amount of executive pay that could qualify as aUnited States. Our effective tax deduction. The Federal statutory tax rate reduction is effective January 1, 2018. The Company has a fiscal year end which subjects us to transitional tax rate rules. In the three months ended January 27, 2018, we revised our estimated annual effective rate and applied a blended U.S. statutory rate of 26.96% due to the tax rate reduction. Additionally, income tax expense for the three and six months ended January 28, 2017 was adjusted30, 2021, differs from the federal statutory income tax rate primarily due to reflect the discrete effectsnet operating loss carryback provisions of the TaxCARES Act and resulted in an increase inexcess tax benefits from stock-based compensation, partially offset by certain nondeductible expenses.expense of $4.7 million, relatedrate primarily due to the remeasurement of existing deferred tax balances. This discrete impact was considered a provisional amount under the U.S. Securitiescertain nondeductible expenses and Exchange Commission Staff Accounting Bulletin No. 118. The Company remeasured the deferred tax balances based on the tax rates atstate taxes which they are expected to reverse in the future. The Company will continue to refine provisional balances and adjustments may be made under SAB 118 during the measurement period as a result of future changes in interpretation, information available, assumptions madeoffset by the Company and/or issuancebenefits of additional guidance.9.Earnings (Loss) Per Share Attributable to Common Stockholders net incomeearnings (loss) per share attributable to common stockholders is presented in conformity with the two-class2-class method required for participating securities. We consider convertible preferred stock and early exercised share options to be participating securities. In connection with the IPO, we established two classes of authorized common stock:securities: Class A common stock and Class B common stock. As a result, all then-outstanding shares of common stock were converted into shares of Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting, conversion, and transfer rights. Eachone1 vote per share and each share of Class B common stock is entitled to ten10 votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one1 share of Class A common stock.Undistributed earnings allocated to participating securities are subtracted fromin determining net income attributable to common stockholders. Basic net income(loss) per share attributable to common stockholders is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding.the basic and diluted EPS attributable to common stockholders is as follows (in thousands except share and per share amounts): For the Three Months Ended January 30, 2021 February 1, 2020 (in thousands, except share and per share amounts) Class A Class B Class A Class B Numerator: Net income (loss) $ (12,790) $ (8,249) $ 6,243 $ 5,188 Net income (loss) attributable to common stockholders - basic (12,790) (8,249) 6,243 5,188 Reallocation of undistributed earnings (loss) as a result of conversion of Class B to Class A shares 0 0 5,188 0 Reallocation of undistributed earnings (loss) to Class B shares 0 0 0 64 Net income (loss) attributable to common stockholders - diluted $ (12,790) $ (8,249) $ 11,431 $ 5,252 Denominator: Weighted-average shares of common stock - basic 64,163,400 41,381,115 55,733,232 46,311,855 Conversion of Class B to Class A common shares outstanding 0 0 46,311,855 0 Effect of dilutive stock options and restricted stock units 0 0 2,592,461 1,760,938 Weighted-average shares of common stock - diluted 64,163,400 41,381,115 104,637,548 48,072,793 Earnings (loss) per share attributable to common stockholders: Basic $ (0.20) $ (0.20) $ 0.11 $ 0.11 Diluted $ (0.20) $ (0.20) $ 0.11 $ 0.11 For the Six Months Ended January 30, 2021 February 1, 2020 (in thousands, except share and per share amounts) Class A Class B Class A Class B Numerator: Net income (loss) $ (6,765) $ (4,733) $ 6,113 $ 5,140 Net income (loss) attributable to common stockholders - basic (6,765) (4,733) 6,113 5,140 Reallocation of undistributed earnings as a result of conversion of Class B to Class A shares 0 0 5,140 0 Reallocation of undistributed earnings to Class B shares 0 0 0 78 Net income (loss) attributable to common stockholders - diluted $ (6,765) $ (4,733) $ 11,253 $ 5,218 Denominator: Weighted-average shares of common stock - basic 61,685,068 43,155,215 55,300,571 46,501,095 Conversion of Class B to Class A common shares outstanding 0 0 46,501,095 0 Effect of dilutive stock options and restricted stock units 0 0 2,217,116 1,736,121 Weighted-average shares of common stock - diluted 61,685,068 43,155,215 104,018,782 48,237,216 Earnings (loss) per share attributable to common stockholders: Basic $ (0.11) $ (0.11) $ 0.11 $ 0.11 Diluted $ (0.11) $ (0.11) $ 0.11 $ 0.11 For the Three Months Ended For the Six Months Ended January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Restricted stock units 8,372,991 2,347,736 7,468,108 4,022,303 Stock options to purchase Class A common stock Stock options to purchase Class A common stock 1,465,162 2,969,625 1,153,235 2,969,625 Stock options to purchase Class B common stock 1,937,512 1,336,984 1,953,331 2,083,118 Total 11,775,665 6,654,345 10,574,674 9,075,046 10.Subsequent EventsOn January 29, 2018, we executed an amendment to the lease on our corporate headquarters. Beginning June 1, 2018, the amendment adds two additional floorsoffice space, provides for a ten-year lease term for the additional spaceFinancial Condition and extends our existing lease by four and a half years to be coterminous with the termResults of the additional space. The future minimum lease payments for our corporate headquarters increased from approximately $43.8 million to approximately $115.3 million over ten years. Our restricted cash balance increased by $3.7 million, representing an increase in collateral for letters of credit on our leased properties.
Operationstheretoand our Annual Report on Form 10-K for the year ended July 29, 2017, included in the final prospectus for our initial public offering (“IPO”), dated as of November 16, 2017, andAugust 1, 2020, filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) on November 17, 2017 (File No. 333-221014) (the “Final Prospectus”). September 25, 2020. We use a 5252- or 53 week53-week fiscal year, with our fiscal year ending each year on the Saturday that is closest to July 31 of that year. Each fiscal year generallytypically consists of four 13-week fiscal quarters, with eachquarters. The fiscal quarteryear ending onJuly 31, 2021, and the Saturday that is closest to the last day of the last month of the quarter. The yearsfiscal year ended July 30, 2016 and July 29, 2017 includedAugust 1, 2020, include 52 weeks of operations. Throughout this Quarterly Report on Form 10-Q (this “Quarterly Report”), all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.AllForward-looking statements other thanare often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements of historical facts included in this Quarterly Report, including without limitation, statements inare based on the following discussionbeliefs and analysis of our financial condition and results of operations regarding our projected financial position and results, [estimated quantities and net present values of reserves], business strategy, plans and objectivesassumptions of our management, for future operationswhich are forward-looking statements. In some cases, forward-looking statements are identified by words such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or similar expressions. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relatein turn based on information currently available to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. Thesemanagement. Such forward-looking statements are subject to certain known and unknown risks, uncertainties, and other important factors that could cause our actual results performance or achievementsand the timing of certain events to differ materially from any future results performances or achievements anticipated, expressed or implied by thesuch forward-looking statements. Factors that mightcould cause or contribute to such a differencedifferences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q inthe section titled “Risk Factors” included under Part II, Item 1A — “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. Forward-lookingbelow. Furthermore, such forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this Quarterly Report on Form 10-Q, speak only as of theirthe date andof this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or revise these statementscircumstances after the date of such statements.light2011, we have helped millions of future developments. We caution investors that our businessmen, women, and financial performance are subject to substantial riskskids discover and uncertainties.OverviewStitch Fix is transforming the way people findbuy what they love one client at a time and one Fix at a time.We are reinventing the shopping experience by delivering one-to-one personalization to our clients through the combination of data science and human judgment. This combination drives a better client experience and a more powerful business model than either element could deliver independently. Our stylists hand select items from a broad selection of merchandise. Stylists pair their own judgment with our analysis of client and merchandise data to provide a personalized shipmentshipments of apparel, shoes, and accessories, suitedhand-selected by Stitch Fix stylists and delivered to each client’s needs.our clients’ homes. We call each of these unique shipments a Fix. Our clients mayClients can choose to schedule automatic shipments that arrive every two to three weeks or on a monthly, bi-monthly or quarterly cadence, or scheduleorder a Fix on-demand. Clients can increaseon demand after they fill out a style profile on our website or decrease their desiredmobile app. For each Fix, frequency at any time, and canwe charge clients a styling fee that is credited toward items they purchase. Alternatively, select U.S. clients may purchase an annual Style Pass, which offers unlimited styling for the exact date by whichyear for a $49 fee that is also credited towards items they want to receive a Fix.purchase. After receiving a Fix, our clients purchase the items they want to keep and return the other items. Historically, we charged clients a $20 styling fee that is credited towards the merchandise purchased. If the client chooses to keep all items, in a Fix, she receives a 25% discount on her entire purchase. December 2017, we launched Style Pass to provideaddition, our clients with an alternative to paying a $20 styling fee per Fix. With Style Pass, clients pay a $49 annual fee for unlimited styling that is credited towards merchandise purchases. In February 2018, we launched Extras a new feature that allows clients to select items such as socks, bras, underwear, and other intimates that are then added to the five items their stylist selects for their Fix.very human experience thatfirst offering of this direct-buy functionality was Buy It Again, which is available for Men’s and Women’s clients in the United States and allows clients to order previously purchased items in different colors, sizes, or prints. In February 2020, we deliver is powered by data science. Our data science capabilities consistlaunched Complete Your Looks, which presents clients a personalized set of our rich data set and our proprietary algorithms, which fuel our business by enhancing the client experience and driving business model efficiencies. The vast majority of our client data is provided directly and explicitly by our clients, rather than inferred, scraped or obtained from other sources. We also gather extensive merchandise data, such as inseam, pocket shape, silhouette and fit.This large and growing data set provides the foundation for proprietary algorithms that we use throughout our business, including those that predict purchase behavior, forecast demand, optimize inventory and enable us to design new apparel. We believe our data science capabilities give us a significant competitive advantage, and as our data set grows, our algorithms become more powerful.Our stylists leverage our data science through a custom-built, web-based styling application that provides recommendations from our broad selection of merchandise. Our stylists then apply their judgment to select what they believe to be the bestalgorithmically generated items for each Fix. Our stylists provide a personal touch, offerdirect purchase based on items they have already bought from us, and in June 2020, we introduced Trending For You, which allows Men’s and Women’s clients to shop personalized looks based on their style profiles. No styling advice and context to each item selected, and help us develop long-term relationships with our clients. Our stylists are U.S.-based employees, most of whom work part-time and remotely.We maintain a broad range of product offerings to serve our clients. We offer both merchandise sourced from brand partners and our own Exclusive Brands. We use our data to inform the merchandise we buy and develop that will best suit our clients.We reach clients through a combination of word of mouth, referrals, advertising and other marketing efforts. We invest in marketing with the goal of attracting new clients, improving engagement with current clients and expanding our client closet share over time. As we continue to expand our marketing efforts, we plan to remain disciplined in measuring the return on advertising spend.We believe our success in serving clients has resulted in our rapid and profitable growth. We have achieved positive cash flows from operations on an annual basis since 2014, while continuing to make meaningful investments to drive growth. fee is charged for direct purchases.andmonths ended January 30, 2021, we reported $504.1 million in net revenue, representing year-over-year growth of 11.6% from the three months ended February 1, 2020. For the six months ended January 27, 201830, 2021, we reported $295.9 million and $591.5$994.5 million in net revenue, respectively, representing year-over-year growth of 24.4% and 24.8%10.9% from the three and six months ended January 28, 2017, respectively.February 1, 2020. As of January 27, 201830, 2021, and January 28, 2017,February 1, 2020, we had 2,508,000 active clients3,873,000 and 1,920,0003,465,000 active clients, respectively, representing year-over-year growth of 30.6%11.8%.income for the three and six months ended January 27, 2018 was $3.6 million and $17.1 million, respectively, an increase of $3.4 million and $3.6 million, respectively, from a year ago. Included in net incomeloss for the three and six months ended January 28, 201730, 2021, was a $21.3$21.0 million compensation expense relatedand $11.5 million, respectively, compared to certain stock sales by current and former employees. Included in net income for the three and six months ended January 27, 2018 was a $4.7February 1, 2020, of $11.4 million remeasurement expenseand $11.3 million, respectively. For more information on the components of net income (loss), refer to the section titled “Results of Operations” below.deferred tax assetsrevenue per active client, and which we believe was largely attributable to consumer reactions as the COVID-19 crisis escalated during March and April. Despite the continuing impact of COVID-19 on the overall economy, we saw strong retention from our auto-ship clients and growth in new client demand from increases in first Fix shipments in the second half of fiscal 2020. We continue to see growth in new client demand and strong auto-ship retention during the first half of fiscal 2021 and believe we are benefiting from the dislocation in the retail apparel market that is resulting from the COVID-19 pandemic. For further discussion of the COVID-19 related risks facing our business, refer to the Tax Cuts“Risk Factors” section included in Part II, Item 1A.Jobs Act (“Tax Act”), which was enacted on December 22, 2017.or GAAP.(“GAAP”). However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. Management believes that excluding certain items that may vary substantially in frequency and magnitude period-to-period from net income and earnings per share (“EPS”) provides useful supplemental measures that assist in evaluating our ability to generate earnings and to more readily compare these metrics between past and future periods. Management also believesWe believe that adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, and that suchthis supplemental measure facilitates comparisons between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies. For instance, we do not exclude stock-based compensation expense from adjusted EBITDA or non-GAAP net income. Stock-based compensation is an important part of how we attract and retain our employees, and we consider it to be a real cost of running the business.our non-GAAP net income, •adjusted EBITDA excludes interest (income) expense and non-GAAP EPS – diluted measures exclude compensationother (income) expense, that we recognized related to certain stock sales by current and former employees;our non-GAAP net, income and non-GAAP EPS – diluted measures exclude the impact of the remeasurementas these items are not components of our net deferred tax assets following the adoption of the Tax Act;our non-GAAP net income, adjusted EBITDA and non-GAAP EPS – diluted measures exclude the remeasurement of the preferred stock warrant liability, which is a non-cash expense incurred in the periods prior to the completion of our IPO;reducesmay increase or decrease cash available to us;otherinterest (income), net, expense, provision (benefit) for income taxes, other (income) expense, net, depreciation and amortization, the remeasurement of preferred stock warrant liability and when present,stock-based compensation expense related to certain stock sales by current and former employees.expense. The following table presents a reconciliation of net income (loss), the most comparable GAAP financial measure, to adjusted EBITDA for each of the periods presented (in thousands):We define non-GAAP net income as net income excluding the remeasurement of preferred stock warrant liability and, when present, compensation expense related to certain stock sales by current and former employees, and their related tax impacts, if any, as well as the remeasurement of our net deferred tax assets in relation to the adoption of the Tax Act. The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to non-GAAP net income for each of the periods presented (in thousands): For the Three Months Ended For the Six Months Ended (in thousands) January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Net income (loss) $ (21,039) $ 11,431 $ (11,498) $ 11,253 Add (deduct): Interest (income) expense (642) (1,477) (1,803) (3,130) Provision (benefit) for income taxes (18,777) (1,484) (46,895) (327) Other (income) expense, net 107 28 312 862 Depreciation and amortization 6,664 5,804 13,123 10,770 Stock-based compensation expense 24,759 15,755 44,684 27,881 Adjusted EBITDA $ (8,928) $ 30,057 $ (2,077) $ 47,309 Non-GAAP Earnings Per Share - DilutedWe define non-GAAP EPS as diluted EPS excluding the per share impact of the remeasurement of preferred stock warrant liability and, when present, compensation expense related to certain stock sales by current and former employees, and their related tax impacts, if any, as well as the per share impact of the remeasurement of our net deferred tax assets in relation to the adoption of the Tax Act. The following table presents a reconciliation of EPS attributable to common stockholders - diluted, the most comparable GAAP financial measure, to non-GAAP EPS attributable to common stockholders - diluted for each of the periods presented (in thousands):flow from operationsflows provided by (used in) operating activities reduced by purchases of property and equipment which isthat are included in cash flow fromflows provided by (used in) investing activities. The following table presents a reconciliation of cash flows fromprovided by (used in) operating activities, the most comparable GAAP financial measure, to free cash flow for each of the periods presented (in thousands):presented: For the Six Months Ended (in thousands) January 30, 2021 February 1, 2020 Free cash flow reconciliation: Cash flows provided by (used in) operating activities $ 5,666 $ 38,242 Deduct: Purchases of property and equipment (13,894) (11,446) Free cash flow $ (8,228) $ 26,796 Cash flows provided by (used in) investing activities $ (6,784) $ (45,601) Cash flows provided by (used in) financing activities $ (3,577) $ 402 January 30, 2021 October 31, 2020 August 1, 2020 May 2, 2020 February 1, 2020 Active clients (in thousands) 3,873 3,763 3,522 3,418 3,465 $ 467 $ 467 $ 486 $ 498 $ 501 12-month period,52 weeks, measured as of the last dateday of that period. A client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We consider each Men’s, Women’s, or Kids account as a client, even if they share the same household. We had 2,508,0003,873,000 and 1,920,0003,465,000 active clients as of January 27, 201830, 2021, and January 28, 2017,February 1, 2020, respectively, representing year-over-year growth of 30.6%11.8%.profitablyefficiently acquire clients. For example, we recently significantly increased our advertising spend, from $10.2 million and $25.5 million for the three and six months ended January 28, 2017 to $19.8 million and $48.0 million for the three and six months ended January 27, 2018, respectively, to support the growth of our business. We expect to continue to make significant marketing investments to grow our business. We currently utilize both digital and offline channels to attract new visitors to our website or mobile app and subsequently convert them into clients. Our current marketing efforts include client referrals, affiliate programs, partnerships, display advertising, television, print, radio, video, content, direct mail, social media, email, mobile “push” communications, search engine optimization, and keyword search campaigns.these investmentsoperations and infrastructure in the future and cannot be certain that these efforts will grow our client base or be cost-effective. However, we believe these strategies will yield positive returns in the long term.Inventory ManagementWe leverage our data science to buy and manage our inventory, including merchandise assortment and fulfillment center optimization. To ensure sufficient availability of merchandise, we generally enter into purchase orders well in advance and frequently before apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. We incur inventory write-offs and changes in inventory reserves that impact our gross margins. Because our merchandise assortment directly correlates to client success, we may at times optimize our inventory to prioritize long-term client success over short-term gross margin impact. Moreover, our inventory investments will fluctuate with the needs of our business. For example, entering new categories or adding new fulfillment centers will require additional investments in inventory.Plus.Kids. We also carry a mix of third-party branded merchandise, including premium brands, and our own Exclusive Brands. We also offer a wide variety of product types, including denim, dresses, blouses, skirts, shoes, jewelry, and handbags. We sell merchandise across a broad range of price points and may further broaden our price point offerings in the future.margin, andmargins, shoes have generally contributed lower margin.margins, and newer categories, such as Kids, tend to initially have lower margins. Shifts in merchandise mix driven by client demand may result in fluctuations in our gross margin from period to period. $20 nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any merchandise purchased in the Fix. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout the report. In December 2017, we launchedWe offer Style Pass to provide ourselect U.S. clients with an alternative to paying a $20 styling fee per Fix. With Style Pass clients pay a $49nonrefundable annual fee for unlimited styling that is credited towards merchandise purchases. To a lesser extent, we also recognize revenue resulting from direct purchases and estimated breakage income on gift cards. We expect our revenue to increase in absolute dollars as we grow our business, although our revenue growth rate may continue to slow in future periods.costs.costs, offset by the recoverable cost of merchandise estimated to be returned. We expect our cost of goods sold to fluctuate as a percentage of revenue primarily due to how we manage our inventory and merchandise mix. Our classification of cost of goods sold may vary from other companies in our industry and may not be comparable.stylist,stylists, fulfillment center operations, data analytics, merchandising, engineering, marketing, client experience, marketing and corporate personnel. Selling, general, and administrative expenses also include marketing and advertising costs, third-party logistics costs, facility costs for our fulfillment centers and offices, professional service fees, information technology costs, and depreciation and amortization expense. We expect our selling, general, and administrative expenses to increase in absolute dollars and to fluctuate as a percentage of revenue due to the anticipated growth of our business, and increased marketing investments and additional costs associated with being a public company.investments. Our classification of selling, general, and administrative expenses may vary from other companies in our industry and may not be comparable.Remeasurement of Preferred Stock Warrant LiabilityWe estimate the fair value of the preferred stock warrant liability at the end of each reporting periodrecognize changesinvestments in the fair value through our statement of operations. In connection with our IPO, all warrants were automatically exercised for no consideration, therefore we do not expect to have preferred stock warrant liability in future periods.stateinternational income taxes based on enacted federal, state, and stateinternational tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, and changes in the valuation allowance againstof our net federal and state deferred tax assets, as applicable.assets.27, 201830, 2021, and January 28, 2017indicated (in thousands):indicated: For the Three Months Ended % For the Six Months Ended % (in thousands) January 30, 2021 February 1, 2020 Change January 30, 2021 February 1, 2020 Change Revenue, net $ 504,087 $ 451,784 11.6 % $ 994,510 $ 896,599 10.9 % Cost of goods sold 287,744 249,597 15.3 % 558,716 493,110 13.3 % Gross profit 216,343 202,187 7.0 % 435,794 403,489 8.0 % Selling, general, and administrative expenses 256,694 193,689 32.5 % 495,678 394,831 25.5 % Operating income (loss) (40,351) 8,498 * (59,884) 8,658 * Interest (income) expense (642) (1,477) (56.5) % (1,803) (3,130) (42.4) % Other (income) expense, net 107 28 282.1 % 312 862 (63.8) % Income (loss) before income taxes (39,816) 9,947 * (58,393) 10,926 * Provision (benefit) for income taxes (18,777) (1,484) * (46,895) (327) * Net income (loss) $ (21,039) $ 11,431 (284.1) % $ (11,498) $ 11,253 (202.2) % For the Three Months Ended For the Six Months Ended January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Revenue, net 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 57.1 % 55.2 % 56.2 % 55.0 % Gross margin 42.9 % 44.8 % 43.8 % 45.0 % Selling, general, and administrative expenses 50.9 % 42.9 % 49.8 % 44.0 % Operating income (loss) (8.0) % 1.9 % (6.0) % 1.0 % Interest (income) expense (0.1) % (0.3) % (0.1) % (0.3) % Other (income) expense, net — % — % — % 0.1 % Income (loss) before income taxes (7.9) % 2.2 % (5.9) % 1.2 % Provision (benefit) for income taxes (3.7) % (0.3) % (4.7) % — % Net income (loss) (4.2) % 2.5 % (1.2) % 1.2 % $58.1$52.3 million and $117.7$97.9 million, or 24.4%11.6% and 24.8%10.9%, respectively, during the three and six months ended January 27, 201830, 2021, compared with the same periods last year. The increase in revenue was primarily attributable to a 30.6%an 11.8% increase in active clients from January 28, 2017February 1, 2020, to January 27, 2018,30, 2021, which drove increased sales of merchandise.27, 201830, 2021, decreased by 1.9%190 basis points and 120 basis points, respectively, compared with the same periodperiods last year. The decrease was primarily attributable to investments in inventory and expansion into new categories, as well as an increase in inventory shrink. The gross margin for the three and six months ended January 27, 2018 decreased by 2.5% compared with the same period last year. The decrease30, 2021, was primarily attributabledriven by increased shipping expenses largely due to higher clearance andrates with our carriers. In addition, the decline was impacted by increased inventory shrinkreserves due to higher inventory levels, as well as an increase in merchandise costs, as we expanded into new categories, andsome select Men’s inventory obsolescence reserves.$5.9$63.0 million and $41.9$100.8 million for the three and six months ended January 27, 2018, respectively,30, 2021, compared with the same periods in 2017. last year. As a percentage of revenue, selling, general, and administrative expenses increased to 50.9% for the three months ended January 30, 2021, compared with 42.9% for the three months ended February 1, 2020, and increased to 49.8% for the six months ended January 30, 2021, compared with 44.0% for the six months ended February 1, 2020. in both periods was primarily due to an increase in advertising spend of $9.6 million and $22.5 million for the three and six months ended January 27, 2018, respectively, as we expandedour television and online advertising initiatives. The increases were also due30, 2021, compared with the same periods last year, was primarily related to higher compensation and benefits expense, as weincluding an increase in hourly wages for our full-time U.S. warehouseour headcount over the last year, partially offset by $21.3 million in compensation costs incurred in 2017 in connection with certain stock sales by current and former employees.Remeasurement of Preferred Stock Warrant LiabilityThe change in the preferred stock warrant liability was due to a change in the underlying fair value of our preferred stock until the conversion of our preferred stock warrants into Class B common stock as part of our IPO.presented (in thousands):presented: For the Three Months Ended For the Six Months Ended (in thousands) January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 Income (loss) before income taxes $ (39,816) $ 9,947 $ (58,393) $ 10,926 Provision (benefit) for income taxes (18,777) (1,484) (46,895) (327) Effective tax rate 47.2 % (14.9) % 80.3 % (3.0) % We are subject to income taxes in the United States. 28, 201730, 2021, differs from the federal statutory income tax rate primarily due to accounting for the effects of enactmentnet operating loss carryback provisions of the TaxCARES Act certain nondeductible expenses, effect of state taxes,and excess tax benefits from stock-based compensation, partially offset by the benefit from the non-includible gain on remeasurement of the preferred stock warrant liability.In the three months ended January 27, 2018, we revised our estimated annual effective rate to reflect a change in the federal statutory rate from 35% to 21%, as a result of the enactment of the Tax Act on December 22, 2017. The Company has a fiscal year end which subjects us to transitional tax rate rules. Therefore, a blended U.S. statutory rate of 26.96% was computed for our fiscal year 2018. Income tax expense for the three and six months ended January 28, 2017 was adjusted to reflect the discrete effects of the Tax Act and resulted in an increase in income tax expense of $4.7 million related to the remeasurement of existing deferred tax balances. This discrete impact was considered a provisional amount under the U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 118. January 28, 2017 was based on the historic statutory tax rate of 35%. Our effective tax rate for the three and nine months ended January 28, 2017 differsFebruary 1, 2020, differed from the federal statutory income tax rate primarily due to certain nondeductible loss on remeasurement of the preferred stock warrant liability, effect ofexpenses and state taxes certain other nondeductible expenses, partiallywhich are offset by the benefits on certainof allowable credits and excess tax benefits from stock-based compensation deductions.IPO. We have had positive and growing cash flows from operations since 2014. As of January 27, 2018, we had raised an aggregate of $169.6 million of equity capital including proceeds from our IPO. We had $266.4 million of cash and $9.1 million of restricted cash as of January 27, 2018. Webeen abletaken measures to fund these costs throughpreserve our access to liquidity, our cash flowsgenerated from operations since 2014has been negatively impacted and expect to continue to do so. Wefuture cash flows may be impacted by the development of the pandemic. However, we believe our existing cash, cash equivalents, short-term investment balances, and cash flows from operationsthe borrowing available under our senior revolving credit facility, if needed, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months.and our cash and working capital balances as of the end of the period (in thousands):below: For the Six Months Ended (in thousands) January 30, 2021 February 1, 2020 Net cash provided by (used in) operating activities $ 5,666 $ 38,242 Net cash provided by (used in) investing activities (6,784) (45,601) Net cash provided by (used in) financing activities (3,577) 402 Net increase (decrease) in cash and cash equivalents $ (4,695) $ (6,957) 27, 2018,30, 2021, cash provided by operating activities was $33.7$5.7 million, which consisted of a net incomeloss of $17.1$11.5 million, adjusted by non-cash charges of $12.0$63.7 million and by a change of $4.6$46.5 million in our net operating assets and liabilities. The non-cash charges were largely driven by $7.0 million increase in our inventory reserve, a $5.5 million increase in deferred tax expense primarily related to a $4.7 million remeasurement of our net deferred tax assets under the Tax Act, $5.1$44.7 million of stock-based compensation expense and $4.9$14.2 million of depreciation, amortization, and amortization,accretion. The change in our net operating assets and liabilities was primarily due to a change of $62.0 million in our inventory balance due to increased inventory purchases to support our growth and a change of $44.2 million in long-term federal income tax receivables due to the net operating loss carryback provisions of the CARES act. This was partially offset by $10.7an increase of $50.0 million in our accounts payable and accrued liabilities related to increased business activity and timing of payments.remeasurementsix months ended February 1, 2020, cash provided by operating activities was $38.2 million, which consisted of the preferred stock warrant liability.net income of $11.3 million, adjusted by non-cash charges of $36.2 million, and a change of $9.3 million in our net operating assets and liabilities. The non-cash charges were largely driven by $27.9 million of stock-based compensation expense and $10.3 million of depreciation, amortization, and accretion. The change in our net operating assets and liabilities was primarily due to an increase of $15.3 million in accounts payable and accrued liabilities related to the increased business activity, and a decrease of $5.1 million in prepaid and other assets due to timing of payments substantially all offset by an increase of $19.5$31.6 million in our inventory balance due to increased inventory purchases to support our growth,.28, 2017,30, 2021, cash provided by operatingused in investing activities was $49.5 million, which consisted of net income of $13.5 million, adjusted by non-cash charges of $19.4 million and a change of $16.6 million in our net operating assets and liabilities. The non-cash charges were largely driven by $9.7 million in compensation expense related to certain stock sales by current and former employees, $3.4 million of depreciation and amortization, a $3.2 million increase in our inventory reserve, and $2.6 million related to the remeasurement of the preferred stock warrant liability. The change in our net operating assets and liabilities$6.8 million. This was primarily due to an increasepurchases of $28.5property and equipment of $13.9 million in accounts payable and accrued liabilities, an increaseour investment of $3.6$112.6 million in gift card liability, and an increase of $3.1 million in other liabilities, primarilyhighly rated available-for-sale securities, substantially offset by an increasematurities and sales of $10.5available-for-sale securities of $90.4 million in inventory and $9.4$29.3 million, in prepaid expenses and other assets.Cashrespectively.27, 2018 and January 28, 2017, cash used in investing activities was $8.2 million and $11.4 million, respectively, due to the purchase of property and equipment primarily related to the expansion of our fulfillment centers and offices as well as continued investment in our proprietary systems.Cash (used in) provided by financing activitiesDuring the six months ended January 27, 2018 , cash provided by financing activities was $130.0 million, which was primarily due to the net proceeds from our IPO.During the six months ended January 28, 2017, 30, 2021, cash used in financing activities was $2.6$3.6 million which was primarily due to payments for tax withholding related to vesting of restricted stock units, partially offset by proceeds from the repurchaseexercise of Class B common stock options.early exercised options.On January 29, 2018, subsequentour quarter-end,lease approximately 700,000 square feet of space to be used as a fulfillment center in Salt Lake City, Utah. We expect to classify this lease as an operating lease, with a commencement date of late fiscal 2021 or early fiscal 2022. The lease expires in 2030 and we executed an amendmentexpect to therecord fixed operating lease on our corporate headquarters, which increased the future minimum lease payments on our corporate headquarters tocosts of approximately $115.3$33.1 million over ten years.Final Prospectus.materialsignificant changes to our critical accounting policies as compared to the critical accounting policies and significant judgments and estimates as compared to the critical accounting policies and significant judgments and estimates discloseddiscussed in the Final Prospectus. For additional information, please refer to Note 2 of our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.2020 Annual Report.ITEM 3. and Qualitative Disclosures about Market RiskOur cash is deposited in checking and savings accounts; therefore, we believe weQualitative Disclosures about Market Riskrelatively insensitiveprimarily exposed to market risks through interest rate changes.risk on our investments. As of January 30, 2021, we had $229.4 million in highly rated investments accounted for as available-for-sale securities, which are presented on our balance sheet at their fair market value. These interest-earning instruments carry a degree of interest rate risk; however, a hypothetical 10% change in interest rates during the three and six months ended January 30, 2021, would not have had a material impact on our condensed consolidated financial statements.ITEM 4.Report on Form 10-Q.27, 2018,30, 2021, our Chief Executive Officer and Chief Financial Officer concluded that as a resultour disclosure controls and procedures were effective.a material weaknessour employees are working remotely due to the COVID-19 pandemic, there were no changes during the quarter ended January 30, 2021, in our internal control over financial reporting as previously disclosed in our Final Prospectus, our disclosure controls and procedures were not effective as of January 27, 2018.Material Weakness in Internal Control Over Financial ReportingIn connection with the audit of our consolidated financial statements for the year ended July 29, 2017, we identified a material weakness in our internal control over financial reporting, as defined in the standards established by the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Our management has determined that we had a material weakness in our internal control over financial reporting as of July 29, 2017, relating to the accounting and proprietary systems used in our financial reporting process not having the proper level of controls. Specifically, our systems lacked controls over access, program change management and computer operations that are needed to ensure access to financial data is adequately restricted to appropriate personnel.Management’s Plan to Remediate the Material WeaknessAs a result of this material weakness, we have initiated and will continue to implement remediation measures including, but not limited to, engaging external consultants to conduct a review of processes that involve financial data within our accounting and proprietary systems. This review includes identification of potential risks, documentation of processes and recommendations for improvement. We are still in the process of completing the remediation of the previously identified material weakness.The initiatives we are implementing to remediate the material weakness are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. We will continue to implement measures to remedy our internal control deficiencies in order to meet the deadline imposed by Section 404 of the Sarbanes-Oxley Act. However, we cannot be certain that the measures we have taken or may take in the future will ensure that we will establish and maintain adequate controls over our financial processes and reporting in the future.Notwithstanding the material weakness, our management has concluded that the financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.If we fail to fully remediate this material weakness or fail to maintain effective internal controls in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered public accounting firm has not assessed the effectiveness of our internal control over financial reporting and, under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected.Changes in Internal ControlOther than the changes intended to remediate the material weakness noted above, there were no changes in our internal control over financial reporting during the quarter ended January 27, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. and ProceduresIn designing and evaluatingdisclosurepossibility of human error or overriding of controls, and procedures andtherefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting management recognizes that anymay not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls, and procedures, no matter how well designed and operated,or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.statements.ITEM 1.We are not party to any material legal proceedings at this time. From time to time, we may become involvedvarious legal proceedings that ariseFootnote 6 “Commitments and Contingencies” under the heading “Contingencies” in the ordinary course of business. We have inNotes to the past and may in the future become involved in private actions, collective actions, investigations and various other legal proceedingsCondensed Consolidated Financial Statements included within this Quarterly Report on Form 10-Q is incorporated herein by clients, employees, suppliers, competitors, government agencies or others. We evaluate any claims and lawsuits with respect to their potential merits, our potential defenses and counter claims, and the expected effect on us of defending the claims and a potential adverse result. However, the results of any litigation, investigations and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time and divert significant resources. If any legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition and operating results.reference.ITEM 1A.filings.filings. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition, or results of operations. In such case, the trading price of our Class A common stock could decline, and you may lose all or part of your original investment. This Quarterly Report on Form 10-Q also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.risks relatingCOVID-19 pandemic has caused significant disruption to our operations and is negatively impacting our business, set forthkey financial and operating metrics, and results of operations in numerous ways that remain unpredictable.Final Prospectus,warehouses during the third quarter of fiscal year 2020, which resulted in delayed Fix shipments, a significant Fix backlog, delayed inventory and return processing, extended wait times for clients, and inventory management challenges. Since the third quarter of fiscal year 2020, we have experienced smaller, intermittent interruptions in connection with temporary closures of fulfillment centers for part of a work day or for a full day to perform safety and cleaning procedures following employees testing positive for COVID-19.set forthable to work remotely are required to do so. An extended period of remote work arrangements could strain our business continuity plans, increase operational risk, including heightened vulnerability to cyber attacks, reduce productivity, and impair our ability to manage our business. Our ability to return to normalized operations and the timing of such a return cannot be predicted at this time.unchanged substantivelyclosing our South San Francisco fulfillment center. We also have a fulfillment center in the United Kingdom, which is operated by a third party. During the third quarter of our 2020 fiscal year, in response to the COVID-19 pandemic, we temporarily closed three of our eight fulfillment centers, offered our fulfillment center employees four weeks of paid time off, and reduced the maximum number of employees in each fulfillment center in order to implement social distancing protocols. These changes resulted in operational constraints, which in turn temporarily reduced our ability to ship merchandise to clients and earn revenue during the third quarter of our 2020 fiscal year. Since the third quarter of fiscal year 2020, we have continued to experience smaller, intermittent interruptions at in connection with temporary closures of fulfillment centers for part of a work day or for a full day to perform safety and cleaning procedures following notice that employees tested positive for COVID-19. If there is a resurgence of COVID-19 in the areas where our fulfillment centers are located, or if we or our third-party partner are unable to adequately staff our fulfillment centers to meet demand in the future, or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases, regulatory changes, international expansion, or other factors, these effects could be exacerbated and our operating results could be further harmed. For example, during the fourth quarter of fiscal 2020, we experienced some difficulty hiring employees in two of our warehouse locations, which we attribute to COVID-19 concerns and to increased competition and rising wages for eCommerce fulfillment center workers as eCommerce demand accelerates. To address this, during the first fiscal quarter of January 27, 2018, except2021, we increased wages in our fulfillment centers so we would be more competitive in hiring employees. These wage increases impacted our operating results, and any future wage increases for thoseour warehouse employees or other employees, would impact our operating resultsdesignated by an asterisk (*).Risks Relatedsuch as workplace safety issues and employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Furthermore, if we fail to comply with wage and hour laws for our Businessbrand;brand and maintain our reputation;successfully expand our offering and geographic reach;anticipate and respond to macroeconomic changes;effectively manage our growth;continue to enhance our personalization capabilities;hire, integrate and retain talented people at all levels of our organization;Since ourFrom inception to date, we have rapidly and significantly increased our employee headcount to support the growth of our business. We expect to addadded a significant number of employees during 2018. Wefiscal years 2019 and 2020 and may do so again in the future. Since our initial public offering in 2017, we have expanded across all areas of our business. To support continued growth, we must effectively integrate, develop, and motivate a large number of new employees while maintaining our corporate culture. We face significant competition for personnel, particularlyculture, which is made more challenging in the San Francisco Bay Area where our headquarters are located. To attract top talent, we have had to offer,face of shelter-in-place orders and believe we will need to continue to offer, competitive compensation and benefits packages before we can validate the productivity of those employees. We may also need to increase our employee compensation levelsother restrictions issued by governments in response to competition.the COVID-19 pandemic. The risks associated with a rapidly growing workforce will be particularly acute as we expand internationally, as we are less familiar with the labor markets outside of the United States, and if we choose to expand into new merchandise categories and internationally.Additionally, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs or successfully integrate new hires, our efficiency, ability to meet forecasts and our employee morale, productivity and retention could suffer, which may have an adverse effect on our business, financial condition and operating results.year 2017, we began to increase our paid marketing expenses by investing more in digital marketing and launching our first television advertising campaigns. WeAlthough we have reduced our marketing spend at times, including during the third fiscal quarter of 2020 in light of the operational constraints we experienced due to the effects of the COVID-19 pandemic, we expect to increase our spending on thesedigital, television, radio and other paid marketing channels in the future and cannot be certain that these efforts will yield more clients, continue to achieve meaningful payback on our investments, or be cost-effective.as cost effective. For example, we expect to increase marketing spend during the remainder of our fiscal year 2021 in an effort to take market share as we seek to capitalize on the apparel industry dislocation caused by the COVID-19 pandemic. Although we expect to increase marketing spend over time, our marketing activity and spend may vary from period to period and we may adjust our marketing strategy or spend within a period if we are not achieving the intended results or if we believe the return-on-investment is not favorable, which may result in faster or slower rates of active client growth in any given period. For instance, while we expected a certain level of marketing in the second fiscal quarter of 2021, we experienced higher costs per acquisition (CPAs) than expected and, therefore, did not spend as much on marketing as anticipated. In addition, we seek to attract new clients by offering new, products, services and ways to engage with our platform, such as our direct buy offering. If such new products or services are not timely launched or are not successful in attracting new clients our revenue growth and results of operations may suffer. Moreover, new clients may not purchase from us as frequently or spend as much with us as existing clients, and the revenue generated from new clients may not be as high as the revenue generated from our existing clients. For example, net revenue per active client dropped to $467 as of January 30, 2021 compared to $501 as of February 1, 2020. These factors may harm our growth prospects and our business could be adversely affected.cost-effective. to attract new clients. We believe that much of the growth in our client base during our first five years was originated from referrals, organic word of mouth, and other methods of discovery, as our marketing efforts and expenditures were relatively limited. More recently,In recent years, we increased our paid marketing initiatives and intend to continue to do so. For example, we expect to increase marketing spend during the remainder of our fiscal year 2021 in an effort to take market share as we seek to capitalize on the apparel industry dislocation caused by the COVID-19 pandemic. Our marketing efforts currently include client referrals, affiliate programs, partnerships, display advertising, television, print, radio, video, content, direct mail, social media, email, mobile “push” communications, search engine optimization, and keyword search campaigns. In February 2019, we launched our first integrated brand marketing campaign. We have limited or no experience marketing our services using some of these methods. methods and our efforts may be unsuccessful. External factors beyond our control, including general economic conditions and decreased discretionary consumer spending, may also impact the success of our marketing initiatives or how much we decide to spend on marketing in a given period. For example, in response to the COVID-19 pandemic, we reduced our marketing expenditures in the third quarter of our fiscal year 2020. This led to fewer new clients being acquired in the third quarter, which we anticipate may impact demand for several subsequent quarters.difficult.difficult, such as the increased costs we have seen in certain digital marketing channels. We may also adjust our marketing activity from period to period or within a period as we launch new initiatives or offerings, such as direct buy, run tests, or make decisions on marketing investments in response to anticipated rates of return, such as when we identify favorable cost per acquisition trends. For example, although we have historically reduced our advertising during the holiday season, when many other retailers compete for marketing opportunities, we had planned for more robust advertising during our second fiscal quarter of 2021. However, as we experienced higher costs per acquisition than we expected, we did not spend as much on marketing during the quarter as we anticipated. Even if we successfully increase revenue as a result of our paid marketing efforts, it may not offset the additional marketing expenses we incur.suchtheir importance may be increasing. We may be unable to effectively maintain a presence within these networks, which could lead to lower than anticipated brand affinity and awareness, and in turn could adversely affect our operating results.
Further, mobile operating system and web browser providers, such as Apple and Google, have announced product changes as well as plans to limit the ability of advertisers to collect and use data to target and measure advertising. For example, Apple recently announced plans for iOS 14 to require apps to get a user’s opt-in permission before tracking or sharing the user’s data across apps or websites owned by companies other than the app’s owner. That requirement is expected to reduce our ability to efficiently target and measure advertising, in particular, advertising on online social networks, making our advertising less cost effective and successful.marketing efforts are not successful in promoting awarenessbusiness, financial condition, and operating results could be negatively impacted.services, driving client engagementrevenue today comes from the sale of Women’s apparel. From 2015 to 2018, we expanded our merchandise offering into categories including Petite, Maternity, Men’s, Plus, Premium Brands, and Kids; began offering different product types including, accessories, and Extras; and expanded the number of brands we offer. In May 2019, we launched our service in the UK market. In June 2019, we introduced a direct-buy functionality with Buy It Again allowing clients in the United States to buy previously purchased items in new colors, prints, and sizes, and in February 2020, we expanded Complete Your Looks, which allows clients to discover and shop personalized outfits with new items that complement their prior purchases, to all U.S. Women’s and Men’s clients. In addition, in early June 2020, we introduced Trending For You, which allows Men’s and Women’s clients to shop personalized looks based on their style profiles. We continue to explore additional offerings to serve our existing clients, attract new clients, and expand our geographic scope.attractinggain traction as quickly, as our current offerings. If the merchandise we offer is not accepted by our clients or does not attract new clients, or if we are not able to cost-effectively manageattract clients in new markets such as the UK, our marketingsales may fall short of expectations, our brand and reputation could be adversely affected, and we may incur expenses that are not offset by sales. If the launch of a new category or offering or in a new geography requires investments greater than we expect or is delayed, our operating results willcould be negatively impacted. Also, our business may be adversely affected.We may be unable to maintain a high level of engagement with our clients and increase their spending with us, which could harm our business, financial condition or operating results.A high proportion of our revenue comes from repeat purchases by existing clients, especially those existing clients who are highly engaged and purchase a significant amount of merchandise from us. If existing clients no longer find our service and merchandise appealing, they may make fewer purchases and may stop using our service. Even if our existing clients find our service and merchandise appealing, they may decide to receive fewer Fixes and purchase less merchandise over time as their demand for new apparel declines. Additionally, if clients who receive Fixes most frequently and purchase a significant amount of merchandise from us were to make fewer purchases or stop using our service, then the aggregate amount clients spend with us would decline or grow more slowly. A decrease in the number of our clients or a decrease in their spending on the merchandise we offer could negatively impact our operating results. Further, we believe that our future success will depend in part on our ability to increase sales to our existing clients over time and,affected if we are unable to do so,attract brands and other merchandise vendors that produce sufficient high-quality, appropriately priced, and on-trend merchandise. For example, vendors in the UK may not be familiar with our business may suffer.We must successfully gauge apparel trends and changing consumer preferences.Our success is, in large part, dependent upon our ability to identify apparel trends, predict and gauge the tastes of our clients and provide merchandise that satisfies client demand in a timely manner. However, lead times for many of our purchasing decisionscompany or brand, which may make it difficult for us to respond rapidlyobtain the merchandise we seek or be able to purchase products at an appropriate price.changing apparel trends or client acceptance of merchandise chosen by our merchandising buyers. We generallyduties that lower margins. Additionally, as we enter into purchase contracts significantlynew categories and markets, we may not have as high purchasing power as we do in advanceour current offerings, which could increase our costs of anticipated salesgoods sold and frequently before apparel trends are confirmed by client purchases. In the past, we have not always predictedfurther reduce our clients’ preferences and acceptance levelsmargins. Expansion of our merchandise offerings and geographic scope may also strain our management and operational resources, specifically the need to hire and manage additional merchandise buyers to source new merchandise and to allocate new categories across our distribution network. We may also face greater competition in specific categories or regions from companies that are more focused on these areas. For example, now that we have launched in the UK, we compete with accuracy. Further,existing businesses that have been providing similar services in the region and may be more familiar with trends and customer preferences in that market. Also, our entry into the Kids category means we now compete with a number of additional companies that have been in the Kids category for a longer period of time and may have more experience in children’s clothing. If any of the above were to occur, it could damage our reputation, limit our growth, and have an adverse effect on our operating results.data sciencecosts. If we continue to predictinvest substantial time and resources to establish and expand our clients’ preferencesoperations internationally and gaugeare unable to do so successfully and in a timely manner, our operating results would suffer.there is no guarantee thatservice, increasing competition, a decrease in the growth rate of our data science and algorithms will accurately anticipate client demand and tastes. To the extent we misjudge theoverall market, for the merchandise we offer or fail to execute on trends and deliver attractive merchandise to clients, our sales will decline and our failure to capitalize on growth opportunities, as well as the maturation of our business.results willas a public company, we are incurring significant additional legal, accounting, and other expenses that we did not incur as a private company. If our revenue does not increase to offset increases in our operating expenses, we may not be adversely affected.frequentlyoften before apparel trends are confirmed by client purchases. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases.purchases. For example, in response to the initial consumer reaction to COVID-19, we cancelled many inventory orders to be prepared for what we expected would be lower client demand. Consequently, when client demand increased, we were not as well optimized with our inventory as we would have liked to meet the demand. We have also sought to rapidly shift elements of our inventory away from office attire and towards athleisure to accommodate consumer demand changes caused by the COVID-19 pandemic. In the past, we have not always predicted our clients’ preferences and acceptance levels of our trend items with accuracy, which has resulted in significant inventory write offs and lower gross margins. Furthermore, we do not use the same liquidation methods as traditional retailers, such as markdowns. We rely on our merchandising team to order styles and products that our clients will purchase and we rely on our data science to inform the levels of inventory we purchase, including when to reorder items that are selling well and when to write off items that are not selling well. If our merchandise team does not predict client demand and tastes well or if our algorithms do not help us reorder the right products or write off the right products timely, we may not effectively manage our inventory and our operating results could be adversely affected.Our inability to develop and introduce new merchandise offerings in a timely and cost-effective manner may damage our business, financial condition and operating results.The largest portion of our revenue today comes from the sale of Women’s apparel. From 2015 to 2017, we expanded our merchandise offering into categories including Petite, Maternity, Men’s and Plus, began offering different product types including shoes and accessories and expanded the number of brands we offer. In 2018, we also launched our Premium Brand and Extras offerings. We continue to explore additional offerings to serve our existing clients and to attract new clients. However, any new offerings may not have the same success, or gain traction as quickly, as our current offerings. If the merchandise we offer is not accepted by our clients or does not attract new clients, our sales may fall short of expectations, our brand and reputation could be adversely affected and we may incur expenses that are not offset by sales. If the launch of a new category requires investments greater than we expect, our operating results could be adversely affected. Also, our business may be adversely affected if we are unable to attract brands and other merchandise vendors that produce sufficient high quality, appropriately priced and on-trend merchandise. Our current merchandise offerings have a range of margin profiles and we believe new offerings will also have a broad range of margin profiles that will affect our operating results.For example, to date, our Exclusive Brands have generally contributed higher margins and shoes, Men’s and Plus have generally contributed lower margins. Additionally, as we enter into new categories, we may not have as high of purchasing power as we do in our current offerings, which could increase our costs of goods sold and further reduce our margins. Expansion of our merchandise offerings may also strain our management and operational resources, specifically the need to hire and manage additional merchandise buyers to source new merchandise and to allocate new categories across our distribution network. We may also face greater competition in specific categories from companies that are more focused on these new areas. If any of these were to occur, it could damage our reputation, limit our growth and have an adverse effect on our operating results.Our industry is highly competitive and if we do not compete effectively our operating results could be adversely affected.The retail apparel industry is highly competitive. We compete with department stores, specialty retailers, discount chains, independent retail stores, the online offerings of these traditional retail competitors and eCommerce companies that market the same or similar merchandise and services that we offer. We believe our ability to compete depends on many factors within and beyond our control, including:attracting new clients and engaging with existing clients;our direct relationships with our clients and their willingness to share personal information with us;further developing our data science capabilities;maintaining favorable brand recognition and effectively marketing our services to clients;delivering merchandise that each client perceives as personalized to him or her;the amount, diversity and quality of brands and merchandise that we or our competitors offer;our ability to expand and maintain appealing Exclusive Brands and exclusive to Stitch Fix merchandise;the price at which we are able to offer our merchandise;the speed and cost at which we can deliver merchandise to our clients and the ease with which they can use our services to return merchandise; andanticipating and quickly responding to changing apparel trends and consumer shopping preferences.Many of our current competitors have, and potential competitors may have, longer operating histories, larger fulfillment infrastructures, greater technical capabilities, faster shipping times, lower-cost shipping, larger databases, greater financial, marketing, institutional and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater revenue and profits from their existing customer bases, acquire customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in apparel trends and consumer shopping behavior. These competitors may engage in more extensive research and development efforts, enter or expand their presence in the personalized retail market, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate revenue from their existing customer bases more effectively than we do. If we fail to execute on any of the above better than our competitors, our operating results may be adversely affected.and high-quality merchandise, and appropriate price points, which we may not do successfully. Client complaints or negative publicity about our styling services, merchandise, delivery times, or client support, especially on social media platforms, could harm our reputation and diminish client use of our services, the trust that our clients place in Stitch Fix, and vendor confidence in us.We may not be able to sustain our revenue growth rate and we may not be profitable in the future.*Our recent revenue growth and past profitability should not be considered indicative of our future performance. Our rate of revenue growth has slowed in recent periods. Specifically, our revenue increased by 24.4% and 24.8% for the three and six months ended January 27, 2018 compared to the three and six months ended January 28, 2017 which was significantly lower than our 35.3% and 42.8% revenue growth for the three and six months ended January 28, 2017 compared to the three and six months ended January 30, 2016. As we grow our business, we expect our revenue growth rates may continue to slow in future periods due to a number of reasons, which may include slowing demand for our merchandise and service, increasing competition, a decrease in the growth rate of our overall market, and our failure to capitalize on growth opportunities, as well as the maturation of our business.Moreover, our expenses have increased in recent periods, and we expect expenses to increase substantially in the near term, particularly as we make significant investments in our marketing initiatives, expand our operations and infrastructure, develop and introduce new merchandise offerings and hire additional personnel. We may not always pursue short-term profits but are often focused on long-term growth, which may adversely impact our financial results. In addition, in connection with operating as a public company, we are incurring additional significant legal, accounting and other expenses that we did not incur as a private company. If our revenue does not increase to offset increases in our operating expenses, we may not be profitable in future periods.We rely on consumer discretionary spending and may be adversely affected by economic downturns and other macroeconomic conditions or trends.Our business and operating results are subject to global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment, higher consumer debt levels, reductions in net worth and declines in asset values and related market uncertainty, home foreclosures and reductions in home values, fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices and general uncertainty regarding the overall future political and economic environment. Economic conditions in certain regions may also be affected by natural disasters, such as hurricanes, tropical storms and wildfires. Consumer purchases of discretionary items, including the merchandise that we offer, generally decline during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence.Adverse economic changes could reduce consumer confidence, and thereby could negatively affect our operating results. In challenging and uncertain economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business.or effectively manage succession, or hire, develop, and motivate our employees, our business, financial condition, and operating results could be adversely affected. Competition for key personnel is strong, especially in the San Francisco Bay Area where our headquarters are located, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in the future, or that the compensation costs of doing so will not adversely affect our operating results. IfFor example, after our former Chief Financial Officer left in December 2019, we are unableconducted a search for a candidate to retain, attractreplace him that did not conclude until we announced the hiring of Dan Jedda as our Chief Financial Officer in December 2020. Additionally, our former President, Chief Operating Officer and motivate talented employees withInterim Chief Financial Officer, Mike Smith, resigned as an employee of the appropriate skills at cost-effective compensation levels, or if changes to our business adversely affect morale or retention, we may not achieve our objectives and our business and operating results could be adversely affected. In addition, theCompany in January 2021. The loss of one or more of our key personnel or the inability to promptly identify a suitable successor to a key role could have an adverse effect on our business. In particular, Katrina Lake, our Founder and Chief Executive Officer has unique and valuable experience leading our company from its inception through today. If she were to depart or otherwise reduce her focus on Stitch Fix, our business may be disrupted. We do not currently maintain key-person life insurance policies on any member of our senior management team andor other key employees.whomost of whom work remotely and on a part-time basis for us and are paid hourly. They track and report the time they spend working for us. These employees are classified as nonexempt under federal and state law. If we fail to effectively manage our stylists, including by ensuring accurate tracking and reporting of their hours worked and proper processing of their hourly wages, then we may face claims alleging violations of wage and hour employment laws, including, without limitation, claims of back wages, unpaid overtime pay, and missed meal and rest periods. Any such employee litigation could be attempted on aSuchFor example, in August 2020, a representative action under California’s Private Attorneys General Act was filed against us alleging various violations of California’s wage and hour laws relating to our current and former non-exempt stylist employees. While we were able to settle this matter, future litigation canconcerning our styling employees could be expensive and time-consuming regardless of whether the claims against us are valid or whether we are ultimately determined to be liable, and could divert management’s attention from our business. We could also be adversely affected by negative publicity, litigation costs resulting from the defense of these claims, and the diversion of time and resources from our operations.Compromisesdata security could cause us to incur unexpected expensesstylist positions in California and may materially harm our reputation and operating results.In the ordinary course of our business, we and our vendors collect, process and store certain personal information and other data relating to individuals, such as our clients and employees, including client payment card information. We rely substantially on commercially available systems, software, tools and monitoring to provide security for our processing, transmission and storage of personal information and other confidential information. There can be no assurance, however, that we or our vendors will not suffer a data compromise, that hackers or other unauthorized parties will not gain access to personal information or other data, including payment card data or confidential business information or that any such data compromise or access will be discovered in a timely fashion. The techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not identified until they are launched against a target, and we and our vendors may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, our employees, contractors, vendors or other third parties with whom we do business may attempt to circumvent security measures in order to misappropriate such personal information, confidential information or other data, or may inadvertently release or compromise such data.Compromise of our data security or of third parties with whom we do business, failure to prevent or mitigate the loss of personal or business information and delays in detecting or providing prompt notice of any such compromise or loss could disrupt our operations, damage our reputation and subject us to litigation, government action or other additional costs and liabilities that could adversely affect our business, financial condition and operating results.Our use of personal information and other data subjects us to privacy laws and obligations, and our failure to comply with such obligations could harm our business.We collect and maintain significant amounts of personal information and other data relating to our clients and employees. Numerous laws, rules and regulations in the United States and internationally govern privacy and the collection, use and protection of personal information, the scope of which is continually changing. These laws, rules and regulations evolve frequently and may be inconsistent from one jurisdiction to another or may be interpreted to conflict with our practices. Any failure or perceived failure by us or any third parties with which we do business to comply with these laws, rules and regulations, or with other obligations to which we may be or may become subject, may result in actions against us by governmental entities, private claims and litigations, fines, penalties or other liabilities. Any such action would be expensive to defend, would damage our reputation and adversely affect our business and operating results.System interruptions that impair client access to our website or other performance failureshired more stylists in our technology infrastructure could damage our business.The satisfactory performance, reliability and availability of our website, mobile application, internal applications and technology infrastructure are critical to our business. We rely on our website and mobile application to engage with our clients and sell them merchandise. We also rely on a host of internal custom-built applications to run critical business functions, such as styling, merchandise purchasing, warehouse operations and order fulfillment. In addition, we rely on a variety of third party, cloud-based solution vendors for key elements of our technology infrastructure. These systems are vulnerable to damage or interruption and we have experienced interruptions in the past. For example, in February 2017, as a result of an outage with Amazon Web Services, where much of our technology infrastructure is hosted, we experienced disruptions in applications that support our warehouse operations and order fulfillment that caused a temporary slowdown in the number of Fix shipments we were able to make. Interruptions may be caused by a variety of incidents, including human error, our failures to update or improve our proprietary systems, cyber-attacks, fire, flood, power loss or telecommunications failures. Any failure or interruption of our website, mobile application, internal business applications or our technology infrastructure could harm our ability to serve our clients, which would adversely affect our business and operating results.Material weaknesses in our internal control over financial reporting may cause us to fail to timely and accurately report our financial results or result in a material misstatement of our financial statements.In connection with the audit of our 2017 consolidated financial statements, we identified control deficiencies in the design and operation of our internal control over financial reporting that constituted a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.The material weakness identified in our internal control over financial reporting in 2017 primarily related to our accounting and proprietary systems used in our financial reporting process not having the proper level of controls. Specifically, our systems lacked controls over access, program change management and computer operations that are needed to ensure access to financial data is adequately restricted to appropriate personnel. As a result of this material weakness, we have initiated and will continue to implement remediation measures including, but not limited to, engaging external consultants to conduct a review of processes that involve financial data within our accounting and proprietary systems. This review, which is ongoing, includes the identification of potential risks, documentation of processes and recommendations for improvements.We are still in the process of completing the remediation of the 2017 material weakness related to our accounting and proprietary systems. However, we cannot assure you that the steps we are taking will be sufficient to remediate our material weakness or prevent future material weaknesses or significant deficiencies from occurring.If we identify future material weaknesses in our internal controls over financial reporting or fail to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of the Sarbanes-Oxley Act could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If additional material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weakness, our reputation, financial condition and operating results could suffer.Expansion of our operations internationally will require management attention and resources, involves additional risks and may be unsuccessful.We have no experience with operating internationally or selling our merchandise outsideregions of the United States to replace these positions. During our fourth fiscal quarter of 2020, as we reduced our number of stylists in California and increased our hiring of stylists in other locations, we experienced challenges managing overall styling capacity as we tried to meet increases in client demand. While we made substantial new styling team hires outside of California during our first fiscal quarter of 2021, if we choosefail to expand internationallyeffectively onboard and train these new stylists or if they don’t perform as we would need to adapt to different local cultures, standards and policies. The business model we employ andexpect, the merchandise we currently offer may not appeal to consumers outside of the United States. Furthermore, to succeed with clients in international locations, it likely will be necessary to locate fulfillment centers in foreign markets and hire local employees in those international centers, and we may have to invest in these facilities before proving we can successfully run foreign operations. We may not be successful in expanding into international markets or in generating revenue from foreign operations for a variety of reasons, including:localization of our merchandise offerings, including translation into foreign languages and adaptation for local practices;different consumer demand dynamics, which may make our model and the merchandisepersonalized styling experience we offer less successful compared to the United States;competition from local incumbents that understand the local market and may operate more effectively;regulatory requirements, taxes, trade laws, trade sanctions and economic embargoes, tariffs, export quotas, custom duties or other trade restrictions or any unexpected changes thereto;laws and regulations regarding anti-bribery and anti-corruption compliance;differing labor regulations where labor lawsour clients may be more advantageous to employees as compared to the United Statesimpacted and increased labor costs;more stringent regulations relating to privacy and data security and access to, or use of, commercial and personal information, particularly in Europe;changes in a specific country’s or region’s political or economic conditions; andrisks resulting from changes in currency exchange rates.If we invest substantial time and resources to establish and expand our operations internationally and are unable to do so successfully and in a timely manner, our operating results would suffer.manufacturingof merchandise and warehousing.demand disruptions.freight costs, or shipping delays in connection with our merchandise. Our operating results would be negatively impacted by increases in the pricescost of our merchandise, and we have no guarantees that pricescosts will not rise. In addition, as we expand into new categories, and product types, and geographies, we expect that we may not have strong purchasing power in these newsnew areas, which could lead to higher pricescosts than we have historically seen in our current categories. We may not be able to pass increased pricescosts on to clients, which could adversely affect our operating results.the fabrics or raw materials used in the manufacture of the merchandise we offer, theour vendors that we work with might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price. For example, natural disasters have in the past increased raw material costs, impacting pricing with certain of our vendors, and caused shipping delays for certain of our merchandise. The United States government’s recent ban on cotton imported from the Xinjiang region of China, the source of a large portion of the world’s cotton supply, may impact prices and the availability of cotton for our merchandise. Similarly, the occurrence of a contagious disease or illness could cause delays or increase costs in the manufacture of certain merchandise. For example, the COVID-19 pandemic caused delays in some shipments from our suppliers. In addition, the labor costs to produce our products may fluctuate. Any delays, interruption, damage to, or increased costs in raw materials or the manufacture of the merchandise we offer could result in higher prices to acquire the merchandise, or non-delivery of merchandise altogether, and could adversely affect our operating results.distributionfulfillment centers, or when returned by customers. While we take measures to ensure merchandise quality and avoid damage, including evaluating vendor product samples, conducting inventory inspections, and inspecting returned product, we cannot control merchandise while it is out of our possession or prevent all damage while in our distributionfulfillment centers. We may incur additional expenses and our reputation could be harmed if clients and potential clients believe that our merchandise is not of high quality or may be damaged.merchandise vendorsthem a high quality,high-quality, cost-effective fulfillment process.merchandise,products for our clients, and our operating results may suffer.Anyby us or our vendors to comply with product safety, labor or other laws, or our standard vendor terms and conditions, or to provide safe factory conditions for our or their workers mayadequately prevent fraudulent transactions could damage our reputation, and brand and harm our business.The merchandise we sell to our clients is subject to regulation by the Federal Consumer Product Safety Commission, the Federal Trade Commission and similar state and international regulatory authorities. As a result, such merchandise could be in the future subject to recalls and other remedial actions. Product safety, labeling and licensing concerns may require us to voluntarily remove selected merchandise from our inventory. Such recalls or voluntary removal of merchandise can result in among other things, lost sales, diverted resources, potential harm to our reputation and increased client service costs and legal expenses, which could have a material adverse effect on our operating results.Some of the merchandise we sell may expose us to product liability claims and litigation or regulatory action, relating to personal injury or environmental or property damage. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms or at all. In addition, some of our agreements with our vendors may not indemnify us from product liability for a particular vendor’s merchandise or our vendors may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.We purchase our merchandise from numerous domestic and international vendors. Our standard vendor terms and conditions require vendors to comply with applicable laws. We have hired independent firms that conduct social audits of the working conditions at the factories producing our Exclusive Brands. If an audit reveals potential problems, we require that the vendor institute corrective action plans to bring the factory into compliance with our standards, or we may discontinue our relationship with the vendor. Failure of our vendors to comply with applicable laws and regulations and contractual requirements could lead to litigation against us, resulting in increased legal expenses and costs. In addition, the failure of any such vendors to provide safe and humane factory conditions and oversight at their facilitiesthat could damage our reputation with clients or result in legal claims against us.Shipping is a critical part of our business and any changes in our shipping arrangements or any interruptions in shipping could adversely affect our operating results.We currently rely on two major vendors for our shipping. If we are not able to negotiate acceptable pricing and other terms with these entities or they experience performance problems or other difficulties, it could negativelysubstantially impact our operating results and our clients’ experience. In addition, our ability to receive inbound inventory efficiently and ship merchandise to clients may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism and similar factors. For example, strikes at major international shipping ports have in the past impacted our supply of inventory from our vendors. In addition, as a result of Hurricane Harvey in September 2017, one of our shipping vendors was unable to deliver Fixes to certain affected areas for several weeks, resulting in delivery delays and Fix cancellations. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our merchandise is not delivered in a timely fashion or is damaged or lost during the delivery process, our clients could become dissatisfied and cease using our services, which would adversely affect our business and operating results.fraud, and wefraud. We may in the future offer new payment options to clients that would be subject to additional regulations and risks. We pay interchange and other fees in connection with credit card payments, which may increase over time and adversely affect our operating results. While we use a third party to process payments, we are subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers. If we fail to comply with applicable rules and regulations, we may be subject to fines or higher transaction fees and may lose our ability to accept online payments or other payment card transactions. If any of these events were to occur, our business, financial condition, and operating results could be adversely affected.incur significant lossesface claims from fraud.incurred and may in the future incur losses frombecome involved in other private actions, collective actions, investigations, and various other legal proceedings by clients, employees, suppliers, competitors, government agencies, stockholders, or others. In addition, the COVID-19 pandemic could give rise to new types of fraud,claims or lawsuits, including, stolen credit card numbers,without limitation, workers compensation claims for employees that contracted the virus. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a client did not authorizesettlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, and operating results.purchase, merchant fraudresult, such merchandise could in the future be subject to recalls and clients who have closed bank accounts or have insufficient funds in open bank accounts to satisfy payments. In addition to the direct costs of such losses, if the fraud is related to credit card transactionsother remedial actions. Product safety, labeling, and becomes excessive, it could potentiallylicensing concerns may result in us paying higher feesvoluntarily removing selected merchandise from our inventory. Such recalls or losingvoluntary removal of merchandise can result in, among other things, lost sales, diverted resources, potential harm to our reputation, and increased client service costs and legal expenses, which could have a material adverse effect on our operating results.rightmerchandise we sell, including the children’s merchandise sold through Stitch Fix Kids, may expose us to accept credit cardsproduct liability claims and litigation or regulatory action relating to personal injury or environmental or property damage. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for payment.liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms or at all. In addition, under current credit card practices,some of our agreements with our vendors may not indemnify us from product liability for a particular vendor’s merchandise or our vendors may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.are liable for fraudulent credit card transactions becauserequire that the vendor institute corrective action plans to bring the factory into compliance with our standards, or we do not obtain a cardholder’s signature. Ourmay discontinue our relationship with the vendor. The loss of an Exclusive Brand vendor due to failure to adequately prevent fraudulent transactionscomply with our standards could cause inventory delays, impact our clients’ experiences, and otherwise harm our operating results. In addition, failure of our vendors to comply with applicable laws and regulations and contractual requirements could lead to litigation against us, resulting in increased legal expenses and costs. Furthermore, the failure of any such vendors to provide safe and humane factory conditions and oversight at their facilities could damage our reputation with clients or result in legal claims against us.regulatoryother liabilities. Any such action would be expensive to defend, damage our reputation, and adversely affect our business and operating results. For example, the GDPR imposes more stringent data protection requirements and provides greater penalties for noncompliance than previous data protection laws. Further, the UK withdrew from the EU on January 31, 2020, subject to a transition period that ended on December 31, 2020 (“Brexit”). The regulation of data protection in the UK after December 31, 2020 is still uncertain and depends on ongoing negotiations between the UK and the EU. The UK GDPR is currently consistent with the GDPR in effect since 2018, but it may evolve following the end of the transition period and it is uncertain whether our operations in, and data transfers to and from, the UK can comply with any future changes in the law. Similarly, the State of California legislature passed the CCPA, which became effective on January 1, 2020. The CCPA requires us to make new disclosures to consumers about our data collection, use, and sharing practices. The CCPA also allows consumers to opt out of certain data sharing with third parties, and provides a new cause of action for data breaches with the possibility of significant statutory damage awards. The CCPA prohibits discrimination against individuals who exercise their privacy rights, provides for civil penalties for violations, and creates a private right of action for data breaches that is expected to increase data breach litigation. The CCPA itself will expand substantially when the California Privacy Rights Act of 2020 (the “CPRA”), which California voters approved in November 2020, takes effect on January 1, 2023. The CPRA will, among other things, restrict use of certain categories of sensitive personal information that we handle; further restrict the sharing of personal information; establish restrictions on the retention of personal information; expand the types of data breaches subject to the private right of action; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines. Since the enactment of the CCPA, new privacy and data security laws have been proposed in more than half of the U.S. states and in the U.S. Congress, reflecting a trend toward more stringent privacy legislation in the U.S. Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws as imposing standards for the online collection, use, dissemination, and security of data.expenses thatnegative publicity, make it more difficult or more costly to meet expectations of or commitments to clients, or lead to significant fines, penalties or liabilities for noncompliance, any of which could substantiallyharm our business. These laws could also impact our ability to offer our products in certain locations. The costs, burdens, and potential liabilities imposed by existing privacy laws could be compounded if other jurisdictions in the U.S. or abroad begin to adopt similar or more restrictive laws.in 2010 California’s Automatic Renewal Law went into effect, requiringrequires companies to adhere to enhanced disclosure requirements when entering into automatically renewing contracts with consumers. As a result, a wave of consumer class action lawsuits was brought against companies that offer online products and services on a subscription or recurring basis. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss inlost business, and proceedings or actions against us by governmental entities or others, which could impact our operating results.one patentthree patents issued and sevena number of additional patent applications pending in the United States. We have also have fourfiled patent applications filed in the People’s Republic of China. The patentpatents we own and those that may be issued in the future may not provide us with any competitive advantages or may be challenged by third parties, and our patent applications may never be granted. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property or survive a legal challenge, as the legal standards relating to the validity, enforceability, and scope of protection of patent and other intellectual property rights are uncertain. Our limited patent protection may restrict our ability to protect our technologies and processes from competition. We primarily rely on trade secret laws to protect our technologies and processes, including the algorithms we use throughout our business. Others may independently develop the same or similar technologies and processes, or may improperly acquire and use information about our technologies and processes, which may allow them to provide a service similar to ours, which could harm our competitive position.wereare not valid, defending them could be expensive and distracting, adversely affecting our operating results.An increasingconsideredalready begun, or adopted laws that attempthave positioned themselves to imposebegin, requiring sales and use tax collection obligations on out-of-state retailers. A successful assertion by remote vendors and/or by online marketplaces. The details and effective dates of these collection requirements vary from state to state. While we now collect, remit, and report sales tax in all states that impose a sales tax, it is still possible that one or more states requiring us to collect taxes wherejurisdictions may assert that we presently do not do so, or to collect more taxes in a jurisdiction inhave liability for previous periods for which we currently dodid not collect somesales, use, or other similar taxes, and if such an assertion or assertions were successful it could result in substantial tax liabilities, including taxes onfor past sales as well astaxes and penalties and interest. The imposition by state governments of salesinterest, which could materially adversely affect our business, financial condition, and operating results.collection obligations on out-of-state retailersreform could also create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligationshave unforeseen effects on our competitorsfinancial condition and decrease our future sales, which could have a material adverse impact on our business and operating results.Changes in U.S. tax laws could impact our businessor the(the “Tax Act”) was enacted on December 22, 2017, and contains many significant changes to U.S. Federalfederal tax laws. The Tax Act requires complex computations that were not previously provided for under U.S. tax law. The Company hasWe provided for an estimated effect of the Tax Act in itsour financial statements.statements for the period ended July 28, 2018. In addition, on March 27, 2020, the U.S. enacted the CARES Act. We provided for an estimated effect of the CARES Act in our financial statements for the period ended January 30, 2021. The Tax Act requiresand the CARES Act require significant judgments to be made in the interpretation of the law and significant estimates in the calculation of the provision for income taxes. However, additional guidance may be issued by the IRS,Internal Revenue Service (“IRS”), the Department of the Treasury, or other governing body that may significantly differ from the Company’sour interpretation of the law, which may result in a material adverse effect on our business, cash flow, results of operations, or financial conditions. As we complete our analysis of the 2017 Tax Act, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.experience fluctuations in ourbe subject to additional tax obligations and effective tax rate,liabilities, which could adversely affect our operating results.States. We recordStates under federal, state, and local jurisdictions and in the UK. The governing tax expense based on currentlaws and applicable tax liabilitiesrates vary by jurisdiction and our estimates of future tax liabilities, which may include reserves for estimates of probable settlements of tax audits. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxinginterpretation. Various tax authorities may affectdisagree with tax positions we take and if any such tax authorities were to successfully challenge one or more of our tax positions, the results could have a material effect on our operating results. Further, the ultimate settlementamount of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax ratepayable in a given financial statement period may be materially impacted by sudden or unforeseen changes in tax laws, changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. FluctuationsThe determination of our overall provision for income and other taxes is inherently uncertain as it requires significant judgment around complex transactions and calculations. As a result, fluctuations in our ultimate tax obligations may differ materially from amounts recorded in our financial statements and effective tax rate could adversely affect our business, financial condition, and operating results in the periods for which such determination is made.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.Our failure to adequately and effectively staff our fulfillment centers, through third parties or with our own employees, could adversely affect our client experience and operating results.We currently receive and distribute merchandise at five fulfillment centers in the United States, one of which is operated by a third party. If we or our third-party partner are unable to adequately staff our fulfillment centers to meet demand or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases, regulatory changes, international expansion or other factors, our operating results could be harmed. In addition, operating fulfillment centers comes with potential risks, such as workplace safety issues and employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Any such issues may result in delays in shipping times or packing quality, and our reputation and operating results may be harmed.By using a third-party operator for one of our fulfillment centers, we also face additional risks associated with not having complete control over operations at that fulfillment center. Any deterioration in the financial condition or operations of that operator, or the loss of that operator, would have significant impact on our operations.Some of our software and systems contain open source software, which may pose particular risks to our proprietary applications.We use open source software in the applications we have developed to operate our business and will use open source software in the future. We may face claims from third parties demanding the release or license of the open source software or derivative works that we developed from such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. In addition, our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our website and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have an adverse effect on our business and operating results.Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.We have in the past and may in the future become involved in private actions, collective actions, investigations and various other legal proceedings by clients, employees, suppliers, competitors, government agencies or others. The results of any such litigation, investigations and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition and operating results.Our operating results could be adversely affected by natural disasters, public health crises, political crises or other catastrophic events.Our principal offices and one of our fulfillment centers are located in the San Francisco Bay Area, an area which has a history of earthquakes, and are thus vulnerable to damage. We also operate offices and fulfillment centers in other cities and states. Natural disasters, such as earthquakes, hurricanes, tornadoes, floods and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war and other political instability; or other catastrophic events, whether occurring in the United States or internationally, could disrupt our operations in any of our offices and fulfillment centers or the operations of one or more of our third-party providers or vendors. In particular, these types of events could impact our merchandise supply chain, including our ability to ship merchandise to clients from or to the impacted region, and could impact our ability or the ability of third parties to operate our sites and ship merchandise. In addition, these types of events could negatively impact consumer spending in the impacted regions. To the extent any of these events occur, our business and operating results could be adversely affected.Risks Relating to Ownership of Our Class A Common StockThe market price of our Class A common stock may be volatile or may decline steeply or suddenly regardless of our operating performance and we may not be able to meet investor or analyst expectations. You may lose all or part of your investment.*The market price of our Class A common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:actual or anticipated fluctuations in our client base, the level of client engagement, revenue or other operating results;variations between our actual operating results and the expectations of securities analysts, investors and the financial community;any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information or our failure to meet expectations based on this information;actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;whether investors or securities analysts view our stock structure unfavorably, particularly our dual- class structure and the significant voting control of our executive officers, directors and their affiliates;announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;changes in operating performance and stock market valuations of companies in our industry, including our vendors and competitors;price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;lawsuits threatened or filed against us;developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies; andother events or factors, including those resulting from war or incidents of terrorism, or responses to these events.In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect many eCommerce and other technology companies’ stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the companies’ operating performance. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and seriously harm our business.Moreover, because of these fluctuations, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings forecasts that we may provide.An active trading market for our Class A common stock may not be sustained.*Our Class A common stock is currently listed on the Nasdaq Global Select Market, or Nasdaq, under the symbol “SFIX” and trades on that market and others. We cannot assure you that an active trading market for our Class A common stock will be sustained. Accordingly, we cannot assure you of the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired, or the prices that you may obtain for your shares.Future sales of shares by existing stockholders could cause our stock price to decline.*If our existing stockholders, including employees and service providers who obtain equity, sell or indicate an intention to sell, substantial amounts of our Class A common stock in the public market after the lock-up and other legal restrictions on resale lapse, the trading price of our Class A common stock could decline. As of March 9, 2018, we had outstanding a total of 17,256,799 shares of Class A common stock and 79,931,282 shares of Class B common stock. Each of our directors, executive officers and other holders of substantially all our outstanding shares have entered into lock-up agreements with the underwriters that restrict their ability to sell or transfer their shares for a period of 180 days after November 16, 2017; provided that such restricted period will end with respect to 35% of the shares subject to each lock-up agreement if at any time beginning 90 days after November 16, 2017 (i) we have filed at least one quarterly report on Form 10-Q or annual report on Form 10-K and (ii) the last reported closing price of our Class A common stock is at least 25% greater than the initial public offering price of our Class A common stock for 10 out of any 15 consecutive trading days, including the last day, ending on or after the 90th day after November 16, 2017 (the “Early Release Conditions”); provided, further that if such restricted period ends during a trading black-out period, the restricted period will end one business day following the date that we announce our earnings results for the previous quarter. On February 14, 2018, the Early Release Conditions were satisfied and, in accordance with the lock-up agreements, the restricted period for the eligible 35% of the shares subject to each lock-up agreement will end and up to approximately 37.7 million shares of Class A common stock and Class B common stock will become eligible for immediate sale in the public market at the open of trading on March 14, 2018 (subject to trading limitations on shares held by affiliates of the Company and subject to continued vesting of any unvested equity awards as of such date). In addition, Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC may, in their sole discretion, waive the contractual lock-up restrictions with respect to the remaining shares before the lock-up agreements expire. After the lock-up agreements expire, all 97,188,081 shares outstanding as of March 9, 2018 will be eligible for sale in the public market, of which 62,907,703 shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 of the Securities Act of 1933, asamended, or the Securities Act, and various vesting agreements. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, the perception that such sales may occur or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.In addition, shares underlying any outstanding options and restricted stock units will become eligible for sale if exercised or settled, as applicable, and to the extent permitted by the provisions of various vesting agreements, the lock-up agreements, and Rule 144 of the Securities Act. All the shares of Class A and Class B common stock subject to stock options and restricted stock units outstanding and reserved for issuance under our 2011 Plan and 2017 Plan have been registered on Form S-8 under the Securities Act and such shares will be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates and the lock-up agreement described above. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our Class A common stock could decline.The dual class structure of our common stock concentrates voting control with our executive officers, directors and their affiliates, and may depress the trading price of our Class A common stock.Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. As a result, the holders of our Class B common stock, including our directors and executive officers and their affiliates, will be able to exercise considerable influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or our assets, even if their stock holdings represent less than 50% of the outstanding shares of our capital stock. This concentration of ownership will limit the ability of other stockholders to influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests. This control may adversely affect the market price of our Class A common stock.In addition, in July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. Under the announced policies, our dual class capital structure makes us ineligible for inclusion in any of these indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be investing in our stock. These policies are new and it is unclear what effect, if any, they will have on the valuations of publicly traded companies excluded from the indices, but it is possible that they may depress these valuations compared to those of other similar companies that are included.will beis influenced in part by the research and reports that securities or industry analysts may publish about us, our business, our market, or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our Class A common stock, provide a more favorable recommendation about our competitors, or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A common stock to decline.We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.We are an emerging growth company and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; andexemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.We could be an emerging growth company for up to five years following the completion of our initial public offering, although we expect to not be an emerging growth company sooner. Our status as an emerging growth company will end as soon as any of the following takes place:the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;the date we qualify as a “large accelerated filer,” with at least $700 million of equity securities held by non-affiliates;the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; orthe last day of the fiscal year ending after the fifth anniversary of the completion of our initial public offering.We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our Class A common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our Class A common stock and the market price of our Class A common stock may be more volatile.Under the JOBS Act, “emerging growth companies” can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this accommodation and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.We do not currently intend to pay dividends on our Class A common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation of the value of our Class A common stock.We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, and we do not expect to pay any cash dividends on our Class A common stock in the foreseeable future. As a result, any investment return our Class A common stock will depend upon increases in the value for our Class A common stock, which is not certain.The requirements of being a public company may strain our resources, result in more litigation and divert management’s attention.*As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of the Nasdaq and other applicable securities rules and regulations. Complying with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources. To address these challenges, we recently expanded our finance and accounting teams. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are required to disclose changes made in our internal control and procedures on a quarterly basis. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire additional employees or engage outside consultants to comply with these requirements, which will increase our costs and expenses.In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.These new rules and regulations may make it more expensive for us to obtain director and officer liability insurance and, in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.By disclosing information in filings required of a public company, our business and financial condition are more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business.Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.*Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that could depress the trading price of our Class A common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions include the following:establish a classified board of directors so that not all members of our board of directors are elected at one time;permit the board of directors to establish the number of directors and fill any vacancies and newly- created directorships;provide that directors may only be removed for cause;require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;eliminate the ability of our stockholders to call special meetings of stockholders;prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;restrict the forum for certain litigation against us to Delaware;reflect the dual class structure of our common stock; andestablish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.Any provision of our amended and restated certificate of incorporation or amended and restated bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our Class A common stock.Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.*Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for:any derivative action or proceeding brought on our behalf;any action asserting a breach of fiduciary duty;any action asserting a claim against us arising under the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws; andany action asserting a claim against us that is governed by the internal-affairs doctrine.Our amended and restated certificate of incorporation further provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find either exclusive-forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.(a) Recent Sales of Unregistered SecuritiesThe following sets forth information regarding all unregistered securities sold from July 30, 2017 through January 27, 2018:(1) From October 29, 2017 through January 27, 2018, we granted to our directors, employees, consultants and other service providers options to purchase 1,166,869 shares of our Class A common stock with a per share exercise price ranging from $15.00 to $23.34 and granted 426,056 restricted stock units under our 2017 Plan.(2) From October 29, 2017 through January 27, 2018, we issued to our directors, employees, consultants and other service providers an aggregate of 280,138 shares of our Class B common stock at per share purchase prices ranging from $0.064 to $16.98 pursuant to exercises of options granted under our 2011 Plan.None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering. Unless otherwise specified above, we believe these transactions were exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act (and Regulation D or Regulation S promulgated thereunder) or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or under benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed on the share certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.(b) Use of Proceeds from Registered SecuritiesOn November 16, 2017, our registration statement on Form S-1 (File No. 333-221014) relating to our IPO of Class A common stock became effective. We received net proceeds from the IPO of $127.1 million, after deducting the underwriting discount and offering-related expenses. There has been no material change in the planned use of proceeds from the IPO from that described in the Final Prospectus.ITEM 3.None.Not applicable.ITEM 5.ITEM 6.ExhibitNumberDescription of DocumentIncorporation By ReferenceFormSec File No.ExhibitFiling DateFiled Herewith101.SCHXBRL Taxonomy Extension Schema Document101.CALXBRL Taxonomy Extension Calculation Linkbase Document101.DEFXBRL Taxonomy Extension Definition Linkbase Document101.LABXBRL Taxonomy Extension Label Linkbase Document101.PREXBRL Taxonomy Extension Presentation Linkbase Document*The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates them by reference.Exhibit
NumberDescription Incorporation By Reference Form SEC File No. Exhibit Filing Date Filed or Furnished Herewith 3.1 8-K 001-38291 3.1 11/21/2017 3.2 8-K 001-38291 3.2 11/21/2017 X X 31.1 X 31.2 X 32.1* X 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). + Indicates management contract or compensatory plan. * The certification attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Stitch Fix, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. Stitch Fix, Inc. Date: March 9, 2021 By: /s/ Dan Jedda Date: 13 March, 2018By:/s/ Katrina LakeKatrina LakeFounder, Chief Executive Officer and Director(Principal Executive Officer)Stitch Fix, Inc.Date: 13 March, 2018By:/s/ Paul YeePaul Yee45