# Stitch Fix, Inc. (SFIX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Stitch Fix, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1576942/000157694221000121/sfix-20210731.htm
Accession: 0001576942-21-000121
Filing date: 2021-09-27
Report date: 2021-07-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/SFIX/
All MD&A years: /company/SFIX/mda/
Next year: /company/SFIX/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations together with our 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:

[[GREPCENT_TABLE]]
[["","","For the Fiscal Year Ended"],["(in thousands)","","July 31, 2021","","August 1, 2020","","August 3, 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"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","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"]]
[[/GREPCENT_TABLE]]

Operating Metrics

[[GREPCENT_TABLE]]
[["","","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"]]
[[/GREPCENT_TABLE]]

(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.

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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:

[[GREPCENT_TABLE]]
[["","","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)","%"]]
[[/GREPCENT_TABLE]]

(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:

[[GREPCENT_TABLE]]
[["","","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","","\u2014","%","","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","%"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","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)","%"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","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)"]]
[[/GREPCENT_TABLE]]

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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.

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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.

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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.