SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~Form~~

~~Delaware~~		~~27-5026540~~

1 Montgomery Street, Suite 1100

San Francisco, California 94104

~~1 Montgomery Street, Suite 1500~~

~~San Francisco, CA~~

Indicate by check mark whether the ~~registrant:~~registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filer

☒

☐

Accelerated filer

☐

Non-accelerated filer

☐

☒ ~~(Do not check if a smaller reporting company)~~

Smaller reporting company

☐

Emerging growth company

☒

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

As of March ~~9, 2018~~3, 2023, the number of outstanding shares of the registrant’s Class A common stock, par value $0.00002 per share, was ~~17,256,799,~~87,102,415, and the number of outstanding shares of the registrant’s Class B common stock, par value $0.00002 per share, was ~~79,931,282.~~

25,405,020.

PART I. ~~FINANCI~~ALFINANCIAL INFORMATION


ITEM 1.			FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Operations and Comprehensive ~~Income~~

Loss

(In thousands, except share and per share amounts)

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


	For the Three Months Ended				For the Six Months Ended
	January 28, 2023		January 29, 2022		January 28, 2023		January 29, 2022
Revenue, net	$	412,118	$	516,724	$	867,711	$	1,097,968
Cost of goods sold	243,001		283,920		506,833		592,247
Gross profit	169,117		232,804		360,878		505,721
Selling, general, and administrative expenses	235,827		263,502		482,718		538,269
Operating loss	(66,710)		(30,698)		(121,840)		(32,548)

Interest income	706		171		1,479		505
Other income (expense), net	652		(45)		(632)		(154)
Loss before income taxes	(65,352)		(30,572)		(120,993)		(32,197)
Provision for income taxes	219		340		496		542
Net loss	$	(65,571)	$	(30,912)	$	(121,489)	$	(32,739)
Other comprehensive income (loss):
Change in unrealized gain (loss) on available-for-sale securities, net of tax	941		(654)		755		(969)
Foreign currency translation	2,501		(848)		889		(1,451)
Total other comprehensive income (loss), net of tax	3,442		(1,502)		1,644		(2,420)
Comprehensive loss	$	(62,129)	$	(32,414)	$	(119,845)	$	(35,159)
Net loss attributable to common stockholders:
Basic	$	(65,571)	$	(30,912)	$	(121,489)	$	(32,739)
Diluted	$	(65,571)	$	(30,912)	$	(121,489)	$	(32,739)
Loss per share attributable to common stockholders:
Basic	$	(0.58)	$	(0.28)	$	(1.07)	$	(0.30)
Diluted	$	(0.58)	$	(0.28)	$	(1.07)	$	(0.30)
Weighted-average shares used to compute loss per share attributable to common stockholders:
Basic	113,928,081		109,178,086		113,143,991		108,776,998
Diluted	113,928,081		109,178,086		113,143,991		108,776,998

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of ~~Convertible Preferred Stock and~~ Stockholders’ Equity

(In thousands, except share amounts)

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 Three Months Ended January 28, 2023
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance as of October 29, 2022	113,110,197	$	2	$	552,490	$	(5,325)	$	(222,358)	(2,302,141)	$	(30,042)	$	294,767
Issuance of common stock upon exercise of stock options	117,607	—		154		—		—		—	—		154
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings	1,581,772	—		(3,216)		—		—		—	—		(3,216)

Stock-based compensation	—	—		25,701		—		—		—	—		25,701

Net loss	—	—		—		—		(65,571)		—	—		(65,571)
Other comprehensive income, net of tax	—	—		—		3,442		—		—	—		3,442
Balance as of January 28, 2023	114,809,576	$	2	$	575,129	$	(1,883)	$	(287,929)	(2,302,141)	$	(30,042)	$	255,277

	For the Three Months Ended January 29, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance as of October 30, 2021	108,794,956	$	2	$	437,246	$	2,493	$	38,854	—	$	—	$	478,595
Issuance of common stock upon exercise of stock options	48,983	—		311		—		—		—	—		311
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings	857,276	—		(8,620)		—		—		—	—		(8,620)
Stock-based compensation	—	—		34,206		—		—		—	—		34,206
Repurchase of common stock	—	—		—		—		—		(682,184)	(10,996)		(10,996)
Net loss	—	—		—		—		(30,912)		—	—		(30,912)
Other comprehensive loss, net of tax	—	—		—		(1,502)		—		—	—		(1,502)
Balance as of January 29, 2022	109,701,215	$	2	$	463,143	$	991	$	7,942	(682,184)	$	(10,996)	$	461,082


	For the Six Months Ended January 28, 2023
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance as of July 30, 2022	111,592,931	$	2	$	522,658	$	(3,527)	$	(166,440)	(2,302,141)	$	(30,042)	$	322,651
Issuance of common stock upon exercise of stock options	117,607	—		154		—		—		—	—		154
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings	3,099,038			(6,969)		—		—		—	—		(6,969)

Stock-based compensation	—	—		59,286		—		—		—	—		59,286

Net loss	—	—		—		—		(121,489)		—	—		(121,489)
Other comprehensive income, net of tax	—	—		—		1,644		—		—	—		1,644
Balance as of January 28, 2023	114,809,576	$	2	$	575,129	$	(1,883)	$	(287,929)	(2,302,141)	$	(30,042)	$	255,277

	For the Six Months Ended January 29, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings		Treasury Stock			Total Stockholders’ Equity
	Shares	Amount								Shares	Amount
Balance as of July 31, 2021	107,955,988	$	2	$	416,755	$	3,411	$	40,681	—	$	—	$	460,849
Issuance of common stock upon exercise of stock options	140,377	—		1,365		—		—		—	—		1,365
Issuance of common stock upon settlement of restricted stock units, net of tax withholdings	1,604,850	—		(23,372)		—		—		—	—		(23,372)

Stock-based compensation	—	—		68,395		—		—		—	—		68,395
Repurchase of common stock	—	—		—		—		—		(682,184)	(10,996)		(10,996)
Net loss	—	—		—		—		(32,739)		—	—		(32,739)
Other comprehensive loss, net of tax	—	—		—		(2,420)		—		—	—		(2,420)
Balance as of January 29, 2022	109,701,215	$	2	$	463,143	$	991	$	7,942	(682,184)	$	(10,996)	$	461,082

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flow

(In thousands)


	For the Six Months Ended
	January 28, 2023		January 29, 2022
Cash Flows from Operating Activities
Net loss	$	(121,489)	$	(32,739)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:



Change in inventory reserves	(6,413)		445
Stock-based compensation expense	57,581		64,713
Depreciation, amortization, and accretion	22,095		17,374
Asset impairment	16,874		—
Other	1,067		7
Change in operating assets and liabilities:
Inventory	44,896		28,100
Prepaid expenses and other assets	8,938		(5,755)
Income tax receivables	26,640		43
Operating lease right-of-use assets and liabilities	(111)		4,855
Accounts payable	(38,678)		51,296
Accrued liabilities	(3,840)		(4,267)
Deferred revenue	(1,016)		(3,699)
Gift card liability	1,938		3,261
Other liabilities	2,578		1,298
Net cash provided by operating activities	11,060		124,932
Cash Flows from Investing Activities
Purchases of property and equipment	(11,886)		(30,900)
Purchases of securities available-for-sale	(258)		(77,532)
Sales of securities available-for-sale	4,144		4,690
Maturities of securities available-for-sale	11,210		76,109
Net cash provided by (used in) investing activities	3,210		(27,633)
Cash Flows from Financing Activities

Proceeds from the exercise of stock options, net	154		1,365
Payments for tax withholdings related to vesting of restricted stock units	(6,969)		(23,372)
Repurchase of common stock	—		(9,996)

Other	(117)		—

Net cash used in financing activities	(6,932)		(32,003)
Net increase in cash and cash equivalents	7,338		65,296
Effect of exchange rate changes on cash and cash equivalents	706		(1,203)
Cash and cash equivalents at beginning of period	130,935		129,785
Cash and cash equivalents at end of period	$	138,979	$	193,878



Supplemental Disclosure
Cash paid for income taxes	$	178	$	389
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Purchases of property and equipment included in accounts payable and accrued liabilities	$	1,430	$	3,040
Capitalized stock-based compensation	$	3,409	$	3,682
Repurchase of common stock included in accrued liabilities	$	—	$	1,000

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

$
—

Notes to Condensed Consolidated Financial Statements

1.	~~Description of Business~~

1. Description of Business

Stitch Fix, Inc. (“we,” “our,” “us”, or ~~“the Company”~~the “Company”) delivers ~~one-to-one~~ personalization to our clients through the ~~combination~~pairing of data science and human judgment. ~~Our stylists hand select items from a broad selection~~Currently, clients can engage with us in one of ~~merchandise. Stylists pair their own judgment with our analysis~~two ways that, combined, form an ecosystem of ~~client~~personalized experiences across styling, shopping, and ~~merchandise data to provide~~inspiration: (1) by receiving a personalized shipment of ~~apparel, shoes~~items informed by our algorithms and ~~accessories suited~~sent by a Stitch Fix stylist (a “Fix”); or (2) by purchasing directly from our website or mobile app based on a personalized assortment of outfit and item recommendations (“Freestyle”). Clients can choose to ~~each client’s needs. We call each of these unique~~schedule automatic shipments or order a ~~Fix.~~Fix on demand after they fill out a style profile on our website or mobile app. After receiving a Fix, our clients purchase the items they want to keep and return the other ~~items.~~items, if any. Freestyle utilizes our algorithms to recommend a personalized assortment of outfit and item recommendations that will update throughout the day and will continue to evolve as we learn more about the client. We are incorporated in Delaware and ~~operate~~have operations in the United ~~States.~~

~~Initial Public Offering~~

~~On November 16, 2017, we completed an initial public offering~~States and the United Kingdom (“~~IPO~~”UK”).~~In connection with the IPO, we authorized two new classes~~

2. Summary of common stock: Class A common stock and 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. Each share of Class A common stock is entitled to one vote per share and 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 share 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. 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 closing of the IPO, all of 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.

Significant Accounting Policies

2.	~~Summary of Significant Accounting Policies~~

Our fiscal year is a 52-week or 53-week period ending on the Saturday closest to July 31. The fiscal years ~~ended~~ending July 29, ~~2017~~2023 (“~~2017”~~2023”), and July ~~28, 2018~~30, 2022 (“~~2018”~~2022”) ~~each~~, consist of 52 weeks.

The unaudited condensed consolidated financial statements include the accounts of Stitch Fix, Inc. and our wholly owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and ~~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, 2018~~29, 2023, or for any other interim period or for any other future year. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements ~~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 contained~~30, 2022, included in our ~~prospectus~~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.~~

September 21, 2022 (the “2022 Annual Report”).

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in our condensed consolidated financial statements and accompanying footnotes.

Short-Term and Long-Term Investments

Our short-term and long-term investments have been classified and accounted for as available-for-sale securities. We determine the appropriate classification of our investments at the time of purchase and reevaluate the classification at each balance sheet date. Available-for-sale securities with maturities of 12 months or less are classified as short-term and available-for-sale securities with maturities greater than 12 months are classified as long-term. Our available-for-sale securities are carried at fair value, with unrealized gains and losses, net of taxes, reported within accumulated other comprehensive income (loss) (“AOCI”) in ~~segregated accounts collateralizing letters~~stockholders’ equity. The cost of securities sold is based upon the specific identification method.

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 ~~for~~losses. The portion of the deficit attributable to expected credit losses is recognized in other income (expense), net on our ~~leased properties~~condensed consolidated statements of operations and comprehensive loss. During the three and six months ended January 28, 2023, we did not record any expected credit losses on our available-for-sale debt securities.

We have elected to present accrued interest receivable separately from short-term and long-term investments on our condensed consolidated balance sheets. Accrued interest receivable was $0.4 million and $0.3 million as of January ~~27, 2018~~28, 2023, and July 30, 2022, respectively, and was recorded in prepaid expenses and other current assets in the condensed consolidated balance sheets. 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 when amounts are determined to be uncollectible. We did not write off any accrued interest receivable during the three and six months ended January 28, 2023, and January 29, ~~2017~~.

~~Deferred Offering Costs~~

~~Deferred offering~~2022, respectively.

Inventory, net consists of finished goods which are recorded at the lower of cost or net realizable value using the first-in-first-out (FIFO) method. Gross inventory costs ~~which consist~~include both merchandise costs and in-bound freight costs. Inventory, net includes reserves for excess and slow-moving inventory we expect to write off based on historical trends, damaged inventory, and shrinkage. We estimate and accrue shrinkage as a percentage of ~~direct incremental legal, consulting, banking and accounting fees relating~~inventory out to the ~~IPO were capitalized~~client and ~~offset against proceeds~~damaged items at 100% of cost.

Our leasing portfolio consists of operating leases, which include lease arrangements for our corporate offices, fulfillment centers, and, to a lesser extent, equipment. Operating leases with a term greater than one year are recorded on the condensed consolidated balance sheets as operating lease right-of-use assets and operating lease liabilities at the commencement date. These balances are initially recorded at the present value of future minimum lease payments, which is calculated using our incremental borrowing rate and the expected lease term. Certain adjustments to our operating lease right-of-use assets may be required for items such as initial direct costs paid or incentives received.

In September 2022, we amended our lease agreement for our fulfillment center in Phoenix, AZ, to extend the lease term by five years. We recorded an additional operating lease liability of $14.9 million and right-of-use asset of $14.9 million.

The functional currency of our international subsidiary is the British pound sterling. For that subsidiary, we translate assets and liabilities to U.S. dollars using period-end exchange rates, and average monthly exchange rates for revenues, costs, and expenses. We record translation gains and losses in AOCI as a component of stockholders’ equity. Net foreign exchange transaction gains and losses resulting from the conversion of the transaction currency to functional currency are recorded in other income (expense), net in the condensed consolidated statements of operations and comprehensive loss.

Impairment of Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated from the use of the asset and its eventual disposition. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount exceeds the fair value of the impaired assets. Assets to be disposed of are reported at the lower of their carrying amount or fair value less cost to sell.

In the second quarter of 2023, we recorded an impairment charge related to a portion of our corporate office space. Refer to “Note 11 - Restructuring” for further details on the impairment charge.

We generate revenue primarily from the sale of merchandise in a Fix or Freestyle. Clients create an online account on our website or mobile app, complete a style profile, and order a Fix or merchandise to be delivered on a specified date.

Each Fix represents an offer made by us to the client to purchase merchandise. The client is charged a nonrefundable upfront styling fee before the Fix is shipped. As an alternative to the styling fee, we offer select clients the option to purchase a Style Pass. Style Pass clients pay a nonrefundable annual fee for unlimited Fixes that is credited towards merchandise purchases. If the offer to purchase merchandise is accepted, we charge the client the order amount for the accepted merchandise, net of the upfront styling fee or Style Pass annual fee. For each Fix, acceptance occurs when the client checks out the merchandise on our website or mobile app. We offer a discount to clients who purchase all of the items in the Fix.

We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation.

Our styling fee and Style Pass arrangements represent the option to purchase merchandise. These fees and arrangements are not distinct within the context of the contract with our Fix customers and therefore do not give rise to separate performance

obligations. 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).

Revenue is recognized when control of the promised goods is transferred to the client. 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 applies 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 Freestyle purchase, control is transferred and revenue is recognized upon shipment to the client.

We deduct discounts, sales tax, and estimated refunds to arrive at net revenue. Sales tax collected from clients is not considered revenue and is included in accrued liabilities until remitted to the taxing authorities. All shipping costs are accounted for in cost of goods sold and all handling costs are accounted for as fulfillment costs within selling, general, and administrative expense (“SG&A”), and are therefore not evaluated as a separate performance obligation. Discounts are recorded as a reduction to revenue when the order is accepted. We record a refund reserve based on our historical refund patterns. Our refund reserve, which is included in accrued liabilities in the condensed consolidated balance sheets, was $8.4 million and $10.3 million as of January 28, 2023, and July 30, 2022, respectively.

We have five types of contractual liabilities: (i) cash collections of upfront styling fees, which are included in deferred revenue and are recognized as revenue upon the ~~consummation~~earlier of application to a merchandise purchase or expiry of the ~~IPO,~~offer, (ii) cash collections of Style Pass annual fees, which ~~became effective~~are 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 Freestyle purchases, which are included in deferred revenue and are recognized as revenue upon shipment.

We sell gift cards to clients and establish a liability based upon the face value of such gift cards. We reduce the liability and recognize revenue upon usage of the gift card. If a gift card is not used, we will recognize estimated gift card breakage revenue proportionately to customer usage of gift cards over the expected gift card usage period, subject to requirements to remit balances to governmental agencies. All commissions paid to third parties upon issuance of gift cards are recognized in SG&A as incurred, as on ~~November 16, 2017 (See Note 1).~~

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.

We expect deferred revenue for upfront styling fees, Freestyle orders, and Style Pass annual fees to be recognized within one year. On average, gift card liability and other current liabilities are also recognized within one year.

The following table summarizes the balances of contractual liabilities included in deferred revenue, gift card liability, and other current liabilities as of the dates indicated:


(in thousands)	January 28, 2023		July 30, 2022
Deferred revenue
Upfront styling fees	$	7,690	$	8,422
Style Pass annual fees	4,359		4,337
Freestyle orders	1,379		1,682

Total deferred revenue	$	13,428	$	14,441
Gift card liability	$	12,489	$	10,551
Other current liabilities
Referral credits	$	925	$	684

The following table summarizes revenue recognized during the six months ended January 28, 2023, that was previously included in deferred revenue, gift card liability, and other current liabilities at July 30, 2022:


(in thousands)	Revenue Recognized From Amounts Previously Included in Deferred Balances at July 30, 2022
Upfront styling fees	$	8,321
Style Pass annual fees	2,874
Freestyle orders	1,160
Gift card liability	1,865
Referral credits	545

Concentration of Credit Risks

We are subject to concentrations of credit risk principally from cash and cash equivalents and investment securities. The majority of our cash is held by ~~three~~two 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.

No client accounted for greater than 10% of total revenue, net for the three and six months ended January ~~27, 2018~~28, 2023, and January ~~28, 2017.~~

~~Recently Issued Accounting Pronouncements~~

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~, or ASU 2014-09, which amended the existing FASB Accounting Standards Codification. ASU 2014-09 establishes a principle for recognizing revenue 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 new guidance may be applied retrospectively to each prior period presented or retrospectively with 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 do not anticipate the impact to be material to our consolidated financial statements.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~, or ASU 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. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. We expect to adopt 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 result in a substantial increase in our long-term assets and liabilities.

~~In October 2016, the FASB issued ASU No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (Topic 740)~~, which amends existing guidance on the recognition of current and deferred income tax impacts for intra-entity asset transfers other than inventory. This amendment should be applied on a modified retrospective basis. We expect to adopt this standard in fiscal 2019 and are currently evaluating the impact that it will have on our consolidated financial statements.

29, 2022, respectively.

3.	~~Fair Value Measurements~~

3. Fair Value Measurements

We disclose and recognize the fair value of our assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes three levels of the fair value hierarchy as follows:

Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2: Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and

Our financial instruments consist of cash and cash equivalents, short-term and long-term investments, accounts payable, and accrued ~~liabilities and the preferred stock warrant liability.~~liabilities. At January ~~27, 2018~~28, 2023, and July ~~29, 2017,~~30, 2022, 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 with our IPO, all outstanding preferred stock warrants were automatically exercised into Class B common stock. As a result, we remeasured and reclassified the preferred stock warrant liability to additional paid-in capital upon the closing of the IPO. As of January 27, 2018, the Company did not have any financial instruments measured at fair value.

maturities.

The following table sets forth our ~~financial instruments~~cash 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 January 28, 2023, and July ~~29, 2017 (in thousands):~~

30, 2022:

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


	January 28, 2023								July 30, 2022
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash equivalents:
Money market funds	$	11,658	$	—	$	—	$	11,658	$	16,267	$	—	$	—	$	16,267

Investments:
U.S. Treasury securities	42,748		—		—		42,748		42,260		—		—		42,260

Commercial paper	—		—		—		—		—		2,985		—		2,985

Corporate bonds	—		42,160		—		42,160		—		54,517		—		54,517
Total	$	54,406	$	42,160	$	—	$	96,566	$	58,527	$	57,502	$	—	$	116,029

There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 for the three and six months ended January ~~27, 2018~~28, 2023, 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:~~

2022.

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

—
%


	January 28, 2023								July 30, 2022
(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	$	43,311	$	—	$	(563)	$	42,748	$	43,163	$	—	$	(903)	$	42,260

Commercial paper	—		—		—		—		2,985		—		—		2,985

Corporate bonds	42,754		—		(594)		42,160		55,526		—		(1,009)		54,517
Total	$	86,065	$	—	$	(1,157)	$	84,908	$	101,674	$	—	$	(1,912)	$	99,762

The following table shows fair value and gross unrealized losses, aggregated by security category and length of time that individual securities have been in a ~~summary~~continuous unrealized loss position as of January 28, 2023:


	Less Than 12 Months				More Than 12 Months				Total
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Financial Assets:
Investments:
U.S. Treasury securities	$	42,748	$	(563)	$	—	$	—	$	42,748	$	(563)



Corporate bonds	16,592		(247)		25,568		(347)		42,160		(594)
Total	$	59,340	$	(810)	$	25,568	$	(347)	$	84,908	$	(1,157)

Gross unrealized losses on our available-for-sale securities have decreased since July 30, 2022, due to maturities of our investments in the six months ended January 28, 2023, and approaching maturities of securities in our portfolio. We evaluate securities for expected credit losses on a quarterly basis with consideration given to the financial condition and near-term prospects of the ~~changes~~issuer; whether we intend to sell the securities, and whether it is more likely than not that we will be required to sell the securities before recovery of their amortized cost basis.

As of January 28, 2023, the losses on our available-for-sale securities were considered to be a direct effect of the increase in interest rates and not the creditworthiness of the issuers. We have the current intent and ability to retain these securities until maturity or recovery of the amortized cost basis. Therefore, we did not recognize any expected credit losses as of January 28, 2023.

The following table sets forth the fair value of ~~the preferred stock warrant liability (in thousands):~~

available-for-sale securities by contractual maturity as of January 28, 2023 and July 30, 2022:

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 28, 2023								July 30, 2022
(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	$	42,487	$	261	$	—	$	42,748	$	35,473	$	6,787	$	—	$	42,260

Commercial paper	—		—		—		—		2,985		—		—		2,985

Corporate bonds	40,133		2,027		—		42,160		43,591		10,926		—		54,517
Total	$	82,620	$	2,288	$	—	$	84,908	$	82,049	$	17,713	$	—	$	99,762

4.	~~Accrued Liabilities~~

4. Accrued Liabilities

Accrued liabilities consisted of the ~~following (in thousands):~~

following:


(in thousands)	January 28, 2023		July 30, 2022
Compensation and related benefits	$	24,604	$	11,319
Advertising	7,603		15,579
Sales taxes	6,029		7,136
Shipping and freight	8,962		10,304
Accrued accounts payable	4,951		5,814
Inventory purchases	23,785		24,712
Sales refund reserve	8,385		10,314
Other	7,540		9,238
Total accrued liabilities	$	91,859	$	94,416

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

5.	~~Preferred Stock Warrant Liability~~

5. Credit Agreement

We are party to an amended and ~~2013,~~restated credit agreement, entered into June 2, 2021 and amended on July 29, 2022 (the “Amended Credit Agreement”) with Silicon Valley Bank and other lenders, to provide a revolving line of credit of up to $100.0 million, including a letter of credit sub-facility in ~~connection~~the aggregate amount of $30.0 million, and a swingline sub-facility in the aggregate amount of $40.0 million. We also have the option to request an incremental facility of up to an additional $150.0 million from one or more of the lenders under the Amended Credit Agreement.

Under the terms of the Amended Credit Agreement, revolving loans may be either Secured Overnight Financing Rate (“SOFR”) Loans or ABR Loans. Outstanding SOFR Loans incur interest at the Adjusted Term SOFR, which is defined in the Amended Credit Agreement as Term SOFR plus the Term SOFR Adjustment), plus a margin of 2.25%. Outstanding ABR Loans incur interest at the highest of (a) the 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 Adjusted Term SOFR for a one-month tenor in effect on such day plus 1.00%, in each case plus a margin of 1.25%. We are charged a commitment fee of 0.25% for committed but unused amounts. The revolving line of credit under the Amended Credit Agreement will terminate on May 31, 2024, unless the termination date is extended at the election of the lenders.

Our obligations under the Amended Credit Agreement and any hedging or cash management agreements entered into with ~~financing arrangements, we issued warrants to purchase shares~~any lender thereunder are secured by substantially all of our ~~convertible preferred stock. For one~~current and future property, rights, and assets, including, but not limited to, cash, goods, equipment, contractual rights, financial assets, and intangible assets. The Amended Credit Agreement contains covenants limiting the ability under certain circumstances to, among other things, dispose of ~~the financing arrangements, we issued warrants~~assets, undergo a change in control, merge or consolidate, make acquisitions, incur debt, incur liens, pay dividends, repurchase stock, and make investments, in each case subject to ~~purchase 375,230 shares of Series Seed convertible preferred~~

~~stock at~~certain exceptions. The Amended Credit Agreement also contains financial covenants requiring us to maintain minimum free cash flow and 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,adjusted current ratio above specified levels, measured in each case at the ~~warrant holder’s option, either (a) 624,730 shares~~end of ~~Series A-1 convertible preferred stock at an exercise price~~each fiscal quarter. The Amended Credit Agreement contains events of ~~$0.2401 per share~~default that include, among others, non-payment of principal, interest, or ~~(b) 308,315 shares~~fees, breach of ~~Series B convertible preferred stock at an exercise price~~covenants, inaccuracy of ~~$0.486516 per share. Prior~~representations and warranties, cross defaults to ~~their automatic exercise~~certain other indebtedness, bankruptcy and insolvency events, and material judgments.

As of January 28, 2023, we did not have any borrowings outstanding on the revolving line of credit under the Amended Credit Agreement, and we had $79.1 million in ~~connection~~borrowing capacity as reduced by outstanding letters of credit. As of January 28, 2023, we were in compliance with ~~the IPO, as described below, the warrants were exercisable for~~all financial covenants.

6. Commitments and ~~expired ten years from the date of issuance.~~ ~~In November 2017, in connection with our IPO, the preferred stock warrants were automatically exercised into Class B common stock~~ ~~and the preferred stock warrant liability was reclassified to additional paid-in capital.~~

Contingencies

6.	~~Commitments and~~ Contingencies

We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results, financial position, and cash flows.

On August 26, 2022, a class action lawsuit alleging violations of federal securities laws was filed by certain of our stockholders in the U.S. District Court for the Northern District of California, naming as defendants us, certain of our officers and directors and certain of our affiliated stockholders. The lawsuit alleges violations of the Securities Exchange Act of 1934, as amended, by us and our officers for allegedly making materially false and misleading statements regarding our Freestyle offering between December 2020 and December 2021. The plaintiffs seek unspecified monetary damages and other relief.

On October 11, 2018, October 26, 2018, November 16, 2018, and December 10, 2018, four putative class action lawsuits alleging violations of the federal securities laws were filed by certain of our stockholders in the U.S. District Court for the Northern District of California, naming as defendants us and certain of our officers. The four lawsuits each make the same allegations of violations of the Securities Exchange Act of 1934, as amended, by us and our officers for allegedly making materially false and misleading statements regarding our active client growth and strategy with respect to television advertising between June 2018 and October 2018. The plaintiffs seek unspecified monetary damages and other relief. The four lawsuits have been consolidated and a lead plaintiff has been appointed. On September 18, 2019, the lead plaintiff in the consolidated class action lawsuits (the “Class Action”) filed a consolidated complaint for violation of the federal securities laws. On October 28, 2019, we and other defendants filed a motion to dismiss the consolidated complaint. The lead plaintiff filed an opposition to the motion to dismiss on December 9, 2019, and we and the other defendants filed our reply in support of our motion to dismiss on December 30, 2019. The court granted our motion to dismiss on September 30, 2020 but allowed the lead plaintiff to file an amended complaint. On November 6, 2020, the lead plaintiff filed his amended complaint. We filed a motion to dismiss the amended complaint on December 7, 2020. The lead plaintiff filed an opposition to the motion to dismiss on January 8, 2021, and we filed our reply in support of our motion to dismiss on January 22, 2021. The court granted our motion to dismiss on October 1, 2021. On October 29, 2021, the lead plaintiff filed a notice of appeal to the Ninth Circuit Court of Appeals. On October 19, 2022, the United States Court of Appeals for the Ninth Circuit affirmed the district court's dismissal of the complaint. The lead plaintiff did not file a petition to the Supreme Court by the January 17, 2023 deadline.

On December 12, 2018, a derivative action was filed against our directors in the same court, alleging the same violations of securities laws as alleged in the Class Action and breach of fiduciary duties. On December 12, 2019, a second derivative action was filed against our directors in the same court, alleging the same violations of securities laws and breach of fiduciary duties as the other derivative action. The two derivative actions have been related to each other and to the Class Action, and all the related cases are now proceeding before a single judge in the U.S. District Court for the Northern District of California. The derivative actions were stayed pending resolution of the plaintiffs’ appeals of the dismissal of the Class Action pursuant to the parties’ stipulation. On February 15, 2023, the court entered orders dismissing both derivative actions without prejudice.

There have been no other material changes to our commitments and contingencies disclosed in our 2022 Annual Report.

In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.

7. Accumulated Other Comprehensive Loss

The following tables present the changes in AOCI by component and, if applicable, the reclassifications out of AOCI for the periods presented:



	For the Three Months Ended January 28, 2023						For the Three Months Ended January 29, 2022
(in thousands)	Available-for-sale Securities		Foreign Currency Translation		Total		Available-for-sale Securities		Foreign Currency Translation		Total
Beginning balance	$	(2,526)	$	(2,799)	$	(5,325)	$	(605)	$	3,098	$	2,493
Other comprehensive income (loss) before reclassifications(1)	941		2,501		3,442		(654)		(848)		(1,502)

Net change in AOCI	941		2,501		3,442		(654)		(848)		(1,502)
Ending balance	$	(1,585)	$	(298)	$	(1,883)	$	(1,259)	$	2,250	$	991

	For the Six Months Ended January 28, 2023						For the Six Months Ended January 29, 2022
(in thousands)	Available-for-sale Securities		Foreign Currency Translation		Total		Available-for-sale Securities		Foreign Currency Translation		Total
Beginning balance	$	(2,340)	$	(1,187)	$	(3,527)	$	(290)	$	3,701	$	3,411
Other comprehensive income (loss) before reclassifications(1)	773		889		$	1,662	(969)		(1,451)		$	(2,420)
Amounts reclassified from AOCI	(18)		—		(18)		—		—		—
Net change in AOCI	755		889		1,644		(969)		(1,451)		(2,420)
Ending balance	$	(1,585)	$	(298)	$	(1,883)	$	(1,259)	$	2,250	$	991

7.	~~Stock-Based Compensation~~

(1) There was no associated income tax effect for gains/losses on available-for-sale securities for the three and six months ended January 28, 2023 or January 29, 2022, as we have recorded a valuation allowance against these deferred tax balances.

8. Stock-Based Compensation

2011 Equity Incentive Plan

In 2011, we adopted the 2011 Equity Incentive Plan (the “2011 Plan”). The 2011 Plan provided for the ~~granting~~grant of stock-based awards to employees, ~~including~~ directors, and ~~non-employees~~nonemployees under terms and provisions established by the ~~board~~Board of ~~directors.~~

Directors.

The 2011 Plan allowed for the grant of incentive stock options or nonqualified stock options as well as restricted stock units, restricted stock, and stock appreciation rights. ~~As of January 27, 2018, we had only granted~~Only incentive and nonqualified stock options were granted under the 2011 Plan. Employee stock ~~options~~option awards generally ~~vest~~vested 25% on the first anniversary of the grant date with the remaining shares subject to the option vesting ratably over the next three ~~years.~~years subject to the employee’s continued service with the Company. Options generally expire after 10 years. Effective upon our ~~IPO,~~initial public offering in 2017, the 2011 ~~Equity Incentive~~ Plan ~~has been~~was replaced by the 2017 Incentive Plan.

In November 2017, our ~~board~~Board of ~~directors~~Directors and stockholders adopted our 2017 Incentive Plan (the “2017 Plan”). The remaining shares available for issuance under ~~the~~our 2011 Plan became reserved for issuance under the 2017 Pl~~an.~~Plan. Our 2017 Plan provides for the grant of Class A incentive stock options to employees, including employees of ~~any parent or~~our subsidiary, and for the grant of ~~nonstatutory~~nonqualified stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards (“RSU”), 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 begin to vest six months after the grant date with the remaining shares subject to the option vesting ratably over the next 30 months. Options generally expire after 10 years. RSU awards made to employees generally vest ratably on a quarterly basis subject to the employee’s continued service with the Company. The number of shares authorized for issuance under the 2017 Plan was ~~28,423,374~~38,257,771 shares of Class A common stock as of January ~~27, 2018,~~28, 2023.

2019 Inducement Plan

In October 2019, our Board of ~~which~~ ~~6,038,778 were~~ ~~available~~Directors adopted our 2019 Inducement Plan (the “2019 Plan”). Our 2019 Plan provides for ~~grant.~~

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 10,750,000 shares of Class A common stock as of January 28, 2023.

Stock option activity under the 2011 Plan, 2017 Plan, and ~~2017 Plans~~2019 Plan is as follows:

The aggregate intrinsic value is the difference between the current fair value of the underlying common stock and the exercise price for in-the-money stock options.

Restricted Stock Units

The following table summarizes the ~~restricted stock unit (RSU)~~RSU award activity under the 2017 ~~Incentive~~Plan and 2019 Plan:

Performance-based Stock Awards

The Company incurs stock-based compensation expense under compensation arrangements with certain of its employees under which the Company will settle bonuses for a fixed dollar amount by issuing a variable number of restricted stock units. The number of restricted stock units issued will be based on the Company’s trailing seven-day average share price following the Company’s public release of fiscal 2023 financial results. The awards have both service and performance conditions.

These awards are classified as liability-based awards in accrued expenses in the accompanying condensed consolidated balance sheets, which are measured based on the fair value of the award at the end of each reporting period until settled. The Company records stock-based compensation related to accrued compensation in which it intends to settle in shares of the Company’s common stock. However, it is the Company’s discretion whether this compensation will ultimately be paid in stock or cash, as it has the right to dictate the form of these payments up until the date they are paid.

Stock-based compensation expense is recorded over the fiscal year in which performance is assessed. Forfeitures are recorded in the period in which they occur.

Stock-Based Compensation Expense

Stock-based compensation expense for employees was ~~$3.1~~$25.9 million and ~~$5.1~~$57.6 million for the three and six months ended January ~~27, 2018, respectively~~28, 2023 and ~~$0.7~~$32.4 million and ~~$1.2~~ $64.7 million for the three and six months ~~end~~edended January 29, 2022. As a result of the January 2023 Reduction in Force, described in Note 11, stock-based compensation expense decreased by $4.4 million for the three months ended January 28, ~~2017, respectively.~~2023 due to forfeitures of previously granted awards above our estimate. Stock-based compensation expense is included in selling, general, and administrative expenses in our condensed consolidated statements of ~~operations.~~

operations and comprehensive loss.

As of January 28, 2023, the total unrecognized compensation expense related to unvested options and RSUs, net of estimated forfeitures, was $175.3 million, which we expect to recognize over an estimated weighted average period of 2.2 years. The weighted-average grant date fair value of options granted during the six months ended January ~~27, 2018~~28, 2023, was ~~$7.65~~ $2.42 per share. The weighted-average grant date fair value of options granted during the six months ended January ~~28, 2017~~ 29, 2022, was ~~$2.84~~ $9.11 per share. ~~As of January 27, 2018, the total unrecognized compensation expense related to unvested options and RSU’s, net of estimated forfeitures,~~ ~~was $40.8 million~~ ~~which we expect to recognize over an estimated weighted average period of 3.49 years.~~

~~For the Three Months Ended~~

~~For the Six Months Ended~~

~~January 27, 2018~~

~~January 28, 2017~~

~~January 27, 2018~~

~~January 28, 2017~~

~~Expected term (in years)~~

~~5.4 - 6.6~~

~~5.5 - 6.1~~

~~5.4 - 6.6~~

~~5.4 - 6.5~~

~~Volatility~~

~~41.4 - 43.5%~~

~~42.7 - 42.8%~~

~~41.4 - 43.5%~~

~~44.4 - 46.0%~~

~~Risk free interest rate~~

~~2.1 - 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 28, 2023		January 29, 2022		January 28, 2023		January 29, 2022
Expected term (in years)	3.2 - 5.5		3.2 - 5.5		3.2 - 5.5		3.2 - 5.5
Volatility	87.3%		62.1%		87.3%		62.1%
Risk free interest rate	4.2% - 4.4%		0.8% - 1.3%		4.2% -4.4%		0.8% - 1.3%
Dividend yield	—	%	—	%	—	%	—	%

The following table summarizes our effective tax rate from income for the periods ~~presented (in thousands):~~

presented:


	For the Three Months Ended						For the Six Months Ended
(in thousands)	January 28, 2023			January 29, 2022			January 28, 2023			January 29, 2022
Loss before income taxes	$	(65,352)		$	(30,572)		$	(120,993)		$	(32,197)
Provision for income taxes	219			340			496			542
Effective tax rate	(0.3)		%	(1.1)		%	(0.4)		%	(1.7)		%

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
%

Our effective tax rate for the three and six months ended January 29, 2022, differed from the federal statutory income tax rate primarily due to the full valuation allowance recorded on our net federal and state deferred tax ~~balances based on~~assets. The tax provision for the ~~tax rates at which they are expected to reverse~~three and six months ended January 29, 2022, is comprised of state taxes and income taxes 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 made by the Company and/or issuance of additional guidance.

foreign jurisdictions.

We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.

9.	~~Earnings (Loss) Per Share Attributable to Common Stockholders~~

10. Net Loss Per Share Attributable to Common Stockholders

Basic and diluted ~~net income~~loss per share attributable to common stockholders is presented in conformity with the two-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. Each

share of Class A common stock is entitled to one vote per share and 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 share of Class A common stock.

~~Undistributed earnings allocated to participating securities are subtracted from net income in 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.~~

For the calculation of diluted ~~earnings~~loss per share, ~~(“EPS”),~~ net ~~income~~loss attributable to common stockholders for basic ~~EPS~~loss per share is adjusted by the effect of dilutive securities. Diluted 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, including all potentially dilutive common shares. In periods of loss, there are no potentially dilutive common shares to add to the weighted-average number of common shares outstanding. The undistributed earnings are allocated based on the contractual participation rights of the Class A and Class B common shares as if the ~~earnings~~losses for the year have been distributed. As the liquidation and dividend rights are identical, the undistributed ~~earnings are~~loss is allocated on a proportionate basis. ~~The computation~~

In January 2022, the Company's Board of ~~the diluted net income per~~Directors authorized a share repurchase program to repurchase up to $150.0 million of our outstanding Class A common stock, ~~assumes~~with no expiration date (the “2022 Repurchase Program”). The actual timing, number and value of shares repurchased in the ~~conversion~~future will be determined by the Company in its discretion and will depend on a number of ~~Class B~~factors, including market conditions, applicable legal requirements, our capital needs, and whether there is a better alternative use of capital.

Repurchases during any given fiscal period under the 2022 Repurchase Program will reduce the number of weighted-average common ~~stock, while diluted net income per share of Class B common stock does not assume~~shares outstanding for the ~~conversion of Class A common stock as Class A common stock is not convertible into Class B common stock.~~

period.

A reconciliation of the numerator and denominator used in the calculation of ~~the~~ basic and diluted ~~EPS~~loss per share attributable to Class A and Class B common stockholders is as ~~follows (in thousands except share and per share amounts):~~

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

follows:


	For the Three Months Ended		For the Six Months Ended
(in thousands, except share and per share amounts)	January 28, 2023		January 29, 2022		January 28, 2023		January 29, 2022

Numerator:



Net loss attributable to Class A and Class B common stockholders	$	(65,571)	$	(30,912)	$	(121,489)	$	(32,739)





Denominator:
Weighted-average shares of common stock - basic	113,928,081		109,178,086		113,143,991		108,776,998



Weighted-average shares of common stock - diluted	113,928,081		109,178,086		113,143,991		108,776,998
Loss per share attributable to Class A and Class B common stockholders:
Basic	$	(0.58)	$	(0.28)	$	(1.07)	$	(0.30)
Diluted	$	(0.58)	$	(0.28)	$	(1.07)	$	(0.30)

As the Company has reported net loss for each of the periods presented, all potentially dilutive securities were considered antidilutive. The following common stock equivalents were excluded from the computation of diluted ~~earnings (loss)~~loss per share for the periods presented because including them would have been antidilutive:

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


	For the Three Months Ended		For the Six Months Ended
	January 28, 2023	January 29, 2022	January 28, 2023	January 29, 2022


Restricted stock units that settle into Class A common stock	13,745,346	10,341,380	13,745,346	10,341,380
Stock options to purchase Class A common stock	4,296,003	2,715,632	4,296,003	2,715,632
Stock options to purchase Class B common stock	905,367	1,184,895	905,367	1,184,895
Total	18,946,716	14,241,907	18,946,716	14,241,907

~~10.Subsequent Events~~

11. Restructuring

We announced a restructuring plan on June 9, 2022, to reduce our future fixed and variable operating costs and allow us to centralize key capabilities, strengthen decision-making to drive efficiencies, and ensure we are allocating resources to our most critical priorities. This restructuring plan reduced our workforce by approximately 15% of salaried positions and represented approximately 4% of our roles in total. In the first quarter of fiscal 2023, we recorded $0.9 million of additional restructuring charges consisting of severance and employee-related benefits. These charges were recorded in selling, general, and administrative expenses on the condensed consolidated statements of operations and comprehensive loss.

In furtherance of and as an expansion of this restructuring plan, on January 5, 2023, the Company implemented a plan of termination (“January 2023 Reduction in Force”) that included the elimination of approximately 6% of the Company’s then-current employee workforce, including approximately 20% of employees in salaried positions. In connection with the Company’s January 2023 Reduction in Force, the Company’s Chief Executive Officer agreed that she would step down from her employment with the Company and from the Board of Directors, effective January 5, 2023. This plan also included the closure of our Salt Lake City fulfillment center. In the second quarter of fiscal 2023, we recorded $34.6 million of restructuring charges associated with this plan, $15.6 million of which will be paid in cash and relates to severance and employee-related benefits. We expect substantially all of these cash payments to be completed by the end of the quarter ending April 29, ~~2018,~~2023.

In connection with this plan, we ~~executed~~also recorded $16.9 million of impairment related to a portion of our corporate office space due to a change in the use of this space, and further deterioration in the San Francisco sublease market. This charge was allocated between operating lease right-of-use assets and property and equipment, net on the condensed consolidated balance sheets to record the corresponding assets at their estimated fair market value, with the expense being recorded within selling, general, and administrative expenses on the condensed consolidated statements of operations and comprehensive loss. The estimated fair value of the right-of-use asset and the property and equipment, net was determined using level 3 inputs and based on an ~~amendment~~income approach using discounted future cash flows.

Due to the ~~lease~~closure of our Salt Lake City fulfillment center, we recorded $1.8 million of accelerated depreciation expense on assets that will not be transferred to other fulfillment centers in our ~~corporate headquarters. Beginning June 1, 2018, the amendment adds two additional floors of office space, provides for a ten-year lease term~~network and which we do not have immediate plans to use.

The January 2023 Reduction in Force reduced stock-based compensation expense by $4.4 million for the ~~additional space and extends our existing lease by four and a half years to be coterminous with the term~~three months ended January 28, 2023. This impact is not included in restructuring charges.

The components of the ~~additional space.~~ restructuring charges are as follows:


	For the Three Months Ended		For the Six Months Ended
(in thousands)	January 28, 2023		January 28, 2023
Severance and employee-related benefits	$	15,571	$	16,498
Asset impairments	16,874		16,874
Accelerated depreciation	1,755		1,755
Other	367		367
Total restructuring(1)	$	34,567	$	35,494

(1) Recognized in selling, general, and administrative expenses.

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~~following table provides the components of and changes in the Company’s restructuring and related charges, included in accounts payable and accrued liabilities on the condensed consolidated balance ~~increased by $3.7 million, representing an increase in collateral for letters of credit on our leased properties.~~

sheets:

~~ITEM 2.~~	~~Management’s Discussion~~
(in thousands)		Severance and ~~Analysis of~~ ~~Financial Condition~~Employee Related Benefits and ~~Results of Operations~~ Other
Balance at July 30, 2022		$	290
Charges incurred		16,633
Cash payments		(2,434)

Balance at January 28, 2023		$	14,489

12. Subsequent Events

On March 1, 2023, Dan Jedda, Chief Financial Officer of the Company, gave notice of his resignation, effective April 3, 2023.

On March 3, 2023, the Board of Directors of the Company appointed David Aufderhaar, SVP, Finance, as the Company’s Chief Financial Officer, effective April 3, 2023. Mr. Aufderhaar joined the Company in May of 2019. Previously, Mr. Aufderhaar was the VP, Corporate Finance and Financial Planning & Analysis at Twitter.

There are no related person transactions between the Company and Mr. Aufderhaar.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our 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 ~~thereto~~and our Annual Report on Form 10-K (the “2022 Annual Report”) for the year ended July ~~29, 2017, included in the final prospectus for our initial public offering (“IPO”), dated as of November 16, 2017, and~~30, 2022, 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 21, 2022. We use a 5252- or ~~53 week~~53-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 ~~generally~~typically consists of four 13-week fiscal ~~quarters, with each~~quarters. The fiscal ~~quarter~~year ending onJuly 29, 2023, and the ~~Saturday that is closest to the last day of the last month of the quarter. The years~~fiscal year ended July 30, ~~2016 and July 29, 2017 included~~2022, 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.

Special Note Regarding Forward-Looking Statements

This Quarterly Report contains forward-looking statements that involve risks, uncertainties, and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report that are not purely historical, including without limitation statements in the following discussion and analysis of financial condition and results of operations regarding our projected financial position and results, business strategy, plans, and objectives of our management for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. ~~All~~Forward-looking statements ~~other than~~are 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 in~~are based on the ~~following discussion~~beliefs 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 operations~~which 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. These~~management. 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 achievements~~and the timing of certain events to differ materially from ~~any~~ future results ~~performances or achievements anticipated,~~ expressed or implied by ~~the~~such forward-looking statements. Factors that ~~might~~could cause or contribute to such ~~a difference~~differences include, but are not limited to, those discussed in ~~this Quarterly Report on Form 10-Q in~~the section titled “Risk Factors” included under Part II, Item 1A ~~— “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. Forward-looking~~below. 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 ~~their~~the date ~~and~~of this Quarterly Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or ~~revise these statements~~circumstances after the date of such statements.

Overview

Since our founding in ~~light~~2011, we have helped millions of ~~future developments. We caution investors that our business~~women, men, and ~~financial performance are subject to substantial risks~~kids discover and ~~uncertainties.~~

~~Overview~~

~~Stitch Fix is transforming the way people find~~buy what they love through personalized shipments of apparel, shoes, and accessories. Currently, clients can engage with us in one ~~client at a time~~of two ways that, combined, form an ecosystem of personalized experiences across styling, shopping, and ~~one Fix at a time.~~

~~We are reinventing the shopping experience~~inspiration: (1) 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 providereceiving a personalized shipment of ~~apparel, shoes~~items informed by our algorithms and ~~accessories suited to each client’s needs. We call each~~sent by a Stitch Fix stylist (a “Fix”); or (2) by purchasing directly from our website or mobile app based on a personalized assortment of ~~these unique shipments~~outfit and item recommendations (“Freestyle”). For a ~~Fix. Our~~Fix, clients ~~may~~can choose to schedule automatic shipments ~~that arrive every two to three weeks~~ or order on demand after they fill out a ~~monthly, bi-monthly~~style profile on our website or ~~quarterly cadence, or schedule a Fix on-demand. Clients can increase or decrease their desired Fix frequency at any time, and can select the exact date by which they want to receive a Fix.~~mobile app. 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.~~

In December 2017, we launched Style Pass to provide 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.

The very human experience that we deliver is powered by data science. Our data science capabilities consist 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,if any. Freestyle utilizes our algorithms ~~become more powerful.~~

~~Our stylists leverage our data science through~~to recommend a ~~custom-built, web-based styling application that provides~~personalized assortment of outfit and item recommendations from our broad selection of merchandise. Our stylists then apply their judgment to select what they believe to be the best items for each Fix. Our stylists provide a personal touch, offer 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~~update throughout the day 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~~will continue to ~~expand our marketing efforts,~~evolve as we ~~plan to remain disciplined in measuring~~learn more about 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. client.

For the three ~~and six~~ months ended January ~~27, 2018~~28, 2023, we reported ~~$295.9 million and $591.5~~$412.1 million in net revenue, ~~respectively,~~ representing a year-over-year ~~growth~~decline of ~~24.4% and 24.8% from~~20.2% compared to the three ~~and six~~ months ended January ~~28, 2017, respectively.~~29, 2022. As of January ~~27, 2018~~28, 2023, and January ~~28, 2017,~~29, 2022, we had ~~2,508,000 active clients~~3,574,000 and ~~1,920,000~~4,019,000 active clients, respectively, representing a year-over-year ~~growth~~decline of ~~30.6%~~11.1%.

~~Net income~~

During fiscal 2022, we experienced a decline in net revenue year-over-year primarily due to our challenges in acquiring new clients. This trend has continued in the first half of fiscal 2023, and we expect these challenges in acquiring active clients to have a negative compounding effect on net revenue for the ~~three~~remainder of fiscal 2023. We are continuing to navigate the uncertainties presented by the current macroeconomic environment and ~~six months ended January 27, 2018 was $3.6 million~~remain focused on retaining current clients, improving the conversion of new clients, and ~~$17.1 million, respectively, an increase of $3.4 million~~enhancing our overall client experience for new and ~~$3.6 million, respectively,~~ ~~from a year ago. Included in net income~~existing clients.

Net loss for the three and six months ended January 28, ~~2017~~2023, was $65.6 million and $121.5 million, compared to a ~~$21.3~~net loss of $30.9 million ~~compensation expense related to certain stock sales by current~~ and ~~former employees. Included in net income~~$32.7 million for the three and six months ended January ~~27, 2018 was~~29, 2022.

We announced a ~~$4.7~~restructuring plan on June 9, 2022, to reduce our future fixed and variable operating costs and allow us to centralize key capabilities, strengthen decision-making to drive efficiencies, and ensure we are allocating resources to our most critical priorities. This restructuring plan reduced our workforce by approximately 15% of salaried positions and represented approximately 4% of our roles in total. In connection with the restructuring plan, we incurred $0.9 million ~~remeasurement~~in restructuring costs in the first quarter of fiscal 2023. We also incurred other one-time cash charges related to retention bonuses for continuing employees of $5.2 million in the first quarter of fiscal 2023. In furtherance of and as an expansion of this restructuring plan, on January 5, 2023, the Company implemented a plan of termination that included the elimination of approximately 6% of the

Company’s then-current employee workforce, including approximately 20% of employees in salaried positions. In connection with the Company’s January 2023 Reduction in Force, the Company’s Chief Executive Officer agreed that she would step down from her employment with the Company and from the Board of Directors, effective January 5, 2023. This plan also included the closure of our Salt Lake City fulfillment center. We incurred restructuring costs of $15.6 million in severance and employee-related benefits, $16.9 million of impairment related to a portion of our corporate office space, $1.8 million of accelerated depreciation expense on assets, and $0.1 million of other one-time costs with this plan in the second quarter of fiscal 2023.

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

For more information on the components of net ~~deferred tax assets related~~loss for the three and six months ended January 28, 2023, refer to the ~~Tax Cuts~~section titled “Results of Operations” below.

Key Financial and ~~Jobs Act (“Tax Act”), which was enacted on December 22, 2017.~~

~~Key~~Operating Metrics

Non-GAAP Financial Measures

We report our financial results in accordance with generally accepted accounting principles in the United States ~~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 ~~such~~this supplemental measure facilitates comparisons between companies. We believe free cash flow is an important metric because it represents a measure of how much cash from operations we have available for discretionary and non-discretionary items after the deduction of capital expenditures. These non-GAAP financial measures may be different than similarly titled measures used by other companies. 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 financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with GAAP. There are several limitations related to the use of our non-GAAP financial measures as compared to the closest comparable GAAP measures. Some of these limitations include:

~~our non-GAAP net income,~~ •adjusted EBITDA ~~and non-GAAP EPS – diluted measures exclude compensation expense that we recognized related to certain stock sales by current and former employees;~~

~~our non-GAAP net~~excludes interest income and ~~non-GAAP EPS – diluted measures exclude the impact of the remeasurement~~other income (expense), net, as these items are not components of our ~~net deferred tax assets following the adoption of the Tax Act;~~

core business;

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;

•

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

•adjusted EBITDA does not reflect our ~~tax~~ provision for income taxes, which ~~reduces~~may increase or decrease cash available to us;

•adjusted EBITDA excludes the recurring, non-cash expenses of depreciation and

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

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

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

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

Adjusted EBITDA

We define adjusted EBITDA as net loss excluding interest income, ~~excluding~~ other ~~(income)~~income (expense), net, provision for income taxes, 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.~~restructuring and other one-time costs. 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):~~

presented:

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
(in thousands)	January 28, 2023		January 29, 2022		January 28, 2023		January 29, 2022

Net loss	$	(65,571)	$	(30,912)	$	(121,489)	$	(32,739)
Add (deduct):
Interest income	(706)		(171)		(1,479)		(505)
Other (income) expense, net	(652)		45		632		154
Provision for income taxes	219		340		496		542
Depreciation and amortization	9,879		8,439		19,719		16,179
Stock-based compensation expense	25,867		32,390		57,581		64,713
Restructuring and other one-time costs(1)	34,742		—		40,897		—
Adjusted EBITDA	$	3,778	$	10,131	$	(3,643)	$	48,344

~~Non-GAAP Net Income~~

~~We define non-GAAP net income as net income excluding~~

(1)For 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 asthree months ended January 28, 2023, restructuring charges were $34.6 million described in “Note 11 - Restructuring” in the ~~remeasurement of our net deferred tax assets in relation~~Notes to the ~~adoption of~~Condensed Consolidated Financial Statements in Item 1. Financial Statements, and other one-time costs were $0.1 million. For the ~~Tax Act. The following table presents a reconciliation of net income, the most comparable GAAP financial measure, to non-GAAP net income~~six months ended January 28, 2023, restructuring charges were $35.5 million and other one-time costs were $5.4 million in retention bonuses for ~~each of the periods presented (in thousands):~~

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.

continuing employees.

~~Non-GAAP Earnings Per Share - Diluted~~

We 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):

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

We define free cash flow as cash ~~flow from operations~~flows provided by operating activities reduced by purchases of property and equipment ~~which is~~that are included in cash ~~flow from~~flows used in investing activities. The following table presents a reconciliation of cash flows ~~from~~provided by 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

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
)


	For the Six Months Ended
(in thousands)	January 28, 2023		January 29, 2022
Free cash flow reconciliation:
Cash flows provided by operating activities	$	11,060	$	124,932
Deduct:
Purchases of property and equipment	(11,886)		(30,900)
Free cash flow	$	(826)	$	94,032
Cash flows provided by (used in) investing activities	$	3,210	$	(27,633)
Cash flows used in financing activities	$	(6,932)	$	(32,003)

Operating Metrics


	January 28, 2023	October 29, 2022	July 30, 2022	April 30, 2022	January 29, 2022
Active clients (in thousands)	3,574	3,709	3,795	3,907	4,019

Active Clients

We believe that the number of active clients is a key indicator of our growth and the overall health of our business. We define an active client as a client who checked out a Fix or was shipped an item via Freestyle in the preceding ~~12-month period,~~52 weeks, measured as of the last ~~date~~day of that period. A client checks out a Fix when she indicates what items she is keeping through our mobile application or on our website. We consider each Women’s, Men’s, or Kids account as a client, even if they share the same household. We had ~~2,508,000~~3,574,000 and ~~1,920,000~~4,019,000 active clients as of January ~~27, 2018~~28, 2023, and January ~~28, 2017,~~29, 2022, respectively, representing a year-over-year ~~growth~~decline of ~~30.6%~~11.1%.

The decline in net active clients is due to the addition of fewer new clients, as well as clients becoming inactive, both of which we believe have been influenced by the macroeconomic environment.

Net Revenue per Active Client

We believe that net revenue per active client is an indicator of client engagement and satisfaction. We calculate net revenue per active client based on net revenue over the preceding four fiscal quarters divided by the number of active clients, measured as of the last day of the period. Net revenue per active client was $516 and $549 as of January 28, 2023, and January 29, 2022, respectively, or a decline of 6.0% year over year, as we have observed clients spending less in recent periods, and we expect this to continue given the economic backdrop and the deep discounting we are seeing in the retail industry.

Factors Affecting Our Performance

~~Client Acquisition~~

Macroeconomic Environment

Our business and ~~Engagement~~

~~To grow our business, we must continue~~operating results are subject to ~~acquire clients~~national and ~~successfully engage them. We believe that implementing broad-based marketing strategies that increase our brand awareness has~~global economic conditions and their impact on consumer discretionary spending. As the ~~potential to strengthen Stitch Fix as a national consumer brand, help us acquire new clients~~macroeconomic environment is experiencing inflation, rising interest rates, recessionary concerns, tightening labor markets, and ~~drive revenue growth. As our business has achieved a greater scale~~general uncertainty regarding the overall future political and ~~we are able to support a large and growing client base,~~economic environment, we have increased our investments in marketing to take advantage of more marketing channels to profitably acquire clients. For example, we recently significantly increased our advertising spend, from $10.2 millionseen 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~~see negative impacts on consumer confidence and consumer demand. As this challenging and uncertain economic environment continues, we cannot predict whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business. 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.

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

~~Investment in our Operations and Infrastructure~~

To grow our client base and enhance our offering, we will incur additional expenses. We intend to leverage our data science and deep understanding of our clients’ needs to inform investments in operations and infrastructure. We anticipate that our expenses will increase as we continue to hire additional personnel and further advance our technological and data science capabilities. Moreover, we intend to make capital investments in our inventory, fulfillment centers and office space and logistics infrastructure as we launch new categories, expand internationally and drive operating efficiencies. We expect to increase our spending on these investments in the future and cannot be certain that these efforts will grow our client base or be cost-effective. However, we believe these strategies will yield positive returns in the long term.

Inventory Management

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

Consistent with the trends in the second half of fiscal 2022, supply chain constraints and delays have continued to ease during the three months ended January 28, 2023, and the timing and amount of inventory receipts were not impacted by supply chain delays. As such, we are no longer ordering product in advance of our typical timelines.

Client Acquisition and Engagement

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

The largest component of our marketing spend is advertising, which was $21.0 million and $65.6 million, respectively, for the three and six months ended January 28, 2023, compared to $38.8 million and $93.7 million, respectively, for the three and six months ended January 29, 2022. Beginning in the second fiscal quarter of 2023, we began including costs for influencer campaigns in our advertising expense, and advertising expense for the three and six months ended January 29, 2022, reflects the inclusion of these costs.

Operations and Infrastructure

We intend to leverage our data science and deep understanding of our clients’ needs to make targeted investments in technology and product, and plan to prioritize investments with near-term positive returns. For example, ~~entering new categories or adding new~~in the second quarter of fiscal 2023, we decided to close our Salt Lake City fulfillment ~~centers will require additional investments~~center in ~~inventory.~~

order to optimize network capacity.

Merchandise Mix

We offer apparel, shoes, and accessories across categories, brands, product types, and price points. We currently serve our clients in the following categories: Women’s, Petite, Maternity, Men’s, Plus, and ~~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.

~~While~~

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

Components of Results of Operations

Revenue

We generate revenue from the sale of ~~merchandise. We~~merchandise, either through our Fix or Freestyle offerings. With our Fix offering, we charge a ~~$20~~ nonrefundable upfront fee, referred to as a “styling fee,” that is credited towards any merchandise ~~purchased in the~~purchased. We offer Style Pass to provide select U.S. clients with an alternative to paying a styling fee per Fix. Style Pass clients pay a nonrefundable annual fee for unlimited styling that is credited towards merchandise purchases. We deduct discounts, sales tax, and estimated refunds to arrive at net revenue, which we refer to as revenue throughout ~~the report.~~ In December 2017, we launched Style Pass to provide 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. this Quarterly Report. We ~~expect our~~also recognize revenue ~~to increase in absolute dollars as we grow our business, although our revenue growth rate may continue to slow in future periods.~~

resulting from estimated breakage income on gift cards.

Cost of Goods Sold

Cost of goods sold consists of the costs of merchandise, expenses for inbound freight and shipping to and from clients, ~~and inbound freight,~~ inventory write-offs and changes in our inventory reserve, payment processing fees, and packaging materials ~~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.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) consist primarily of compensation and benefits costs, including stock-based compensation expense, for our employees including our ~~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~~As a ~~percentage of revenue due to the anticipated growth~~result of our ~~business, increased marketing investments~~restructuring and ~~additional costs associated with being a public company.~~cost reduction actions in the fourth quarter of fiscal 2022 and January 2023, we expect SG&A in fiscal 2023 to decrease year over year. Our classification of selling, general, and administrative expenses may vary from other companies in our industry and may not be comparable.

~~Remeasurement of Preferred Stock Warrant Liability~~

~~We estimate the fair value of the preferred stock warrant liability at the end of each reporting period~~

Interest Income

Interest income is generated from our cash equivalents and ~~recognize changes~~investments 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.

available-for-sale securities.

Provision for Income Taxes

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

assets.

Results of Operations

Comparison of the Three and Six Months Ended January ~~27, 2018~~28, 2023, and January ~~28, 2017~~

29, 2022

The following table sets forth our results of operations for the periods ~~indicated (in thousands):~~

indicated:

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				%
(in thousands)	January 28, 2023		January 29, 2022		Change		January 28, 2023		January 29, 2022		Change
Revenue, net	$	412,118	$	516,724	(20.2)	%	$	867,711	$	1,097,968	(21.0)	%
Cost of goods sold	243,001		283,920		(14.4)	%	506,833		592,247		(14.4)	%
Gross profit	169,117		232,804		(27.4)	%	360,878		505,721		(28.6)	%
Selling, general, and administrative expenses	235,827		263,502		(10.5)	%	482,718		538,269		(10.3)	%
Operating loss	(66,710)		(30,698)		117.3	%	(121,840)		(32,548)		274.3	%
Interest income	706		171		312.9	%	1,479		505		192.9	%
Other income (expense), net	652		(45)		*		(632)		(154)		310.4	%
Loss before income taxes	(65,352)		(30,572)		113.8	%	(120,993)		(32,197)		275.8	%
Provision for income taxes	219		340		(35.6)	%	496		542		(8.5)	%
Net loss	$	(65,571)	$	(30,912)	112.1	%	$	(121,489)	$	(32,739)	271.1	%

* Not meaningful

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


	For the Three Months Ended				For the Six Months Ended
	January 28, 2023		January 29, 2022		January 28, 2023		January 29, 2022
Revenue, net	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	59.0	%	54.9	%	58.4	%	53.9	%
Gross margin	41.0	%	45.1	%	41.6	%	46.1	%
Selling, general, and administrative expenses	57.2	%	51.0	%	55.6	%	49.0	%
Operating loss	(16.2)	%	(5.9)	%	(14.0)	%	(2.9)	%
Interest income	0.2	%	—	%	0.2	%	—	%
Other income (expense), net	0.2	%	—	%	(0.1)	%	—	%
Loss before income taxes	(15.9)	%	(5.9)	%	(13.9)	%	(2.9)	%
Provision for income taxes	0.1	%	0.1	%	0.1	%	—	%
Net loss	(15.9)	%	(6.0)	%	(14.0)	%	(2.9)	%

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
%

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

Revenue and Gross Margin

Revenue ~~increased~~decreased by ~~$58.1~~$104.6 million and ~~$117.7~~$230.3 million, or ~~24.4%~~20.2% and ~~24.8%~~21.0%, respectively, during the three and six months ended January ~~27, 2018~~28, 2023, compared ~~with~~to the same periods last year. The ~~increase~~decrease in ~~revenue~~both periods was primarily ~~attributable~~due to a ~~30.6% increase~~ 11.1% decline in active clients from January ~~28, 2017~~29, 2022 to January ~~27, 2018,~~28, 2023, which ~~drove increased~~led to a decrease in sales of merchandise.

Additionally, we observed clients spending less in recent periods, and we expect this to continue given the economic backdrop and the deep discounting we are seeing in the retail industry.

Gross margin for the three months ended January ~~27, 2018~~28, 2023, decreased by ~~1.9%~~410 basis points compared ~~with~~to the same period last ~~year. The decrease~~year, which was primarily ~~attributable to investments in~~driven by higher product and transportation costs as a percentage of revenue, partially offset by lower inventory write-downs and ~~expansion into new categories,~~clearance expense for slow moving inventory as ~~well as an increase in inventory shrink. The gross~~a percentage of revenue. Gross margin for the six months ended January ~~27, 2018~~28, 2023, decreased by ~~2.5%~~450 basis points, compared ~~with~~to the same period last ~~year. The decrease~~year, which was primarily ~~attributable to~~driven by higher ~~clearance~~product and ~~inventory shrink as well as an increase in merchandise~~transportation costs as ~~we expanded into new categories, and inventory obsolescence reserves.~~

a percentage of revenue.

Selling, General, and Administrative Expenses

~~Selling, general and administrative expenses increased~~

SG&A decreased by ~~$5.9~~$27.7 million and ~~$41.9~~$55.6 million for the three and six months ended January ~~27, 2018,~~28, 2023, respectively, compared with the same periods last year. As a percentage of revenue, SG&A increased to 57.2% for the three months ended January 28, 2023, compared with 51.0% for the three months ended January 29, 2022, and increased to 55.6% for the six months ended January 28, 2023, compared with 49.0% for the six months ended January 29, 2022.

The decrease in ~~2017.~~ SG&A expense in the three and six months ended January 28, 2023, compared to the three and six months ended January 29, 2022, was primarily related to lower compensation and benefits expense largely driven by our June 2022 restructuring plan, including lower stock-based compensation, and our decision to reduce advertising spend this fiscal year. The decrease was partially offset by restructuring and other one-time costs of $34.7 million recorded in the second quarter of fiscal 2023. The restructuring charges consist of $15.6 million in severance and employee-related benefits, $16.9 million of impairment related to a portion of our corporate office space, $1.8 million of accelerated depreciation expense on assets, and $0.4 million of other restructuring costs. Other one-time costs were $0.1 million in the second quarter of fiscal 2023.

The increase in ~~both periods was primarily due to an increase in advertising spend of $9.6 million and $22.5 million~~SG&A margin for the three and six months ended January ~~27, 2018, respectively, as we expanded~~

~~our television and online advertising initiatives. The increases were also due~~28, 2023, compared with the same period last year, was primarily related to higher compensation and benefits expense as ~~we increased our headcount over the last year, partially offset by $21.3 million in~~a percentage of revenue, including higher stock-based compensation ~~costs incurred in 2017 in connection with certain stock sales by current~~as a percentage of revenue. The increase was also related to restructuring and ~~former employees.~~

~~Remeasurement of Preferred Stock Warrant Liability~~

~~The change~~other one-time recorded in the ~~preferred stock warrant liability was due to a change in the underlying fair value~~second quarter of ~~our preferred stock until the conversion of our preferred stock warrants into Class B common stock as part of our IPO.~~

fiscal 2023.

Provision for Income Taxes

The following table summarizes our effective tax rate from income for the periods ~~presented (in thousands):~~

presented:


	For the Three Months Ended						For the Six Months Ended
(in thousands)	January 28, 2023			January 29, 2022			January 28, 2023			January 29, 2022
Loss before income taxes	$	(65,352)		$	(30,572)		$	(120,993)		$	(32,197)
Provision for income taxes	219			340			496			542
Effective tax rate	(0.3)		%	(1.1)		%	(0.4)		%	(1.7)		%

We are primarily subject to income taxes in the United ~~States.~~States and the United Kingdom. Our effective tax rate for the three and six months ended January 28, ~~2017~~2023, differs from the federal statutory income tax rate primarily due to ~~accounting for~~ the ~~effects of enactment of the Tax Act, certain nondeductible expenses, effect of~~full valuation allowance recorded on our net federal and state ~~taxes, 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.deferred tax assets. 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~~provision for the three and six months ended January 28, ~~2017 was adjusted to reflect the discrete effects~~2023, is primarily comprised of ~~the Tax Act~~state taxes and ~~resulted~~income taxes 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.

foreign jurisdictions.

Our effective tax rate for the three and six months ended 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~~29, 2022, differs from the federal statutory income tax rate primarily due to ~~nondeductible loss~~the full valuation allowance recorded on ~~remeasurement~~our net federal and state deferred tax assets.

We continue to monitor the progress of ongoing discussions with tax authorities and the impact, if any, of the ~~preferred stock warrant liability, effect~~expected expiration of ~~state taxes, certain other nondeductible expenses, partially offset by~~ the ~~benefits on certain stock-based compensation deductions.~~

statute of limitations in various taxing jurisdictions.

Liquidity and Capital Resources

Sources of Liquidity

Our principal ~~sources~~source of liquidity ~~since inception have been~~is our cash, cash equivalents, and cash flows from ~~operations, as well as the net proceeds we received through private sales of equity securities and our IPO. We have had positive and growing cash flows from operations since 2014.~~ operations.

As of January ~~27, 2018,~~28, 2023, we had ~~raised an aggregate of $169.6 million of equity capital including proceeds from our IPO. We had $266.4~~$139.0 million of cash and ~~$9.1~~cash equivalents and $84.9 million of ~~restricted cash~~investments. Our investment balance includes $82.6 million of short-term investments with contractual maturities of 12 months or less as of January 28, 2023.

We are party to a $100.0 million amended and restated credit agreement, entered into June 2, 2021 and amended on July 29, 2022 (the “Amended Credit Agreement”) with Silicon Valley Bank and other lenders. The Amended Credit Agreement includes a letter of credit sub-facility of $30.0 million and a swingline sub-facility of up to $40.0 million. As of January 28, 2023, we did not have any borrowings outstanding on the revolving line of credit under the Amended Credit Agreement and we had $79.1 million in borrowing capacity as reduced by outstanding letters of credit.

27 ~~2018.~~

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

For information on the terms of the Amended Credit Agreement, please see “Credit Agreement” in Note 5 of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q at Item 1. Financial Statements.

Uses of Cash

Our primary use of cash includes operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our ~~business growth.~~business. We ~~have been able~~may also use cash to ~~fund these costs through~~repurchase shares of our ~~cash flows from operations since 2014 and expect to continue to do so.~~ common stock.

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

months and beyond.

Share Repurchases

In January 2022, our Board of Directors authorized a share repurchase program to repurchase up to $150.0 million of our outstanding Class A common stock, with no expiration date (the “2022 Repurchase Program”). We may repurchase shares from time to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The actual timing, number and value of shares repurchased in the future will be determined by the Company in its discretion and will depend on a number of factors, including price, trading volume, market conditions, and other general business conditions. Repurchases will be funded from the Company’s existing cash and cash equivalents or future cash flow. The repurchase program may be modified, suspended, or terminated at any time. During the three months ended January 28, 2023, the Company made no repurchases of Class A common stock. As of January 28, 2023, the Company has repurchased 2,302,141 shares of Class A common stock for $30.0 million under the 2022 Repurchase Program. We had $120.0 million remaining in share repurchase capacity as of January 28, 2023.

Cash Flows

The following table summarizes our cash flows for the periods indicated ~~and our cash and working capital balances as of the end of the period (in thousands):~~

below:

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


	For the Six Months Ended
(in thousands)	January 28, 2023		January 29, 2022
Net cash provided by operating activities	$	11,060	$	124,932
Net cash provided by (used in) investing activities	3,210		(27,633)
Net cash used in financing activities	(6,932)		(32,003)
Effect of exchange rate changes on cash and cash equivalents	706		(1,203)
Net increase in cash and cash equivalents	$	8,044	$	64,093

Cash provided by operating activities

During the six months ended January ~~27, 2018,~~28, 2023, cash provided by operating activities was ~~$33.7~~$11.1 million, which consisted of a net ~~income~~loss of ~~$17.1~~$121.5 million, adjusted by non-cash charges of ~~$12.0~~$91.3 million and a change of ~~$4.6~~$41.3 million in our net operating assets and liabilities. The non-cash charges were ~~largely~~primarily driven by ~~$7.0~~$57.6 million ~~increase~~of stock-based compensation expense, $22.1 million of depreciation, amortization, and accretion, and $16.9 million in asset impairment charges. The change in our net operating assets and liabilities was primarily due to a change of $44.9 million in our inventory ~~reserve, a $5.5 million increase in deferred tax expense primarily related~~balance due to a ~~$4.7~~decline in inventory receipts and a cash inflow of $26.6 million ~~remeasurement~~from income tax refunds, partially offset by a decrease of $42.5 million in accounts payable and accrued liabilities due to timing of payments.

During the six months ended January 29, 2022, cash provided by operating activities was $124.9 million, which consisted of a net loss of $32.7 million, offset by non-cash charges of $82.5 million and by a change of $75.2 million in our net ~~deferred tax~~operating assets ~~under the Tax Act, $5.1~~and liabilities. The non-cash charges were primarily driven by $64.7 million of stock-based compensation expense and ~~$4.9~~$17.4 million of depreciation, amortization, and ~~amortization, partially offset by $10.7 million related to the remeasurement of the preferred stock warrant liability.~~accretion. The change in our net operating assets and liabilities was primarily due to an increase of ~~$15.3~~$47.0 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~~and a change of ~~$19.5~~$28.1 million in our inventory balance primarily due to ~~increased~~a decline in inventory ~~purchases~~ ~~to support our growth~~.

receipts from global supply chain delays.

Cash used in investing activities

During the six months ended January 28, ~~2017~~,2023, cash provided by ~~operating~~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~~ million. This was primarily due ~~to an~~ ~~increase~~the sales and maturities of ~~$28.5~~available-for-sale securities of $15.4 million, ~~in accounts payable and accrued liabilities, an increase of~~ ~~$3.6 million in gift card liability, and an increase of $3.1 million in other~~ ~~liabilities, primarily~~ partially offset by ~~an increase~~purchases of ~~$10.5 million in inventory~~property and ~~$9.4 million in prepaid expenses and other assets.~~

~~Cash used in investing activities~~

equipment of $11.9 million.

During the six months ended January ~~27, 2018 and January 28, 2017,~~29, 2022, cash used in investing activities was ~~$8.2~~$27.6 million. This was primarily due to maturities and sales of available-for-sale securities of $76.1 million and ~~$11.4~~$4.7 million, respectively, ~~due to the purchase~~substantially offset by our investment of $77.5 million in available-for-sale securities and purchases of property and equipment ~~primarily related to the expansion~~ of ~~our fulfillment centers and offices as well as continued investment~~$30.9 million.

Cash used in ~~our proprietary systems.~~

~~Cash (used in) provided by~~ financing activities

~~During 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~~, 2023, cash used in financing activities was ~~$2.6 million, which~~$6.9 million. This was primarily due to payments for tax withholding related to vesting of restricted stock units.

During the ~~repurchase~~six months ended January 29, 2022, cash used in financing activities was $32.0 million. This was primarily due to payments for tax withholding related to vesting of restricted stock units and purchases of Class BA common stock ~~related~~pursuant to ~~early exercised~~the 2022 Repurchase Program, partially offset by proceeds from the exercise of stock options.

Contractual Obligations and Other Commitments

On January 29, 2018, subsequent to our quarter-end, we executed an amendment to the lease on our corporate headquarters, which increased the future minimum lease payments on our corporate headquarters to approximately $115.3 million over ten years.

There have been no other material changes to our contractual obligations and other commitments as disclosed in ~~the Final Prospectus.~~

~~Off-Balance Sheet Arrangements~~

~~We have not entered any off-balance sheet arrangements and do not have any holdings in variable interest entities.~~

our 2022 Annual Report on Form 10-K.

Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. ~~These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.~~ Actual results may differ from these estimates under different assumptions or conditions.

There have been no ~~material~~significant 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~~ disclosed in ~~the Final Prospectus. For additional information, please refer to Note 2 of~~ our ~~condensed consolidated financial statements in this Quarterly~~2022 Annual Report on Form ~~10-Q.~~

10-K.

~~ITEM 3.~~

~~Quantitative and Qualitative Disclosures about~~

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

We have operations both within the United States and in the UK, and we are exposed to market risks in the ordinary course of business. These risks primarily include interest rate risk, foreign currency risk and inflation risk.

Interest Rate Risk

We are primarily exposed to market risks through interest rate risk on our investments. As of January 28, 2023, we had $84.9 million in highly rated investments accounted for as available-for-sale securities, which are presented on our condensed consolidated balance sheets at their fair market value compared to $99.8 million as of July 30, 2022. 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 28, 2023, would not have had a material impact on our condensed consolidated financial statements.

Foreign Currency Risk

As of January 28, 2023, our revenue was earned in U.S. dollars and British pound sterling. Our ~~cash is deposited~~expansion into the United Kingdom (“UK”) exposes us to fluctuations in ~~checking~~foreign currency exchange rates on our operating expenses. Fluctuations in foreign currency exchange rates may also result in transaction gains or losses on transactions in currencies other than the U.S. dollar or British pound sterling. For the three and ~~savings accounts; therefore,~~six months ended January 28, 2023, a hypothetical 10% increase or decrease in current exchange rates would not have had a material impact on our condensed consolidated financial results.

InflationRisk

Our costs are subject to inflationary pressures, which we expect to continue, and if those pressures become significant, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations. The primary inflationary factors affecting our business are merchandise costs, shipping and freight costs, and labor costs. Additionally, although difficult to quantify, we believe ~~we are relatively insensitive~~inflation is having an adverse effect on our clients’ discretionary spending habits, which has impacted and may continue to ~~interest rate changes.~~

impact net revenue.

~~ITEM 4.~~

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as ~~amended)~~amended (the “Exchange Act”)), as of the end of the period covered by this ~~Quarterly Report on Form 10-Q.~~

Annual Report.

Based on the evaluation of our disclosure controls and procedures as of January ~~27, 2018,~~28, 2023, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as ~~a result~~ of ~~a material weakness~~January 28, 2023.

Changes in Internal Control over Financial Reporting

There were no changes during the quarter ended January 28, 2023 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 Reporting~~

In 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 Weakness~~

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 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 Control~~

~~Other 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.

Inherent Limitations on Effectiveness of Controls ~~and Procedures~~

~~In designing and evaluating~~

An effective internal control system, no matter how well designed, has inherent limitations, including the ~~disclosure~~possibility of human error or overriding of controls, and ~~procedures and~~therefore 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 any~~may 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information contained in ~~various legal proceedings that arise~~“Note 6 - Commitments and Contingencies: Contingencies” in the ~~ordinary course of business. We have in~~Notes to the ~~past and may in the future become involved in private actions, collective actions, investigations and various other legal proceedings~~Condensed 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. RISK FACTORS

Our business is subject to numerous risks. The following summary highlights some of the risks you should consider with respect to our business and prospects. This summary is not complete and the risks summarized below are not the only risks we face. You should review and consider carefully the risks and uncertainties described in more detail in the “Risk Factors” below, which includes a more complete discussion of the risks summarized here.

Risks Relating to Our Business

•Our growth depends on attracting new clients.

•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.

•We rely on paid marketing to help grow our business, but these efforts may not be successful or cost effective, and such expenses may vary from period to period.

•If we are unable to manage our inventory effectively, our operating results could be adversely affected.

•The COVID-19 pandemic has caused significant disruption to our operations and impacted our business, key financial and operating metrics, and results of operations in numerous ways that remain unpredictable.

•Our failure to adequately and effectively staff our fulfillment centers and other operational constraints at our fulfillment centers could adversely affect our client experience and operating results.

•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.

•Our business, including our costs and supply chain, is subject to risks associated with the sourcing and pricing of merchandise and raw materials.

•We may not be able to return to or sustain our revenue growth rate and we may not be profitable in the future.

•If we fail to effectively manage our business, our financial condition and operating results could be harmed.

•If we are unable to develop and introduce new offerings or expand into new markets in a timely and cost-effective manner, our business, financial condition, and operating results could be negatively impacted.

•We have a short operating history in an evolving industry and, as a result, our past results may not be indicative of future operating performance.

•Expansion of our operations internationally requires management attention and resources, involves additional risks, and may be unsuccessful.

•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, effectively manage succession, or hire, develop, and motivate our employees, our business, financial condition, and operating results could be adversely affected.

•If we fail to effectively manage our stylists, our business, financial condition and operating results could be adversely affected.

•If we are unable to acquire new merchandise vendors or retain existing merchandise vendors, our operating results may be harmed.

•We may incur significant losses from fraud.

•We are subject to payment-related risks.

•We rely on consumer discretionary spending and may be adversely affected by economic downturns and other macroeconomic conditions or trends.

•Our industry is highly competitive and if we do not compete effectively our operating results could be adversely affected.

•Our operating results have been, and could be in the future, adversely affected by natural disasters, public health crises, political crises, or other catastrophic events.

•System interruptions that impair client access to our website or other performance failures in our technology infrastructure could damage our business.

•Compromises of our data security could cause us to incur unexpected expenses and may materially harm our reputation and operating results.

•Some of our software and systems contain open source software, which may pose particular risks to our proprietary applications.

•Adverse litigation judgments or settlements resulting from legal proceedings in which we are or may be involved could expose us to monetary damages or limit our ability to operate our business.

•Any failure by 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, may damage our reputation and brand, and harm our business.

•Our use of personal information and other data subjects us to privacy laws and obligations, and our compliance with or failure to comply with such obligations could harm our business.

•Unfavorable changes or failure by us to comply with evolving internet and eCommerce regulations could substantially harm our business and operating results.

•If the use of “cookie” tracking technologies is further restricted, regulated, or blocked, or if changes in technology cause cookies to become less reliable or acceptable as a means of tracking consumer behavior, the amount or accuracy of internet user information we collect would decrease, which could harm our business and operating results.

•If we cannot successfully protect our intellectual property, our business would suffer.

•We may be accused of infringing intellectual property rights of third parties.

•Changes in U.S. tax or tariff policy regarding apparel produced in other countries could adversely affect our business.

•We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our clients would have to pay for our offering and adversely affect our operating results.

•Federal income tax reform could have unforeseen effects on our financial condition and results of operations.

•We may be subject to additional tax liabilities, which could adversely affect our operating results.

•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

•The market price of our Class A common stock may continue to 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.

•We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance long-term stockholder value. Share repurchases could also increase the volatility of the trading price of our stock and could diminish our cash reserves.

•Future sales of shares by existing stockholders could cause our stock price to 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.

•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.

•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 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.

•Future securities sales and issuances could result in significant dilution to our stockholders and impair the market price of our Class A common stock.

•If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy of our reported financial information and this may lead to a decline in our stock price.

•We may not be able to generate sufficient capital to support and grow our business, and this additional capital might not be available or may be available only by diluting existing stockholders.

•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.

	~~Page No~~.
		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:		3
Condensed Consolidated Balance Sheets ~~as of January 27, 2018 and July 29, 2017~~		3
Condensed Consolidated Statements of Operations and Comprehensive ~~Income for the three and six months ended January 27, 2018 and January 28, 2017~~Loss		4
Condensed Consolidated Statements of ~~Convertible Preferred Stock and~~ Stockholders’ Equity ~~as of January 27, 2018~~		5
Condensed Consolidated Statements of Cash ~~Flows for the six months ended January 27, 2018 and January 28, 2017~~Flow		6 7
Notes to the Condensed Consolidated Financial Statements		7 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24 29
Item 4. Controls and Procedures		24 30

PART II. OTHER INFORMATION		26 31
Item 1. Legal Proceedings		26 31
Item 1A. Risk Factors		26 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42 53
Item 3. Defaults Upon Senior Securities		42 53
Item 4. Mine Safety Disclosures		43 53
Item 5. Other Information		43 53
Item 6. Exhibits		43 54
Signatures		45 55


	January 27, 2018		July 29, 2017			January 28, 2023		July 30, 2022
Assets					Assets
Current assets:					Current assets:
Cash	$	266,374	$	110,608
Restricted cash		—		250
Cash and cash equivalents					Cash and cash equivalents	$	138,979	$	130,935
Short-term investments					Short-term investments	82,620		82,049
Inventory, net		80,094		67,592	Inventory, net	158,927		197,251
Prepaid expenses and other current assets		11,653		19,312	Prepaid expenses and other current assets	32,979		39,456
Income tax receivable					Income tax receivable	921		27,561
Total current assets		358,121		197,762	Total current assets	414,426		477,252
Long-term investments					Long-term investments	2,288		17,713
Income tax receivable, net of current portion					Income tax receivable, net of current portion	26,091		26,091
Property and equipment, net		30,875		26,733	Property and equipment, net	92,434		103,375
Deferred tax assets		14,493		19,991
Restricted cash, net of current portion		9,100		9,100
Operating lease right-of-use assets					Operating lease right-of-use assets	119,831		132,179

Other long-term assets		3,813		3,619	Other long-term assets	5,528		7,925
Total assets	$	416,402	$	257,205	Total assets	$	660,598	$	764,535
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Liabilities and Stockholders’ Equity					Liabilities and Stockholders’ Equity
Current liabilities:					Current liabilities:
Accounts payable	$	55,145	$	44,238	Accounts payable	$	104,715	$	143,934
Operating lease liabilities					Operating lease liabilities	32,413		29,014
Accrued liabilities		51,077		46,363	Accrued liabilities	91,859		94,416
Preferred stock warrant liability		—		26,679

Gift card liability		8,151		5,190	Gift card liability	12,489		10,551
Deferred revenue		10,433		7,150	Deferred revenue	13,428		14,441
Other current liabilities		4,953		4,298	Other current liabilities	6,045		3,214
Total current liabilities		129,759		133,918	Total current liabilities	260,949		295,570
Deferred rent, net of current portion		10,752		11,781
Operating lease liabilities, net of current portion					Operating lease liabilities, net of current portion	139,644		141,334

Other long-term liabilities		4,794		7,423	Other long-term liabilities	4,728		4,980
Total liabilities		145,305		153,122	Total liabilities	405,321		441,884
Commitments and contingencies (Note 6)					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:					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

Class A common stock, $0.00002 par value – 2,000,000,000 shares authorized; 89,404,556 and 86,187,911 shares issued; 87,102,415 and 86,187,911 shares outstanding					Class A common stock, $0.00002 par value – 2,000,000,000 shares authorized; 89,404,556 and 86,187,911 shares issued; 87,102,415 and 86,187,911 shares outstanding	1		1
Class B common stock, $0.00002 par value – 100,000,000 shares authorized; 25,405,020 and 25,405,020 shares issued and outstanding					Class B common stock, $0.00002 par value – 100,000,000 shares authorized; 25,405,020 and 25,405,020 shares issued and outstanding	1		1
Additional paid-in capital		219,108		27,002	Additional paid-in capital	575,129		522,658
Retained earnings		51,987		34,858
Accumulated other comprehensive loss					Accumulated other comprehensive loss	(1,883)		(3,527)
Accumulated deficit					Accumulated deficit	(287,929)		(166,440)
Treasury stock at cost (2,302,141 and 2,302,141 shares)					Treasury stock at cost (2,302,141 and 2,302,141 shares)	(30,042)		(30,042)
Total stockholders’ equity		271,097		61,861	Total stockholders’ equity	255,277		322,651
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.

Total liabilities and stockholders’ equity					Total liabilities and stockholders’ equity	$	660,598	$	764,535

	Options Outstanding
	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (in Years)		Aggregate Intrinsic Value			Options Outstanding
								(In thousands)			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
Balance – July 30, 2022										Balance – July 30, 2022	4,703,564	$	21.07	7.58	$	638

Granted		1,608,698		$	20.81					Granted	1,486,774	3.79
Exercised		(492,857	)	$	2.04					Exercised	(117,607)	1.31
Cancelled		(824,629	)	$	4.90					Cancelled	(871,361)	26.93
Balance – January 27, 2018		10,510,124		$	9.63		8.35	$	128,355
Balance – January 28, 2023										Balance – January 28, 2023	5,201,370	$	15.59	7.84	$	1,738

	Class A Common Stock			Weighted- Average Grant Date Fair Value
Unvested at July 29, 2017	$	—		$	—
							Unvested RSUs
							Class A Common Stock	Weighted- Average Grant Date Fair Value
Unvested at July 30, 2022						Unvested at July 30, 2022	19,217,622	$	16.09
Granted		426,056		$	18.87	Granted	3,038,609	4.00
Vested						Vested	(3,099,038)	14.25
Forfeited		(6,000	)	$	15.00	Forfeited	(5,411,847)	15.36
Unvested at January 27, 2018	$	420,056		$	18.92
Unvested at January 28, 2023						Unvested at January 28, 2023	13,745,346	$	14.12

☒
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐
☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware									27-5026540
(State or ~~Other Jurisdiction~~other jurisdiction of ~~Incorporation~~ incorporation or ~~Organization)~~ organization)									(I.R.S. Employer Identification No.)

	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		$	—

	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	$	—