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OFFON

STITCH FIX, INC.

(SFIX)
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STITCH FIX : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

09/27/2021 | 04:54pm EDT
You should read the following discussion and analysis of our financial condition
and results of operations together with our audited consolidated financial
statements and related notes thereto included in Part II, Item 8 of this Annual
Report on Form 10-K, or Annual Report. We use a 52- or 53-week fiscal year, with
our fiscal year ending on the Saturday that is closest to July 31 of that year.
Each fiscal year generally consists of four 13-week fiscal quarters, with each
fiscal quarter ending on the Saturday that is closest to the last day of the
last month of the quarter. The fiscal years ended July 31, 2021 ("2021") and
August 1, 2020 ("2020") consisted of 52 weeks. The fiscal year ended August 3,
2019 ("2019") consisted of 53 weeks. Throughout this Annual Report, all
references to quarters and years are to our fiscal quarters and fiscal years
unless otherwise noted.
In addition, this discussion contains forward-looking statements that reflect
our plans, estimates, and beliefs, and involve risks and uncertainties. Our
actual results and the timing of certain events could differ materially from
those anticipated in or implied by these forward-looking statements as a result
of several factors, including those discussed in the section titled "Risk
Factors" included under Part I, Item 1A and elsewhere in this Annual Report. See
"Special Note Regarding Forward-Looking Statements" in this Annual Report.
A discussion regarding our financial condition and results of operation for the
fiscal year ended July 31, 2021, compared to the fiscal year ended August 1,
2020, is presented below. A discussion regarding our financial condition and
results of operations for fiscal year ended August 1, 2020, compared to the
fiscal year ended August 3, 2019, can be found under Item 7 in our Annual Report
on Form 10-K for the fiscal year ended August 1, 2020, filed with the SEC on
September 25, 2020, which is available on the SEC's website at www.sec.gov and
on the SEC Filings section of the Investor Relations section of our website at:
https://investors.stitchfix.com.
Overview
Since our founding in 2011, we have helped millions of women, men, and kids
discover and buy what they love through personalized shipments of apparel,
shoes, and accessories. Currently, clients can engage with us in one of two ways
that, combined, form an ecosystem of personalized experiences across styling,
shopping and inspiration: (1) by receiving a personalized shipment of apparel
informed by our algorithms and 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"). For a Fix, clients
can choose to schedule automatic shipments or order 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, 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.
For the fiscal year ended July 31, 2021, we reported $2.1 billion of revenue
representing year-over-year growth of 22.8% from the fiscal year ended August 1,
2020. As of July 31, 2021, and August 1, 2020, we had approximately 4,165,000
and 3,522,000 active clients, respectively, representing year-over-year growth
of 18.3%.
Net loss for the fiscal year ended July 31, 2021, was $8.9 million, compared to
net loss of $67.1 million for the fiscal year ended August 1, 2020. For more
information on the components of net income (loss), refer to the section titled
"Results of Operations" below.
COVID-19 Update
There continues to be uncertainty around the COVID-19 pandemic as the Delta
variant of COVID-19, which appears to be the most transmissible and contagious
variant to date, has caused a surge in COVID-19 cases globally. The full impact
of the COVID-19 crisis on our business will depend on factors such as the length
of time of the pandemic; how federal, state and local governments are
responding, especially in light of the recent surge in cases due to the Delta
variant; vaccination rates among the population; the efficacy of the COVID-19
vaccines against the Delta variant and other variants as they emerge; the
longer-term impact of the crisis on the economy and consumer behavior; and the
effect on our clients, employees, vendors, and other partners.
During this time, we are focused on protecting the health and safety of our
employees while seeking to continue operating our business responsibly.
In the third quarter of fiscal 2020, we temporarily closed three of our
fulfillment centers to assess our ability to operate under shelter-in-place
orders and develop protocols to protect the welfare of our fulfillment center
employees. Those fulfillment centers reopened shortly thereafter, and all of our
fulfillment centers are currently operating with safety measures in place. We
have also experienced smaller, intermittent interruptions at our fulfillment
centers in connection with temporary closures of certain fulfillment centers for
part of a work day or for a full day. While we have only experienced
intermittent and temporary closures since the third quarter of 2020, we have
recently begun to experience an increase of COVID-19 cases in our fulfillment
centers in connection with the surge of cases caused by the Delta variant. This
recent increase in cases has affected capacity at our fulfillment centers, which
could affect shipments to clients and inventory management. Additionally, we
have experienced difficulty hiring employees in our fulfillment centers, which
we attribute to COVID-19 concerns and to increased competition and rising wages
for eCommerce fulfillment center workers as eCommerce demand accelerates.

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While we expect many employees to return to our offices later this fiscal year,
the timing of such a return has been affected by the Delta variant and related
surge in COVID-19 cases and could be further effected by this resurgence of
COVID-19 or additional resurgences. When we return to our office, we expect many
employees to continue to work in a remote capacity or a hybrid of in-person and
remote work. These changes to our operations going forward present additional
challenges and increased costs to ensure our offices are safe and functional for
hybrid offices that enable effective collaboration of both remote and in-person
colleagues.
The effect of the COVID-19 pandemic on the broader economy and consumer behavior
continues to evolve. During the latter half of our third fiscal quarter of 2020,
we did experience lower demand, which negatively affected net revenue per active
client, and which we believe was largely attributable to consumer reactions as
the COVID-19 crisis escalated during March and April of 2020. Despite the
continuing impact of COVID-19 on the overall economy, we saw strong retention
from our auto-ship clients and growth in new client demand from increases in
first Fix shipments in the second half of fiscal 2020. We continued to see
growth in new client demand and strong auto-ship retention during fiscal 2021
and believe we are benefiting from the dislocation in the retail apparel market
that is resulting from the COVID-19 pandemic. For further discussion of the
COVID-19 related risks facing our business, refer to the "Risk Factors" section
included in Part I, Item 1A.
Although we are experiencing unprecedented challenges during this global health
crisis, we continue to focus on our long-term growth and strategies that capture
the changing ways people shop. While we cannot reasonably estimate the long-term
impacts of the COVID-19 pandemic, we believe that our business model positions
us to emerge from this crisis with a structural advantage and new opportunities
to increase market share.
Key Financial and Operating Metrics
Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting
principles in the United States ("GAAP"). However, management believes that
certain non-GAAP financial measures provide users of our financial information
with additional useful information in evaluating our performance. We believe
that adjusted EBITDA is frequently used by investors and securities analysts in
their evaluations of companies, and that 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.
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:
•adjusted EBITDA excludes interest (income) expense and other (income) expense,
net, as these items are not components of our core business;
•adjusted EBITDA does not reflect our tax provision (benefit), which 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
•free cash flow does not represent the total residual cash flow available for
discretionary purposes and does not reflect our future contractual commitments.


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Adjusted EBITDA
We define adjusted EBITDA as net income (loss) excluding interest (income)
expense, other (income) expense, net, provision (benefit) for income taxes,
depreciation and amortization, and stock-based compensation expense. The
following table presents a reconciliation of net income (loss), the most
comparable GAAP financial measure, to adjusted EBITDA for each of the periods
presented:
                                                                               For the Fiscal Year Ended
                                                                                                               August 3,
(in thousands)                                                 July 31, 2021           August 1, 2020             2019
Adjusted EBITDA:
Net income (loss)                                            $      

(8,876) $ (67,117) $ 36,881 Add (deduct): Interest (income) expense

                                            (2,610)                  (5,535)            (5,791)
Other (income) expense, net                                             366                    1,593             (1,535)
Provision (benefit) for income taxes                                (52,241)                  19,395             (6,060)
Depreciation and amortization                                        27,610                   22,562             16,095
Stock-based compensation expense                                    100,696                   67,530             35,256
Adjusted EBITDA                                              $       64,945          $        38,428          $  74,846


Free Cash Flow
We define free cash flow as cash flows provided by (used in) operating
activities reduced by purchases of property and equipment that are included in
cash flows used in investing activities. The following table presents a
reconciliation of cash flows provided by (used in) operating activities, the
most comparable GAAP financial measure, to free cash flow for each of the
periods presented:
                                                                                    For the Fiscal Year Ended
(in thousands)                                                   July 31, 2021           August 1, 2020           August 3, 2019
Free cash flow reconciliation:
Cash flows provided by (used in) operating activities          $      (15,675)         $        42,877          $        78,594
Deduct:
Purchases of property and equipment                                   (35,256)                 (30,207)                 (30,825)
Free cash flow                                                 $      

(50,931) $ 12,670 $ 47,769 Cash flows used in investing activities

                        $       

39,093 $ (70,461) $ (225,184) Cash flows provided by (used in) financing activities $ (38,885) $ (1,435) $ 6,945



Operating Metrics
                                       July 31, 2021       August 1, 2020       August 3, 2019
Active clients (in thousands)                  4,165                3,522                3,236
Net revenue per active client(1)      $          505      $           486      $           488




(1) Fiscal year 2019 was a 53-week year, with the extra week occurring in the
quarter ended August 3, 2019.
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 using our direct-buy functionality,
"Freestyle," in the preceding 52 weeks, measured as of the last 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 4,165,000 and 3,522,000 active clients as of July 31, 2021, and August 1,
2020, respectively, representing year-over-year growth of 18.3%.
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 $505 and $486 as of July 31, 2021, and August 1, 2020,
respectively, representing a year-over-year increase of 3.9%.


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Factors Affecting Our Performance
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 availability of merchandise at time of
purchase. We incur inventory write-offs and changes in inventory reserves that
impact our gross margins.
Our inventory investments will fluctuate with the needs of our business. For
example, in the first half of fiscal 2020, we purchased inventory based on our
pre-COVID-19 pandemic projections, which resulted in excess inventory levels and
higher inventory reserves during our third fiscal quarter. As noted above, in
March 2020, we temporarily closed three of our fulfillment centers resulting in
significantly less capacity in our warehouses and in turn delayed Fix shipments
and a substantial backlog, delayed return processing, extended wait times for
our clients, and significant inventory management challenges. During the fourth
quarter of fiscal 2020, we increased capacity at our fulfillment centers and we
experienced an uptick in client demand, both of which contributed to healthier
inventory levels and lower inventory reserves than in our third fiscal quarter.
During fiscal 2021, we increased our inventory levels to expand our inventory
assortment and support our growth and future growth projections. If we fail to
effectively predict client preferences or meet future sales projections, our
inventory reserves, and potentially our inventory write-offs, will increase.
Additionally, capacity constraints at our fulfillment centers due to hiring
challenges, increased cases of COVID-19 among fulfillment center employees, or
other reasons, will affect our ability to successfully manage our inventory.
Furthermore, entering new locations, expanding to new categories, offering new
functionalities such as Freestyle, or adding new fulfillment centers will all
require additional investments in inventory.
Client Acquisition and Engagement
To grow our business, we must continue to acquire clients and successfully
engage them. We believe that implementing broad-based marketing strategies that
increase our brand awareness has the potential to strengthen Stitch Fix as a
national consumer brand, help us acquire new clients, and drive revenue growth.
As our business has achieved a greater scale and we are able to support a large
and growing client base, we have increased our investments in marketing to take
advantage of more marketing channels to efficiently acquire clients. 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. While we expect to continue to make
significant marketing investments to grow our business in the long run, our
marketing expenses may vary from period to period.
The largest component of our marketing spend is advertising, which was $174.7
million for the fiscal year ended July 31, 2021, compared to $167.8 million
for the fiscal year ended August 1, 2020.
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. For example, in July 2018 we launched Stitch Fix Kids,
expanding our client and vendor base, and in May 2019, we launched our services
in the UK, expanding our geographic scope. In June 2019, we launched Direct Buy,
predecessor to Freestyle, in the United States which provides clients the
flexibility to purchase items outside of a Fix.
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. For
example, in November 2020, we entered into an agreement to lease approximately
700,000 square feet of space to be used as a new fulfillment center in Salt Lake
City, Utah, and in May 2021, we closed our South San Francisco fulfillment
center, which was the smallest facility in our network. 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.
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, Men's, Kids, Petite, Maternity, and Plus. We 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.

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While changes in our merchandise mix have not caused significant fluctuations in
our gross margin to date, categories, brands, product types, and price points do
have a range of margin profiles. For example, our Exclusive Brands have
generally contributed higher margins, shoes have generally contributed lower
margins, and newer categories tend to initially have lower margins. Shifts in
merchandise mix driven by client demand may result in fluctuations in our gross
margin from period to period.
Components of Results of Operations
Revenue
We generate revenue from the sale of merchandise, either through our Fix or
Freestyle offerings. With our Fix offering, we charge a nonrefundable upfront
fee, referred to as a "styling fee," that is credited towards any merchandise
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 this Annual
Report. We also recognize revenue resulting from estimated breakage income on
gift cards. We expect our revenue to increase in absolute dollars as we grow our
business, although our revenue growth rate may slow in future periods.
Cost of Goods Sold
Cost of goods sold consists of the costs of merchandise, expenses for inbound
freight and shipping to and from clients, inventory write-offs and changes in
our inventory reserve, payment processing fees, and packaging materials 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 consist primarily of compensation
and benefits costs, including stock-based compensation expense, for our
employees including our stylists, fulfillment center operations, data analytics,
merchandising, engineering, marketing, client experience, and corporate
personnel. Selling, general, and administrative expenses also include marketing
and advertising costs, third-party logistics costs, facility costs for our
fulfillment centers and offices, professional service fees, information
technology costs, and depreciation and amortization expense. We expect our
selling, general, and administrative expenses to increase in absolute dollars
and to fluctuate as a percentage of revenue due to the anticipated growth of our
business. Our classification of selling, general, and administrative expenses
may vary from other companies in our industry and may not be comparable.
Interest Income
Interest income is generated from our cash, cash equivalents, and investments in
available-for-sale securities.
Provision (Benefit) for Income Taxes
Our provision (benefit) for income taxes consists of an estimate of federal,
state, and international income taxes based on enacted federal, state, and
international tax rates, as adjusted for allowable credits, deductions,
uncertain tax positions, and changes in the valuation of our net federal and
state deferred tax assets.

                                       40
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Results of Operations
Comparison of the Fiscal Years Ended July 31, 2021, August 1, 2020, and
August 3, 2019
The following table sets forth our results of operations for the periods
indicated:
                                                             For the Fiscal Year Ended (1)                              2021 vs. 2020                2020 vs. 2019
(in thousands)                              July 31, 2021           August 1, 2020           August 3, 2019                % Change                    % Change
Revenue, net                              $    2,101,258          $     1,711,733          $     1,577,558                         22.8  %                      8.5  %
Cost of goods sold                             1,153,622                  957,523                  874,429                         20.5  %                      9.5  %
Gross profit                                     947,636                  754,210                  703,129                         25.6  %                      7.3  %
Selling, general, and
administrative expenses                        1,010,997                  805,874                  679,634                         25.5  %                     18.6  %
Operating income (loss)                          (63,361)                 (51,664)                  23,495                         22.6  %            

(319.9) %


Interest (income) expense                         (2,610)                  (5,535)                  (5,791)                       (52.8) %                     (4.4) %
Other (income) expense, net                          366                    1,593                   (1,535)                       (77.0) %                   (203.8) %
Income (loss) before income taxes                (61,117)                 (47,722)                  30,821                         28.1  %                   (254.8) %
Provision (benefit) for income
taxes                                            (52,241)         $        19,395          $        (6,060)                      (369.4) %                   (420.0) %
Net income (loss)                         $       (8,876)         $       (67,117)         $        36,881                        (86.8) %                   (282.0) %



(1)Fiscal 2021 and 2020 included 52 weeks. Fiscal 2019 was a 53-week year.

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

For the Fiscal Year Ended

                                                                July 31, 2021          August 1, 2020         August 3, 2019
Revenue, net                                                           100.0  %               100.0  %               100.0  %
Cost of goods sold                                                      54.9  %                55.9  %                55.4  %
Gross margin                                                            45.1  %                44.1  %                44.6  %
Selling, general, and administrative expenses                           48.1  %                47.1  %                43.1  %
Operating income (loss)                                                 (3.0) %                (3.0) %                 1.5  %

Interest (income) expense                                               (0.1) %                (0.3) %                (0.4) %
Other (income) expense, net                                                -  %                 0.1  %                (0.1) %
Income (loss) before income taxes                                       (2.9) %                (2.8) %                 2.0  %
Provision (benefit) for income taxes                                    (2.5) %                 1.1  %                (0.3) %
Net income (loss)                                                       (0.4) %                (3.9) %                 2.3  %


Revenue and Gross Margin
Revenue in the fiscal year ended July 31, 2021 increased by $389.5 million, or
22.8%, from revenue in the fiscal year ended August 1, 2020. The increase in
revenue was primarily attributable to a 18.3% increase in active clients from
August 1, 2020 to July 31, 2021, which drove increased sales of merchandise.
Gross margin for the fiscal year ended July 31, 2021, increased by 1.0% compared
with the fiscal year ended August 1, 2020. The increase was primarily
attributable to improved product margins as we strengthened partnerships with
our vendors, lower packaging costs, and improved inventory reserves year over
year. The increase in gross margin was partially offset by increased shipping
expenses largely due to higher rates with our carriers.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses in the fiscal year ended July 31,
2021, increased by $205.1 million, compared with the fiscal year ended August 1,
2020. As a percentage of revenue, selling, general, and administrative expenses
increased to 48.1% for the fiscal year ended July 31, 2021, compared with 47.1%
for the fiscal year ended August 1, 2020. The increase was primarily related to
higher compensation and benefits expense including an increase in hourly wages
for our full-time U.S. warehouse associates. Our average full-time hourly wage
for our U.S. warehouse employees is over $17 per hour and all full-time U.S.
warehouse employees start with a minimum of $16 per hour.

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Provision for Income Taxes
The following table summarizes our effective tax rate for the periods presented:
                                                          For the Fiscal Year Ended
(in thousands)                             July 31, 2021       August 1, 2020       August 3, 2019
Income (loss) before income taxes         $     (61,117)      $      (47,722)      $      30,821
Provision (benefit) for income taxes            (52,241)              19,395              (6,060)
Effective tax rate                                 85.5  %             (40.6) %            (19.7) %


We are subject to income taxes in the United States and the UK. Our effective
tax rate and provision for income taxes increased from the fiscal year ended
August 1, 2020, to the fiscal year ended July 31, 2021, primarily due to the net
operating loss carryback provisions of the CARES Act and excess tax benefits
from stock-based compensation, partially offset by the change in valuation
allowance and certain nondeductible expenses.
Liquidity and Capital Resources
Sources of Liquidity
Our principal sources of liquidity since inception have been our cash flows from
operations, as well as the net proceeds we received through private sales of
equity securities and our IPO.
As of July 31, 2021, we had $129.8 million of cash and cash equivalents and
$160.6 million of investments. Our investment balance includes $101.5 million of
short-term investments with contractual maturities of 12 months or less as
of July 31, 2021.
In June 2020, we entered into a $90.0 million credit agreement (the "2020 Credit
Agreement") with Silicon Valley Bank and other lenders. On June 2, 2021, we
entered into a $100.0 million amended and restated credit agreement (the
"Amended Credit Agreement") with Silicon Valley Bank and other lenders, which
replaced the 2020 Credit Agreement. The Amended Credit Agreement includes a
letter of credit sub-facility of $30.0 million and a swingline sub-facility of
up to $50.0 million. As of July 31, 2021, we did not have any borrowings
outstanding under the Credit Agreement.
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 7 of the Notes to Consolidated Financial Statements included
in this Annual Report.
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.
We believe our existing cash, cash equivalents, investment balances, and 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.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in
thousands):
                                                                                  For the Fiscal Year Ended
(in thousands)                                                 July 31, 2021           August 1, 2020           August 3, 2019

Net cash provided by (used in) operating activities $ (15,675) $ 42,877 $ 78,594 Net cash provided by (used in) investing activities

                  39,093                  (70,461)                (225,184)
Net cash provided by (used in) financing activities                 (38,885)                  (1,435)                   6,945
Net increase (decrease) in cash, cash equivalents, and
restricted cash                                              $      (15,467)         $       (29,019)         $      (139,645)



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Cash provided by operating activities
During the fiscal year ended July 31, 2021, cash used in operating activities
was $15.7 million, which consisted of a net loss of $8.9 million, adjusted by
non-cash charges of $135.9 million and a change of $142.7 million in our net
operating assets and liabilities. The non-cash charges were largely driven by
$100.7 million of stock-based compensation expense, and $29.9 million of
depreciation, amortization, and accretion. The change in our net operating
assets and liabilities was primarily due to an increase of $96.1 million in our
inventory balance due to increased inventory purchases to support growth and
selection, and a change of $31.7 million in income tax receivables primarily due
to the net operating loss carryback provisions of the CARES Act.
During the fiscal year ended August 1, 2020, cash provided by operating
activities was $42.9 million, which consisted of a net loss of $67.1 million,
adjusted by non-cash charges of $122.7 million and a change of $12.7 million in
our net operating assets and liabilities. The non-cash charges were largely
driven by $67.5 million of stock-based compensation expense, a $43.2 million
valuation allowance on our deferred tax assets, and $22.6 million of
depreciation, amortization, and accretion, partially offset by a $20.3 million
change in deferred tax expense. The change in our net operating assets and
liabilities was primarily due to an increase of $15.2 million in our inventory
balance due to increased inventory purchases to support our growth and an
increase of $6.7 million in our prepaid expenses and other assets balance due to
timing of payments made in the period. This activity was substantially offset by
an increase of $8.3 million in accrued expenses related to increased advertising
activity during fiscal 2020 and expenses related to our California styling
organization restructuring.
Cash used in investing activities
During the fiscal year ended July 31, 2021, cash provided by investing
activities was $39.1 million, primarily related to purchases, sales, and
maturities of $74.4 million in highly rated available-for-sale securities,
partially offset by $35.3 million in purchases of property and equipment.
During the fiscal year ended August 1, 2020, cash used in investing activities
was $70.5 million, primarily related to our net investment of $40.3 million in
highly rated available-for-sale securities and $30.2 million purchases of
property and equipment.
Cash provided by (used in) financing activities
During the fiscal year ended July 31, 2021, cash used in financing activities
was $38.9 million, which was primarily due to payments for tax withholding
related to vesting of restricted stock units of $64.3 million, partially offset
by proceeds from the exercise of stock options of $25.9 million.
During the fiscal year ended August 1, 2020, cash used in financing activities
was $1.4 million, which was primarily due to payments for tax withholding
related to vesting of restricted stock units, substantially offset by proceeds
from the exercise of stock options
Contractual Obligations and Other Commitments
Our most significant contractual obligations relate to purchase commitments on
inventory and operating lease obligations on our fulfillment centers and
corporate offices. As of July 31, 2021, we had $397.5 million of enforceable and
legally binding inventory purchase commitments predominantly due within one
year. For information on our contractual obligations for operating leases,
please see "Leases" in Note 4 of the Notes to Consolidated Financial Statements
included in this Annual Report.
In November 2020, we entered into an agreement to lease approximately 700,000
square feet of space to be used as a fulfillment center in Salt Lake City, Utah.
We expect to classify this lease as an operating lease, with a commencement date
within the first quarter of fiscal 2022. The lease expires in 2031 and we expect
to record fixed operating lease costs of approximately $35.6 million over the
life of the lease.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The
preparation of our financial statements requires us to make assumptions and
estimates about future events and apply judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and the related
disclosures. We base our estimates on historical experience and other
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates.
The critical accounting policies, estimates, and judgments that we believe to
have the most significant impacts to our consolidated financial statements are
described below.
Inventory
Inventory consists of finished goods, which are recorded at the lower of cost or
net realizable value using the specific identification method. We establish a
reserve for excess and slow-moving inventory we expect to write off based on
historical trends. In addition, we estimate and accrue shrinkage as a percentage
of inventory out to the client and damaged items at 100% of cost. Inventory
shrinkage and damage estimates are made to reduce the inventory value for lost,
stolen, or damaged items. If actual experience differs significantly from our
estimates due to changes in client merchandise preferences, client demand, or
economic conditions, our operating results could be adversely affected.

                                       43
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We have not made any material changes to our assumptions included in the
calculations of the lower of cost or net realizable value reserves during the
fiscal year ended July 31, 2021.
Stock-Based Compensation
We grant stock options and restricted stock units (RSUs) to our employees and
members of our board of directors, and recognize stock-based compensation
expense based on the fair value of such awards at grant date. We estimate the
fair value of stock options using the Black-Scholes option-pricing model. This
model requires us to use certain estimates and assumptions such as:
•Expected volatility of our common stock-based on the volatility of comparable
publicly traded companies;
•Expected term of our stock options-as we do not have sufficient historical
experience for determining the expected term of the stock option awards granted,
we base our expected term on the simplified method, generally calculated as the
mid-point between the vesting date and the end of the contractual term;
•Expected dividend yield-as we have not paid and do not anticipate paying
dividends on our common stock, our expected dividend yield is 0%; and
•Risk-free interest rates-based on the U.S. Treasury zero coupon notes in effect
at the grant date with maturities equal to the expected terms of the options
granted.
We record stock-based compensation expense net of estimated forfeitures so that
expense is recorded for only the stock options and RSUs that we expect to vest.
We estimate forfeitures based on our historical forfeiture of stock options and
RSUs adjusted to reflect future changes in facts and circumstances, if any. We
will revise our estimated forfeiture rate if actual forfeitures differ from our
initial estimates.
We will continue to use judgment in evaluating assumptions related to our
stock-based compensation expense. As we continue to accumulate data related to
our common stock, we may have refinements to our estimates and assumptions which
could impact our future stock-based compensation expense. We have not made any
material changes to our assumptions and estimates related to our stock-based
compensation during the fiscal year ended July 31, 2021.
Income Taxes
We are subject to income taxes in the United States and the UK. We compute our
provision for income taxes using the asset and liability method, under which
deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax
bases of assets and liabilities and for tax credit carryforwards. Deferred tax
assets and liabilities are measured using the currently enacted tax rates that
are expected to apply to taxable income for the years in which those tax assets
and liabilities are expected to be realized or settled.
Deferred tax assets are evaluated for future realization and reduced by a
valuation allowance to the amount that is more likely than not to be realized.
We consider many factors when assessing the likelihood of future realization,
including our recent cumulative loss, earnings expectations in earlier future
years, unsettled economic disruption of the COVID-19 pandemic, and other
relevant factors.
Significant judgment is required in determining our uncertain tax positions. We
continuously review issues raised in connection with all ongoing examinations
and open tax years to evaluate the adequacy of our tax liabilities. We evaluate
uncertain tax positions under a two-step approach. The first step is to evaluate
the uncertain tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained upon examination based on its technical merits. The second
step is, for those positions that meet the recognition criteria, to measure the
tax benefit as the largest amount that is more than 50% likely of being
realized. We believe our recorded tax liabilities are adequate to cover all open
tax years based on our assessment. This assessment relies on estimates and
assumptions and involves significant judgments about future events. To the
extent that our view as to the outcome of these matters changes, we will adjust
income tax expense in the period in which such determination is made. We
classify interest and penalties related to income taxes as income tax expense.
Revenue Recognition
While our revenue recognition does not involve significant judgment, it
represents an important accounting policy. Revenue is recognized net of sales
taxes, discounts, and estimated refunds. For a Fix, we generate revenue when
clients purchase merchandise, at which point we apply the nonrefundable upfront
styling fee against the price of merchandise purchased. If none of the items
within the Fix are purchased, we recognize the nonrefundable upfront styling fee
as revenue at that time. For Style Pass clients, we recognize revenue at the
earlier of the time the annual Style Pass fee is applied against the price of
merchandise purchased or the expiry of the annual period. For Freestyle
transactions, we generate revenue when the item is shipped to the client. 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. Sales tax collected from clients is not considered revenue and is
included in accrued liabilities until remitted to the taxing authorities.
Discounts are recorded as a reduction to revenue when merchandise is purchased.
We record a refund reserve based on our historical refund patterns. The impact
of our refund reserve on our operating results may fluctuate based on changes in
client refund activity over time.

                                       44
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We sell gift cards to clients and establish a liability based on the face value
of such gift cards. The liability is relieved and we recognize revenue upon
redemption by our clients. 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.
We have not made any material changes to our revenue recognition accounting
policies during the fiscal year ended July 31, 2021.
Recent Accounting Pronouncements
For recent accounting pronouncements, please see "Significant Accounting
Policies" in Note 2 of the Notes to Consolidated Financial Statements included
in this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are primarily exposed to market risks through interest rate risk on our
investments. As of July 31, 2021, we had $160.6 million in highly rated
investments accounted for as available-for-sale securities, which are presented
on our balance sheet at their fair market value. These interest-earning
instruments carry a degree of interest rate risk; however, a hypothetical 10%
change in interest rates during any of the periods presented would not have had
a material impact on our consolidated financial statements.
Foreign Currency Risk
As of July 31, 2021, our revenue was earned in U.S. dollars and British pound
sterling. Our expansion into the UK exposes us to fluctuations in 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 fiscal year ended July 31, 2021, a hypothetical 10% increase or decrease
in current exchange rates would not have had a material impact on our
consolidated financial results.
Inflation Risk
We do not believe that inflation has had a material effect on our business,
financial condition, or results of operations. Nonetheless, if our costs were to
become subject to significant inflationary pressures, 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.

                                       45

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