Stitch Fix, Inc. (SFIX) Q2 2019 Earnings Conference Call Transcript

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Stitch Fix, Inc. (NASDAQ: SFIX) Q2 2019 Earnings Conference CallMarch 11, 2019 5:00 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone. Welcome to the Stitch Fix second-quarter 2019 earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to David Pearce, head of investor relations.

Please go ahead.

David Pearce -- Head of Investor Relations

Thank you for joining us on the call today to discuss the results for our second quarter of fiscal 2019. Joining me on today's call are Katrina Lake, founder and CEO of Stitch Fix; Mike Smith, president and COO; and Paul Yee, our CFO. We have posted complete Q2 financial results in our shareholder letter on the IR section of our website, investors.stitchfix.com. A link to the webcast of today's conference call can also be found on our site.

We would like to remind everyone that we will be making forward-looking statements on this call, which involve risks and uncertainties. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please review our filings with the SEC for a discussion of the factors that could cause our results to differ.

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Also, note that the forward-looking statements on this call are based on the information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. During this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our IR website.

These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being webcast on our IR website, and a replay of this call will be available on the website shortly. I'd now like to turn the call over to Katrina.

Katrina Lake -- Founder and Chief Executive Officer

Thanks, David, and thank you all for joining us. After the market closed today, we issued our quarterly shareholder letter with more details on our results, which I encourage you to read. I'm excited to be back from parental leave, with a little less sleep but greater perspective. I'm very happy with the results we are reporting today and the great future we have ahead.

Especially during a time when the headlines are dominated by store closures and retail challenges, We are excited to continue our positive momentum and capitalize on the market share opportunity ahead. I'll take a moment to highlight our results from the second quarter and provide more color on how we manage our business to continue to drive this sustainable long-term growth. In the second quarter, we generated net revenue of $370 million, exceeding our guidance and representing 25% year-over-year growth. We delivered $12 million in net income and $19.2 million in adjusted EBITDA, which also exceeded our guidance.

We grew our active client count to three million as of January 26, 2019, an 18% increase year over year. These results demonstrate our continued commitment to delivering long-term growth while making significant investments in future categories and capabilities. I want to open with aligning around what we value most, client relationships. The heart and soul of our business are the intimate real connections we make with our clients that enable us to serve them over a long period of time.

Stitch Fix is a successful business because of these relationships, and they drive significant long-term value for our business and our shareholders. Many of our clients spend hundreds of dollars with us over the course of many months, and some thousands over the course of many years. Our primary focus is on strengthening these relationships, driving higher engagement and, ultimately, translating that to more valuable client. In practice, the decisions we make to drive value in our client base involve an interplay between our inventory assortment, fixed delivery wait times and marketing mix, all of which we manage very intentionally.

For example, at any given time, different clients may find different fixed delivery dates available to them. These dates are a reflection of our efforts to align our inventory assortment with clients' preferences. By using wait times as a lever, we could improve the success of a particular fix but, more importantly, enhance client value over time. Marketing is another lever we have available to us.

In the past, for example, we've chosen to market more aggressively with men or less with plus-sized clients, depending on our available inventory in each product group. Our direct response marketing provides us with the flexibility to manage growth and ensure we can deliver a positive experience to all clients. Putting this framework into context, in Q2, we had higher-than-anticipated demand from existing clients. This was evidenced by our year-to-date repeat rate of 88%, which we define as the percentage of net revenue, excluding certain items in that period recognized from clients who have ever previously checked out of fixed.

As a result of this increased demand, repeat clients consume more of our inventory in the quarter. To ensure we had the right inventory on hand to serve new clients well, we shifted some of our Q2 marketing dollars to the back half of the year. This positions us well to drive client demand in the second half of 2019 and enabled us to prioritize driving client value, evidenced by our third consecutive quarter of increased revenue per active client growth. In addition, this enabled us to support more revenue in the back half of the year, which Paul will share more on in a few minutes.

Before I hand it over to Mike, I'd like to discuss our first integrated brand marketing campaign, which we launched in February shortly after our Q2 closed. Historically, our marketing efforts have largely been focused on a more utilitarian approach of describing how our service works. This has been a great demand-generating strategy, but we see a lot of potential in adding brand as another marketing channel to diversify our mix and reinforce why our brand matters. Few companies have as deep a connection with their clients as we do.

Our clients bring us into their hearts and homes and share the details of their lives with us. These client relationships are at the core of Stitch Fix. We are a service that listens, takes the time to understand each of our clients as individuals and creates an experience that is unique, relevant and fun. Each client's personal style is personal to us too.

One of the most important goals of our brand campaign is to increase understanding of the brand. Something we learned in our research is that even when there is an awareness of Stitch Fix, there isn't always an understanding of the full breadth of our offerings. This has led us to creatives that really showcases diverse styles, sizes and occasions and, of course, all of our offerings: men, kids and women. By increasing understanding of our brand, we hope to improve conversion if clients are presented with our messaging, something that we believe will benefit all of our marketing channels.

We also hope to grow understanding of what makes us special. The empathy and personalized nature of our business are so unique in the world of retail. We believe that they inspire confidence in our clients and create meaningful connections that enable us to serve clients well and drive client value. For this reason, the central message of our first integrative brand campaign is, everyone deserves to be seen.

The timing and theme of this campaign is very intentional and grounded in client insights. We chose to launch this campaign by anchoring to a cultural moment like the Oscars, which encompasses both personal style and confidence. This allowed us to benefit from the significant impressions associated with the event, pre, during and post, greatly amplifying the value of our investment. While you'll see the financial impact of these integrated brand investments in Q3, we expect client growth associated with this spend to materialize over a longer period of time.

We'll be measuring brand awareness, understanding and affinity over that time. In addition to attracting new clients to the Stitch Fix family, we are also excited about the impact of this work on existing clients. Our past TV advertising has shown that for every two new clients we engage, we also reengage one existing client. With these and many other proof points, we're able to invest with a high level of conviction and brand advertising.

This campaign is running across multiple channels seeking to reengage existing clients and build awareness among new clients who weren't previously aware of Stitch Fix. Brand marketing is an important addition to our marketing strategy, giving even more people a reason to engage with Stitch Fix. We're excited about the opportunity to build an emotional connection with existing clients and prospective clients alike and look forward to sharing more in the quarters ahead. Now I'll turn it over to Mike who will walk you through two recent initiatives.

Mike Smith -- President and Chief Operating Officer

Thanks, Katrina, and hello to everyone joining us on today's call. I'd like to take a moment to provide more detail on a couple initiatives that demonstrate our continuing efforts to enhance the client experience, as well as expand our market opportunity. One of our key strengths is our ability to use data science to match our inventory to millions of clients' individualized preferences. As we continue to grow, we're focused on improving this matchmaking capability, which we believe is a competitive advantage and fundamental to driving compelling client experiences.

In Q2, we launched a new inventory optimization algorithm to more effectively allocate inventory across our client universe. Historically, we optimized inventory allocation one client at a time, based on which client was first in the queue. Our new algorithm considers the preferences of a broader universe of clients in the queue to determine which inventory should be made available to stylists as they style for each client. In doing so, it ensures our stylists have the right inventory to meet each client's style preferences regardless of the client's position in our styling queue.

Early results from this new algorithm demonstrated increases in client satisfaction, the number of items purchased for fixed and average order value. We believe this algorithm will enable us to more effectively serve our growing client base over time while also driving efficiencies across styling, inventory management and operation. I'd like to provide you with a quick update on the status of our U.K. launch.

We've established our local presence by hiring a U.K. team and investing in on the ground operations. We've also received strong interest from local brands to work with us to create a compelling assortment for U.K. men and women.

In addition, we're leveraging our existing data science capabilities to serve the unique preferences of our U.K. clients. As we prepare to launch in fiscal Q4, we look forward to capitalizing on our expanded U.S. and U.K.

market opportunity of over $430 billion. I will now turn the call over to Paul who will discuss our financial performance and outlook.

Paul Yee -- Chief Financial Officer

Thanks, Mike. Our Q2 results demonstrate our continued commitment to growing our business profitably. We drove revenue growth and efficiencies year over year, which together enable us to fund strategic investments for the future. With strength in both our top and bottom lines in Q2, we're well on the path to achieve the financial objectives we set for fiscal 2019.

Looking ahead, as Katrina and Mike mentioned, we are executing on our planned investments in our brand campaign and in the U.K. Based on continued client demand momentum, we're raising our full-year guidance for both net revenue and adjusted EBITDA. Before providing details on this outlook, allow me to provide Q2 highlights. Our net revenue was $370 million, representing 25% growth year over year, exceeding our guidance of 22% to 24% growth.

These results reflected healthy year-over-year growth in women's, continued scaling of men's and ramping of our nascent kid's category. Active clients grew 18% year over year. With our recent inventory investments, we believe we're well-positioned to support increased demand in the second half of 2019, which I'll discuss in a moment. Net revenue per active client grew 6% year over year, representing our third consecutive quarter growth, even with the continued penetration and men's the kid's.

These gains reflect the continued strong health of our women's category, as well as our ongoing focus on attracting long-term quality clients. Q2 gross margin was 44.1%, 110 basis points higher than last year's Q2. With higher sell-through rates of product, we had both lower inventory reserve expense and lower clearance activity year over year. Note we expanded gross margin even as we grew the mix of men's and kid's.

Advertising was 6.5% of net revenue, below the 6.7% in Q2 '18, reflecting our planned pullback and ad spend during the holidays. In addition, given higher-than-anticipated levels of demand from existing clients, we decided to further curb our paid marketing, contributing to EBITDA upside in the quarter. We're investing this marketing spend instead in the second half of the year. Other SG&A, excluding advertising, was 33.4% of net revenue in the quarter, compared to 31.1% in last year's Q2.

These results reflect the build out of U.K. capabilities, as well as payroll and SBC investments to track and retain top talent. Adjusted EBITDA was $19.2 million or 5.2% of net revenue. This topped our guidance of $8 to $12 million, driven by higher net revenue and gross margin, as well as lower advertising and operating expense we've chosen to redeploy in later quarters.

Q2 net income was $12.0 million, and diluted EPS was $0.12. Year to date, we've delivered free cash flow of $46 million compared to $26 million in the first half of 2018, and ended Q2 with zero debt and $356 million in cash, cash equivalents and highly rated securities. While our free cash flow in Q2 was lower due to some timing benefits in Q1 reversing in Q2, we continue to manage our working capital well, as evidenced by our gross margin and inventory turns. Specific to inventory, we invested in more products to support our demand expectations in the second half of this year.

We ended Q2 with 29% more inventory year over year, compared with 22% at the end of Q1. We expect this [Inaudible] growth to increase in Q3 and Q4 as we invest to support both our core categories, as well as our expansion into kid's and the U.K. Now I'll provide guidance for Q3, Q4 and full-year 2019. For Q3 '19, we expect net revenue between $388 million and $398 million, representing growth of 22% to 26% year over year.

This growth will be driven by continued momentum in revenue per active clients, similar to Q2, as well as strong active client growth in the period. In this quarter, we anticipate investments of $15 million to $20 million to support our planned brand campaign. Our brand investments this year will be concentrated in Q3. They are incremental to our performance marketing efforts and, given the nature of brand messaging, are not expected to be a near-term catalyst for driving intra-quarter client additions.

With these brand investments, along with costs to launch in the U.K., we expect adjusted EBITDA between negative four and positive $1 million, or an adjusted EBITDA margin of negative 1% to positive 0.3%. Without these long-term investments, Q3 adjusted EBITDA will be positive. In Q4, we expect a return to positive adjusted EBITDA. For Q4 '19 specifically, we expect net revenue between $410 million and $430 million, representing growth of 29% to 35% year over year.

As a reminder, this year's Q4 includes the 14th week. We expect adjusted EBITDA between $4 million and $9 million, or an adjusted EBITDA margin of 1% to 2.1%. For our full-year fiscal 2019, we're raising our net revenue range to $1.53 billion to $1.56 billion, or growth of 25% to 27% year over year. This compares to our prior range of 21 to 25% growth.

We expect net revenue growth in the second half to be driven by a combination of continued active client growth and net revenue per active client momentum. Any net revenue associated with our U.K. launch will be immaterial in fiscal-year 2019. We're raising our adjusted EBITDA range to $33 million to $43 million, reflecting an adjusted EBITDA margin of 2.2% to 2.8%.

This compares to our prior range of $20 million to $40 million dollars. This revised range includes our aforementioned brand investments, as well as approximately $12 million of SG&A expense in the second half of the year to support our U.K. launch. Also, this full-year guidance is inclusive of the extra week in fiscal Q4.

In summary, we had a strong first half, and we're excited by both the demand momentum and long-term benefits we expect from investments we're making in the second half. With that, we're ready to open up for questions. Operator, over to you.

Questions and Answers:

Operator

Thank you. [Operator instructions] We'll hear first today from Doug Anmuth with JP Morgan.

Doug Anmuth -- J.P. Morgan -- Analyst

Great, thanks for taking the question. It seemed like a strong quarter in terms of both new customer acquisitions, with active clients growing sequentially despite the seasonality and then the continued strength in ARPU. Could you just expand on some of the key contributors in terms of the outperformance around women's versus men's or the contribution from Style Pass and extras? And then just one for Mike. Hoping you could talk a little bit more about the inventory algo optimization to expand on some of those operating efficiency initiatives that you're working on.

Thanks.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thanks, Doug. In terms of I think the outperformance, I mean, we saw strength across the board. You see that revenue per client number being 6%, being up 6% year over year.

That is the cumulative effects of things like Style Pass and extras and also on keep rate, which we talked about last quarter as being the highest that we'd ever seen. All of that really contributes to clients who are spending more with us clients, who are happier and ultimately driving kind of health in the business and confidence in the business. That really was kind of a big driver in terms of us kind of raising guidance and being optimistic on the year. I'll let Mike talk about that algo.

Mike Smith -- President and Chief Operating Officer

Yes, the algo. We've been really pleased with how much impact the algo has. I mean, the special special thing that we do is understanding clients really well and match great inventory with those clients. We get trust on both sides, we have this amazing understanding of what inventory is going to work with our clients, and clients give us a lot of information that helps them, helps us deliver a great client experience.

And so while this is, we have data sciences pervasive in all parts of our business. This is a really exciting new algorithm that allows us to think further out in terms of which clients are in the queue and how much inventory we have in the queue, and does a better job of matching that shows up in revenue per active client, as well as client satisfaction and as well as average order value. So very exciting early days. On the operations side, again, early days in terms of being able to derive leverage in the business.

We mentioned in the past rolling out some automation in Phoenix. We're continuing that rollout through the rest of this fiscal year to get to the rest of our warehouses, but we have a lot of opportunity for continued operations leverage in the warehouses in particular.

Doug Anmuth -- J.P. Morgan -- Analyst

OK, thank you guys.

Operator

We'll hear next from Ross Sandler with Barclays.

Ross Sandler -- Barclays -- Analyst

Great. Just two questions. What are the biggest drivers of the improving keep rate? Is it selection, is it some of the stuff that the data science team is working on? Any additional color there would be helpful. And then, Mike, it sounds like you had the data science guys looking at inventory and warehouse operations for a couple of quarters.

As you look across the whole business, what other areas do you think that team can go in and look at and try to uncover additional efficiencies? Is it marketing? Is it these new categories? Any color there would be helpful. Thanks.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thanks, Ross. I think in terms of the drivers as keep rate, these are really just kind of more broadly the things that drive client satisfaction and success in a fix. And so I think the holy grail really of our business is really being able to match inventory and clients.

The thing that somebody wants at the right time. And that's really what we all drive toward. And when we are able to use Style Shuffle for example, we've talked about in past earnings calls, so that we can really better understand what clients' preferences are and better identify what the right product is, when we're able to do, for example, the algorithm that Mike talked about, which helps us on the inventory side to be able to optimize better, all of those things really accumulate into keep rate improvement of us being able to more reliably get people product that they love in their fixes. And ultimately, that leads to client satisfaction and better long-term value and better revenue per client.

I'll let Mike kind of take the question that you have on operations and additional leverage.

Mike Smith -- President and Chief Operating Officer

Yes. So I mean, as a reminder from the past, I mean, we talked a lot about Style Shuffle, so that Katrina's point about what's driving it are things like our data science team working with our merchandising team to make Style Shuffle amazing. We have high client engagement from our active client base, from that active client base that really helps us understand a client's style. For the future, as we look at the roadmap with the data science team, I'd highlight two areas.

Buying, I think we have a lot more opportunity to buy the right product and understand our clients. We understand our clients at a really great rate, and the scale of the business allows us to have a huge impact in terms of buying the right merchandise. And the second one is planning. Like, how much inventory do we buy in matching that inventory investment we make to the actual client base in a way that other retailers just can't do that.

Operator

We'll hear next from RBC Capital Markets, Mark Mahaney.

Shweta Khajuria -- RBC Capital Markets -- Analyst

Thank you. This is Shweta for Mark. Quick question on marketing strategy. So you have a diversified marketing strategy.

You've had it in the past, and now you've added brand campaign. So two questions on marketing. One is how has it changed, or has it changed as you focus on customer growth versus retention versus just reengaging customers? And then on brand campaign, do the U.K. investments include brand campaign investments? Or are you planning on brand campaign there? Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Sure. Thanks for the question. First, I think in terms of what we've seen change in the customer, I mean, I would say that overall what we've really focused on is driving clients that have long-term value and the potential to generate a lot of value over a long period of time. And certainly what's changed I think is our ability firstly to deliver that, which I think you can see through the revenue per client number and the keep rate, the keep rate that we talked about last quarter.

But it also, I think another element is targeting where we're able to now use data science to better targeting as we're prospecting for clients who is likely to be a great customer for us versus who may not be as good of a fit. And so all of that I think has translated to confidence for us on the marketing side, and also opportunity for brand to really play a role here. The other, I think, interesting thing and why I think the brand campaign is a great time right now as we think about not just new customers but also retention and reengagement, is that we have these great businesses now. We have men's and kid's and women's, all of which are in different life cycles.

And so we love that we've seen that TV advertising in the past has reignited clients who have previously gotten a fix before, like such is possible in our large women's business. But also, this is a great introductory opportunity, I think, as we think about the new businesses that we have. Currently we don't have any plans to have the brand campaign extend into the U.K. The $15 million to $20 million investment that we talked about in brand is really focused here in the U.S.

And actually, we've already started spending so you may have seen some mentions of Stitch Fix during the Oscars a few weeks ago, a couple weeks ago. And so that's kind of the beginning of that. But we will stay tuned. We'll see how the U.K.

launch goes, and we're definitely optimistic about the contribution of brand to our marketing portfolio.

Shweta Khajuria -- RBC Capital Markets -- Analyst

OK, thank you, Katrina.

Operator

We'll hear next from Ralph Shackart with William Blair.

Ralph Shackart -- William Blair -- Analyst

Good afternoon. You had a really strong revenue beat in the quarter, yet the full-year outlook was boosted well in excess of what you achieved in that quarter. Just curious what are the main drivers of that really strong revised outlook. I think during the call you talked about planning for second half higher demand expectations.

Just any more color on what that would be. Thank you.

Paul Yee -- Chief Financial Officer

Thanks, Ralph, for your question. This is Paul. You're correct, we're really pleased with the Q2 results, and the upside versus our guidance is driven by the fact that we had higher revenue per client growth year over year of 6%. That was the third quarter in a row of growth and an acceleration from the prior two quarters.

So we're seeing that momentum continue in the second half. And that's a testament to our ability to give our clients value, give them products they love. And we see that across all of our businesses, and that's really feeding into our full-year increase in our revenue guidance. So that's largely the key drivers and really pleased with the fact on top of that we're really setting ourselves up in the back half with inventory and market investments to really drive our overall business.

Ralph Shackart -- William Blair -- Analyst

Great. Thanks Paul.

Paul Yee -- Chief Financial Officer

Thanks, Ralph.

Operator

Moving on to Edward Yruma with KeyBanc Capital Markets.

Edward Yruma -- KeyBank Capital Markets -- Analyst

Hi, good afternoon and congrats on the nice quarter. As you think about some of the new initiatives that you've outlined, be it kid's, be it men's, be it plus, how have you been able to change maybe the maturation curve relative to what you saw within women's? Are these ramping maybe a little bit faster than expected? And I guess on the inventory side, I appreciate you're building inventory for the back half. Do you think in the second quarter you were constrained by inventory? And did that impact the top line? Thank you.

Katrina Lake -- Founder and Chief Executive Officer

Sure, I can start out with some color on the new initiatives. I think as we look at men's, plus and women's, they're all in kind of different phases in our maturation. And I think we shared in the past that the men's business was growing, grew faster in those first few years than our women's had originally. And so that is, I think, a really nice reflection of the platform of Stitch Fix and the ability for us to leverage the learnings that we have from how do you apply data science to our women's business and apply that to other businesses.

And so we continue to kind of see the benefit of that and really benefit from that. And we're very happy to see that. On the question around inventory constraint. In the short term, inventory is a constraint that we have.

And so because we are in wholesale and because we are buying our inventory upfront, within a quarter for example, we don't have a ton of flexibility. And so the way that you can see that come to life, or the way that that came to life in the second quarter was that we saw, as Paul alluded to, we had great demand from our existing customers and from our repeat customers. And so what that meant was that we had more inventory that was consumed by our existing customers, which meant that as we thought about when to deploy marketing dollars, particularly the marketing dollars that are more of a direct response format. So for example, marketing online.

It makes more sense for us to move some of those marketing dollars into later quarters rather than to drive clients into a potentially inventory-constrained experience. And so being able to have that flexibility around the marketing driver enables us to really use time also in our benefit as we try to do matching clients and inventory and making sure that everybody has a great experience. And so that's part of the reason that we decided to move some of those marketing dollars into the back half of the year and ultimately to kind of lead to a higher revenue number for the year than we anticipated.

Edward Yruma -- KeyBank Capital Markets -- Analyst

Thank you.

Operator

And from Goldman Sachs, we'll move to Heath Terry.

Heath Terry -- Goldman Sachs -- Analyst

Great, thanks. I was wondering if you could give us a bit of an update on private label, just what you saw in terms of mix trends within the quarter. And particularly, as you've seen this improvement in keep rate, if there's any particular contribution that you're seeing balanced toward one side or another of the private label versus your bought inventory business.

Mike Smith -- President and Chief Operating Officer

Yes, Heath, this is Mike. I'll take that question. So we, just as a reminder for folks on the phone that might be newer to the story, we have market brands and we have exclusive brands, which is our private label business. They differ by business line in terms of men's, kid's and women's.

We have great product acceptance on our exclusive brands. And each year, we get better and better at sort of building exclusive brands that match our client needs. And we're pleased with what we've done in terms of private label. But no real news in terms of mixed trends in it.

I mean, we will use exclusive brands as a way to fill in for market brands. And obviously, there is some initial markup benefit that we get as a result of that. But the most important thing for us is to build great product that's going to match the client preferences and deliver great satisfaction to the clients who are looking for a great product. And we continue to be able to do that.

Heath Terry -- Goldman Sachs -- Analyst

Thank you.

Operator

We'll move next to Erinn Murphy with Piper Jaffrey.

Erinn Murphy -- Piper Jaffray -- Analyst

Great, thanks. Good afternoon. A couple of questions for me. I guess first on the U.K.

In this kind of window of time before you go live, I know you've done a lot of work in terms of hiring the team and kind of reaching out to some unique vendors. But I'm curious if you can share, Katrina, a little bit more about some of the focus groups or research you've done on the ground here in the U.K. on kind of who that consumer is and kind of what expectations do you have in terms of maybe some of those differences versus the kind of core American consumer that you're focused on today.

Katrina Lake -- Founder and Chief Executive Officer

That's a great question, Erinn. On the U.K., we informed our entry into the U.K. with a lot of market research and a lot of really understanding the market so that we could enter with a true personalized offering. And I think what's interesting, there are even some differences for example between men's and women's.

And I think what we found was that a lot of what we do with Stitch Fix is leverageable, where I think people are really excited to have the idea of a personal stylist. People are very comfortable shopping online for apparel, even more so actually than in the U.S. and that people -- there really aren't other offerings out there that offer the same level of personalization and really kind of this deep understanding. And I think that that is also a huge benefit that people would love out of our business.

And all of that translates from a sentiment perspective. From a merchandise perspective, it is interesting because we are looking, we want to make sure that the offering actually reflects what U.K. clients want. And I think especially for the women's business, that's going to look pretty different than the U.S.

market. And so to just name a couple of trends, for example I think the U.K. market tends to be a little bit more formal, a little bit less athleisure for example that we see in the U.S., and we'll expect to see less of that. The brands are obviously different, and so there may be a handful of brands that we can use across both markets.

But for the most part, we're really going in with a client-right approach to brand. And so we'll see lots and lots of different brands in the U.K. market than we do in the U.S. market.

And I think the interpretation of trends is also going to be different in the U.K. than in the US. And so from a merchandising perspective, I think the assortment will look quite different, and that's really informed by what we know about the client, what we've learned about the client. But I think overall, we think the opportunity is really great, and we're really excited that I think this personalized approach to the market is one that we feel is a really good one to help maximize success for us.

Erinn Murphy -- Piper Jaffray -- Analyst

Got it, that's helpful. And then just my second question is I know your approach per customer is very tailored, and it sounds like with this new inventory algo you're burying that kind of delivery time based on I guess inventory availability and making sure that satisfaction is there I'm curious though, bigger picture and longer term, is there a way that you guys are thinking about internally what that ideal average delivery time should be to the household relative to where it is today?

Mike Smith -- President and Chief Operating Officer

Yes. First and foremost, Erin, is making sure that we match great inventory to the client base that we have. And so when we think about the tailored approach and sort of the algo that we've talked about on the call, it's important for us to understand all the dynamics of personalization of what that client is going to work best with. And so we don't vary the delivery times today with the exception of -- depending on where we are on wait times, someone might have a different sort of different timeline from when they schedule a fix to when they get a fix.

But that's how we think about it. But sort of ideally, over time, we want to bring that down. And some of the constraints that we talked about in our Q2, in the prepared remarks, were that if you have more sales from your existing client base, then obviously there's less inventory to serve even greater demand. And Paul talked about it.

We're very well set up for the second half of the year to be able to have higher, to chase into the higher demand. And that's why raised our revenue targets for the rest of the year. But ideally, it's always kind of faster within reason. A lot of people that go really fast, it's high cost, and we just want to make sure we're always balancing sort of growth and profitability and not do fast for fast's sake, do fast for a client right's sake.

Erinn Murphy -- Piper Jaffray -- Analyst

Thank you.

Operator

And from Suntrust, we'll move to Youssef Squali.

Youssef Squali -- SunTrust Robinson Humphrey -- Analyst

Excellent, thank you very much. I have a couple of questions. First on the U.K. As you look at all the data science that you've been able to invest in and develop over the last few years in the U.S., how transferable do you think those learnings are as you go into the U.K.? And can that actually help inform your basically demand trajectory in the U.K.

such that we can actually see faster adoption the U.K. than we've seen in the U.S.? And then Paul, can you help us just maybe quantify the marketing spend push that you've spoken about Q2 into the second half of the year? I think last quarter you talked about how we should anticipate marketing as a percentage of revenue to be down about maybe 300 basis points or so, similar to what you did last year. You ended up nicely outperforming that. The assumption there, that delta is what got pushed out? Thank you.

Mike Smith -- President and Chief Operating Officer

Yes, Youssef, this is Mike. I'll take the first one like you said. The data science is very transferable in terms of it being a platform approach, being able to really learn quickly what are client attributes that are going to work with what inventory we have. And so with each of our new business launches, whether it's men's or kid's or plus or now the U.K., we have high expectation that we can, not faster adoption but faster learning, faster to profitability with each one of these businesses because we can use a platform approach and we can learn really quickly as a result of having kind of data science as the core of what we do.

So I'll let Paul take the second question.

Paul Yee -- Chief Financial Officer

Hi, Youssef, this is Paul. In regards to your question on marketing spend, Katrina talked about the fact that we did have high demand from existing clients, and we did intentionally pull back versus our plans going into the quarter on marketing spend. So I think you have approximately a good sort of estimate for the amount we should deduct from Q2 to Q3 to Q3 and Q4 in terms of how much marketing we're pushing in the second half and redeploying. I do look forward to the second half.

I would sort of think about our spend in two ways. We have the brand marketing spend of $15 million to $20 million. That's incremental to the new capability we're building. We think we'll drive long-term benefits, and that's going to be in Q3.

Separate from that, we are investing in performance marketing as a percent of revenue. I would look at last year sort of percent of revenue spend sort of as a gauge for you to model out sort of that baseline performance marketing investments in the back half. But altogether, that's really leading to our sort of full-year EBITDA guidance, which is actually going up versus our last call and helping drive of course our higher revenue as well.

Youssef Squali -- SunTrust Robinson Humphrey -- Analyst

Got it. That's helpful. Thank you.

Paul Yee -- Chief Financial Officer

Thanks.

Operator

We'll move next to Ike Boruchow with Wells Fargo.

Ike Boruchow -- Wells Fargo -- Analyst

Hey, congrats everyone. Just a couple of questions that we have left. I think you mentioned $12 million U.K. costs for this year.

Paul, any chance you could break that out between Q3 and Q4? And any color you can provide for how that wraps around to the first half of next year? That's the first question.

Paul Yee -- Chief Financial Officer

Sure. Hi, Ike. Thanks for your question. So the $12 million, I think roughly it's both Q3 and Q4 evenly split.

It's, again, the talent that we've hired to be in-country to personalize the service. And then we're now operating our DC, we're receiving our first goods this quarter in advance for our Q4 launch. So that's some color around our U.K. spend.

And we'll give more details in the coming quarters on our overall outlook for FY '20 obviously on revenue as well as costs in the U.K. So we'll give you an update in future quarters on our launch.

Ike Boruchow -- Wells Fargo -- Analyst

Got it. And then as a follow up on the top line. So the rev per customer seems to be doing really well. And based on your outlook being revised higher, it seems like you're really confident there.

Just curious, taking together the brand marketing, that it sounds like you don't expect to provide a big lift in net adds immediately. Embedded in top line, what kind of active number growth should we be assuming?

Paul Yee -- Chief Financial Officer

Hi, Ike. This is Paul again. Yes, first to emphasize brand marketing. This integrated campaign we've just launched is very much a belief of a new capability we're building.

We're excited and sort of seeing the results this quarter and certainly how it interacts with other channels we're investing in. But absolutely we think of this as a long-term investment, and we don't expect that to have a near-term impact on our client count. In terms of the second half overall, in terms of our drivers of revenue and the upside we saw, we see both levers. Revenue per active client, where we're seeing momentum, continue in the second half.

And also a healthy growth in client count. I've talked about the performance marketing, investments we're making in the second half. And for both new and existing clients, we are positioned I think well in terms of inventory. So we're really excited about the second half.

You're seeing that in the raised guidance for the full year, and we're going to see the benefit, both product and market initiatives, play in both client count and revenue per client.

Ike Boruchow -- Wells Fargo -- Analyst

Got it. Thanks a lot.

Paul Yee -- Chief Financial Officer

Thanks, Ike.

Operator

And from Wolfe Research, we'll hear from Adrienne Yih.

Adrienne Yih -- Wolfe Research -- Analyst

Yes. Katrina, first, congratulations and welcome back. I was wondering if you can discuss the inventory optimization program. And how does that impact the number of personal stylists that you need, as well as the interaction with that stylist and touch points with the client? Secondarily, if you can talk about the high end luxury brand additions, and then tapping into that higher household income customer.

Thank you very much.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thank you, Adrianne. In terms of inventory and kind of optimization, I think the easiest lever to talk about is inventory. It's just saying inventory is a short-term constraint.

And maybe just a step back, I think since we've gone public we have had this ambition of growing at 20% to 25% year over year, and that that's a rate that we feel like is a very healthy growth rate, especially in this retail environment but one that really helps us to capitalize on the huge market opportunity over the longer term. And as we plan for the year, there's a number of constraints, and inventory can be one of them. Stylists can certainly be one of them. Our operations can be those, and we're really -- all of these parts of our business are like walking in lockstep really to be able to deliver great client experiences.

And so when -- Mike talked a little bit about wait times earlier, but one of the levers that we have available to us is that we are able to see if we have great inventory for somebody, we can ship them a fix immediately. If we don't have as great inventory this week but we'll have great inventory for somebody next week, we can manage that through wait times for example. And so what we do is we really, we put those constraints in place and really manage using time because we want to make sure that every client has the best possible experience. And so we want to make sure they have the right inventory experience, we want to make sure they have the right stylist experience.

And so in times of high demand, we are not using stylist time as a lever. So stylists are not shortchanging clients by doing faster fixes or anything like that. We really manage to making sure that the shipment that we ship out are all going to be great fixes and can use kind of time, for example, as a creative lever for that. In terms of the higher end offering, we have -- like Tahari is a brand that we've heard a little bit about.

Workwear for example has been an area of strength in the business. And what we're finding is by having these kind of brands like Theory and Tahari and these brands that women love, that we're able to not only serve that higher end client really well, but also be able to serve the needs of a more high-low client. And so for example, there may be clients who [Inaudible] on athleisure or their weekend offerings, but really want to have like a really nice thing for a work presentation or for an interview, and so being able to have those kind of marquee higher end brands has really helped us I think, both to serve that high end customer well, but also to serve our broader audience well. And we've been really happy with the performance of those brands.

Adrienne Yih -- Wolfe Research -- Analyst

Great. Thank you. And, Paul, really quickly, how different is the private label to branded mix in the U.K. business? Thank you.

Mike Smith -- President and Chief Operating Officer

Yes, I'll take that, this is Mike. We're just getting started in terms of launching before the end of the fiscal year. So I think it's too early to kind of tell. And one of the things we always tell our teams when they're launching new businesses is to have this launch-and-learn approach.

So in future quarters, we can talk more specifically about the performance of the U.K. and sort of how, what's the breakdown not specifically about exclusive brands versus market brands but some color around that after we've been up and running in the country for a little bit.

Adrienne Yih -- Wolfe Research -- Analyst

Great. Thank you very much. Best of luck.

Mike Smith -- President and Chief Operating Officer

Thank you.

Operator

And at this time, I'd like to turn things back to Katrina Lake for closing remarks.

Katrina Lake -- Founder and Chief Executive Officer

Great. Thank you all for joining the call today. We're looking forward to seeing you all on the road and at conferences. Thank you.

Operator

[Operator signoff]

Duration: 47 minutes

Call Participants:

David Pearce -- Head of Investor Relations

Katrina Lake -- Founder and Chief Executive Officer

Mike Smith -- President and Chief Operating Officer

Paul Yee -- Chief Financial Officer

Doug Anmuth -- J.P. Morgan -- Analyst

Ross Sandler -- Barclays -- Analyst

Shweta Khajuria -- RBC Capital Markets -- Analyst

Ralph Shackart -- William Blair -- Analyst

Edward Yruma -- KeyBank Capital Markets -- Analyst

Heath Terry -- Goldman Sachs -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Youssef Squali -- SunTrust Robinson Humphrey -- Analyst

Ike Boruchow -- Wells Fargo -- Analyst

Adrienne Yih -- Wolfe Research -- Analyst

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