Stitch Fix, Inc. (SFIX) FY 2024 MD&A

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 (“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. The fiscal year ending August 3, 2024 (“fiscal 2024”) consists of 53 weeks, and the fiscal years ended, July 29, 2023 (“fiscal 2023”), and July 30, 2022 (“fiscal 2022”) consisted of 52 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 fiscal 2024, compared to fiscal 2023, and for fiscal 2023 compared to fiscal 2022, is presented below.

Business Overview

In 2011, Stitch Fix introduced an innovative approach to shopping for clothing and accessories. We were inspired by the opportunity to create a client-first styling experience, offering an alternative to impersonal, time-consuming and inconvenient traditional shopping. Clients engage with us by (1) receiving a curated shipment of items informed by our algorithms and chosen by a Stitch Fix Stylist (a “Fix”); or (2) purchasing directly from our website or mobile app based on an individualized assortment of outfit and item recommendations (“Freestyle”). Clients choose to schedule regular shipments or order a Fix on demand. Then, after receiving a Fix, they can purchase the items they want to keep and return the other items, if any.

Discontinued Operations

During the first quarter of fiscal 2024, we ceased operations of our UK business and the accounting requirements for reporting the UK business as a discontinued operation were met. Accordingly, any discussion of historical information in Management’s Discussion and Analysis below reflects the results of the UK business as a discontinued operation, and, amounts and disclosures below relate to the Company's continuing operations for all periods presented, unless otherwise noted. Refer to Note 14, “Discontinued Operations” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for further details.

Financial Overview

For fiscal 2024, we reported $1.3 billion of net revenue representing a year-over-year decline of 16.0% as compared to fiscal 2023. As of August 3, 2024, and July 29, 2023, we had approximately 2,508,000 and 3,121,000 active clients, respectively, representing a year-over-year decline of 19.6%. Refer to the section titled “Key Financial and Operating Metrics” below for information on how we define and calculate active clients.

During fiscal 2024 and fiscal 2023, we experienced a decline in net revenue year-over-year primarily due to our challenges in acquiring and retaining clients. We expect these challenges in acquiring and retaining active clients to continue having a negative compounding effect on net revenue in fiscal 2025. We remain focused on retaining current clients, improving the conversion of new clients, and enhancing our overall client experience for new and existing clients.

Net loss from continuing operations for fiscal 2024 was $118.9 million, compared to a net loss from continuing operations of $150.3 million for fiscal 2023. Despite lower revenues year-over-year, our net loss in fiscal 2024 was lower due to several restructuring actions that took place in both fiscal 2023 and fiscal 2024 as described below, which reduced fixed and variable operating expenses, in addition to a reduction in advertising expense. For more information on the components of net loss from continuing operations, refer to the section titled “Results of Operations” below.

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Restructuring

During fiscal 2024 and fiscal 2023, in furtherance of and as an expansion of the restructuring plan announced in June 2022 (the “2022 Restructuring Plan”), we undertook several restructuring actions. These actions were taken to reduce our future fixed and variable operating costs and allow us to centralize key capabilities, strengthen decision-making to drive efficiencies, and ensure we are allocating resources to our most critical priorities. In connection with activities taken for the 2022 Restructuring Plan and activities in furtherance of and as an expansion of the 2022 Restructuring Plan, described further below, we have recorded the following:

(1) Recorded in selling, general, and administrative expenses on the consolidated statements of operations and comprehensive loss.

(2) Includes impairments of both operating lease right-of-use assets and property and equipment.

(3) Recognized in cost of goods sold on the consolidated statements of operations and comprehensive loss.

Below is a summary of the restructuring actions taken to date in connection with the 2022 Restructuring Plan:

•In fiscal 2022, the 2022 Restructuring Plan reduced our then-current employee workforce by approximately 4%, including approximately 15% of our then-salaried positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2023, we implemented a plan of termination that reduced our then-current employee workforce by approximately 6%, including approximately 20% of our then-salaried positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in June 2023, we announced the closure of our fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. The Bethlehem, Pennsylvania location ceased operations during the fiscal quarter ended October 28, 2023, and the Dallas, Texas location ceased operations during the fiscal quarter ended April 27, 2024.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2024, we implemented an organization realignment that resulted in the further elimination of styling leadership and corporate positions.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in January 2024, we revised our compensation model for full-time Stylists to move to a part-time only model, whereby Stylists who opted to continue with the Company received one-time restructuring bonuses. These bonuses will be paid over three quarters, with the last payment in the first quarter of fiscal 2025.

•In furtherance of and as an expansion of the 2022 Restructuring Plan, in the fourth quarter of fiscal 2024, we recorded impairments related to a portion of our corporate office space due to a change in the use of this space.

We have $3.3 million in restructuring related liabilities as of August 3, 2024, and we expect substantially all cash payments in connection with expenses incurred to date related to the 2022 Restructuring Plan will be completed in the first quarter of fiscal 2025. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for further details of restructuring actions taken.

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

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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 from continuing operations (“Adjusted EBITDA”) is frequently used by investors and securities analysts in their evaluations of companies, and that this supplemental measure facilitates comparisons between continuing operations of companies. We believe free cash flow from continuing operations (“Free Cash Flow”) is an important metric because it represents a measure of how much cash from continuing 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 and net other (income) expense as these items are not components of our core business;

•Adjusted EBITDA does not reflect our provision (benefit) for income taxes, 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;

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

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

Adjusted EBITDA

We define Adjusted EBITDA as net loss from continuing operations excluding interest income, other (income) expense, net, provision (benefit) for income taxes, depreciation and amortization, stock-based compensation expense, and restructuring and other one-time costs related to our continuing operations. The following table presents a reconciliation of net loss from continuing operations, the most comparable GAAP financial measure, to Adjusted EBITDA for each of the periods presented:

(1) For fiscal 2024 and 2023, depreciation and amortization excluded $12.1 million and $2.8 million, respectively, reflected in “Restructuring and other one-time costs.”

(2) For fiscal 2022, stock-based compensation expense excluded $1.1 million reflected in “Restructuring and other one-time costs.”

(3) For fiscal 2024, restructuring charges were $43.8 million and other one-time costs were $6.7 million in one-time professional services fees. For fiscal 2023, restructuring charges were $39.9 million and other one-time costs were $5.8 million in retention bonuses for continuing employees. For fiscal 2022, restructuring charges were $17.7 million and other one-time costs were $8.5 million in retention bonuses for continuing employees. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for more details.

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Free Cash Flow

We define Free Cash Flow as cash flows provided by operating activities from continuing operations, reduced by purchases of property and equipment that are included in cash flows from investing activities from continuing operations. The following table presents a reconciliation of net cash flows provided by operating activities from continuing operations, the most comparable GAAP financial measure, to Free Cash Flow for each of the periods presented:

Operating Metrics

Active Clients

We believe that the number of active clients is a key indicator of the overall health of our business. We define an active client as a client who checked out a Fix or was shipped an item via Freestyle in the preceding 52 weeks, measured as of the last day of that period. Clients check out a Fix when they indicate which items they are keeping through our mobile application or on our website. We consider each Women’s, Men’s, or Kids account as a client, even if they share the same household. We had 2,508,000 and 3,121,000 active clients as of August 3, 2024, and July 29, 2023, respectively, representing a year-over-year decline of 19.6%. The decline in active clients is due to dormant clients outpacing new client additions during the year, which we largely attribute to client conversion and retention challenges.

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 $533 and $510 as of August 3, 2024, and July 29, 2023, respectively, representing a year-over-year increase of 4.5%.

Factors Affecting Our Performance

Macroeconomic Environment

Our business and operating results are subject to national and global economic conditions and their impact on consumer discretionary spending. As the macroeconomic environment is experiencing inflation, rising interest rates, recessionary concerns, tightening labor markets, and general uncertainty regarding the overall future political and economic environment, we cannot predict whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business.

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 the time of purchase. We incur inventory write-offs and changes in inventory reserves that impact our gross margins. Moreover, our inventory investments will fluctuate with the needs of our business.

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Client Acquisition and Engagement

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

Marketing expense is recorded in selling, general, and administrative expenses in the consolidated statements of operations and comprehensive loss. The largest component of our marketing expense is advertising, which was $111.4 million in fiscal 2024, compared to $111.6 million in fiscal 2023. We expect advertising expense to approximate 8% to 9% of revenue in fiscal 2025; however, we will continue to be methodical about our approach when we are making investments in advertising, and may adjust our spending up or down based on performance.

Operations and Infrastructure

We intend to leverage our data science and deep understanding of our clients’ needs to make targeted investments in technology and product. In the second quarter of fiscal 2023, we decided to close our Salt Lake City fulfillment center in order to optimize network capacity. In June 2023, we announced the intended closures of our fulfillment centers in Bethlehem, Pennsylvania and Dallas, Texas. The Bethlehem, Pennsylvania location ceased operations during the fiscal quarter ended October 28, 2023 and the Dallas, Texas location ceased operations during the fiscal quarter ended April 27, 2024. Refer to Note 13, “Restructuring” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report for further details.

Merchandise Mix

We offer apparel, shoes, and accessories across categories, brands, product types, and price points. We currently serve our clients in the following categories: Women’s, Petite, Maternity, Men’s, Plus, and Kids. We carry a mix of third-party branded merchandise, including premium brands, and our own Owned Private Label 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.

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

Components of Results of Operations

Revenue

We generate revenue from the sale of merchandise through our Fix and 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 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.

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.

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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses (“SG&A”) consist primarily of compensation and benefits costs, including stock-based compensation expense, for our employees including our Stylists, fulfillment center operations, data analytics, merchandising, engineering, marketing, client experience, and corporate personnel. SG&A also includes 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. As a result of our restructuring and cost reduction actions throughout fiscal years 2024, 2023, and 2022, we expect SG&A in fiscal 2025 to decrease as compared to fiscal 2024. Our classification of certain components within SG&A may vary from other companies in our industry and may not be comparable.

Interest Income

Interest income is generated from our 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 and state income taxes based on enacted federal and state 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.

Results of Operations

Comparison of the Fiscal Years Ended August 3, 2024, July 29, 2023, and July 30, 2022

The following table summarizes our financial results from continuing operations:

* Not meaningful

The components of our results from continuing operations as a percentage of net revenue were as follows:

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

Revenue and Gross Margin

Revenue in fiscal 2024, which included a $21.6 million impact of an extra week, decreased by $255.1 million, or 16.0%, as compared to revenue in fiscal 2023. The decline in revenue was primarily attributable to a 19.6% decline in active clients from July 29, 2023 to August 3, 2024, which led to a decrease in sales of merchandise. Partially offsetting the revenue decline was an improvement in

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revenue per active client, which was driven by an increase in the average order value with the number of items kept by our clients per Fix increasing, and an extra week of revenue in the current year.

Gross margin for fiscal 2024, increased by 190 basis points as compared to fiscal 2023. The increase in gross margin was primarily driven by improved product margins and transportation leverage as our carrier mix yielded more favorable rates year over year.

Revenue in fiscal 2023 decreased by $425.3 million, or 21.1%, as compared to revenue in fiscal 2022. The decline in revenue was primarily attributable to a 13.1% decline in active clients from July 30, 2022 to July 29, 2023, which led to a decrease in sales of merchandise. Revenue was also impacted by a 9.3% decline in net revenue per active client in fiscal 2023, as compared to fiscal 2022, as clients spent less during the year.

Gross margin for fiscal 2023, decreased by 150 basis points as compared to fiscal 2022. The decrease was primarily attributable to higher product and transportation costs as a percentage of revenue in fiscal year 2023, substantially offset by our improved inventory position, as we better aligned our inventory composition, which led to lower inventory write-offs as a percentage of revenue.

Selling, General, and Administrative Expenses

SG&A in fiscal 2024, which included an extra week, decreased by $105.4 million, or 12.7%, as compared to fiscal 2023, primarily due to a $111.6 million decrease in compensation and benefits expense, including lower stock-based compensation, largely driven by our restructuring actions, and reductions in variable labor costs due to lower sales volumes. SG&A was also impacted by $19.3 million non-cash impairment charges recorded in fiscal 2024, as compared to the non-cash impairment charges of $16.9 million recorded in fiscal 2023. These decreases were partially offset by one-time professional service fees in fiscal 2024.

SG&A as a percentage of revenue increased to 54.2% in fiscal 2024, as compared to 52.2% in fiscal 2023. The increase in SG&A as a percentage of revenue was primarily driven by revenue declining at a faster rate than SG&A in fiscal year 2024.

SG&A in fiscal 2023 decreased by $240.2 million, or 22.4%, as compared to fiscal 2022, primarily due to a $147.8 million decrease in compensation and benefits expense, including lower stock-based compensation, largely driven by our restructuring actions and reductions in variable labor costs due to lower sales volumes. These decreases were partially offset by a year-over-year increase of $19.5 million in restructuring and other one-time costs. SG&A expense was also impacted by a $78.3 million reduction in our advertising expense as compared to fiscal 2022, as a result of our decision to reduce advertising spend in fiscal 2023.

SG&A as a percentage of revenue decreased to 52.2% in fiscal 2023, as compared to 53.1% in fiscal 2022. The decrease in SG&A margin was primarily related to reductions in advertising, which was 7.0% of net revenue in fiscal 2023, as compared to 9.4% of net revenue in fiscal 2022. This was partially offset by restructuring and other one-time costs, which increased as a percentage of net revenue from 1.3% in fiscal 2022 to 2.9% in fiscal 2023.

Provision for Income Taxes

The following table summarizes our effective tax rate for the periods presented:

Our effective tax rate and provision for income taxes decreased in fiscal 2024 as compared to fiscal 2023, primarily due to reserve releases in fiscal 2024 from lapses in statutes of limitation and effective settlement of prior year tax positions.

Our effective tax rate and provision for income taxes increased in fiscal 2023 as compared to fiscal 2022, primarily due to increases in federal income taxes and less reserve releases due to lapses in statutes of limitation.

Liquidity and Capital Resources

Sources of Liquidity

Our principal sources of liquidity include our cash, cash equivalents, investments, cash flows from continuing operations, and borrowing capacity under our credit facility. As of August 3, 2024, we had $162.9 million of cash and cash equivalents, which included $0.7 million held outside the U.S. in the UK, and $84.1 million of short-term investments with contractual maturities of 12 months or less. We will use our cash balances in the UK to settle the remaining liabilities attributable to our discontinued operations.

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Credit Facility

On December 4, 2023, we entered into a first lien credit agreement with Citibank, N.A., as agent and lender, which provides for a $50.0 million revolving credit facility maturing on December 4, 2026 (the “2023 Credit Facility”). The 2023 Credit Facility includes a sub-facility that provides for the issuance of letters of credit in an amount of up to $30.0 million. Availability of the 2023 Credit Facility will be based upon a borrowing base formula and periodic borrowing base certifications valuing certain of our accounts receivable, credit card receivables, and inventory as reduced by certain reserves, if any. Our borrowing availability based on balances as of August 3, 2024 was $45.0 million, and our excess availability was $25.0 million as a result of outstanding letters of credit and no outstanding borrowing.

For information on the terms of the 2023 Credit Facility, refer to Note 7, “Credit Agreement” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Uses of Cash

Our primary uses of cash include operating costs such as merchandise purchases, lease obligations, compensation and benefits, marketing, and other expenditures necessary to support our business.

We believe our existing cash, cash equivalents, investment balances, and the borrowing available under our 2023 Credit Facility, if needed, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months and beyond.

Share Repurchases

In January 2022, our Board of Directors authorized a share repurchase program to repurchase up to $150.0 million of our outstanding Class A common stock, with no expiration date (the “2022 Repurchase Program”). We may repurchase shares from time to time through open market repurchases, privately negotiated transactions, or other means, including through Rule 10b5-1 trading plans. The actual timing, number and value of shares repurchased in the future will be determined by the Company in its discretion and will depend on a number of factors, including price, trading volume, market conditions, and other general business conditions. Repurchases will be funded from the Company’s existing cash and cash equivalents or future cash flow. The repurchase program may be modified, suspended, or terminated at any time. The Company made no repurchases of Class A common stock in fiscal 2024 or fiscal 2023. As of August 3, 2024, the Company had repurchased 2,302,141 shares of Class A common stock for $30.0 million, and $120.0 million remained available under the 2022 Repurchase Program authorization.

Cash Flows

The following table summarizes our cash flows for the periods indicated below:

Cash Provided by Operating Activities from Continuing Operations

During fiscal 2024, cash provided by operating activities from continuing operations was $28.2 million, which consisted of a net loss from continuing operations of $118.9 million, adjusted by non-cash charges of $124.6 million and a $22.5 million change in net operating assets and liabilities. The non-cash charges were primarily driven by $76.8 million of stock-based compensation expense and $44.5 million of depreciation, amortization, and accretion, $19.3 million of asset impairment, partially offset by $15.1 million of changes in inventory reserves. The change in net operating assets and liabilities was primarily due to a change of $47.7 million in gross inventory balances due to a decline in inventory receipts to bring inventory balances in line with current demand.

During fiscal 2023, cash provided by operating activities from continuing operations was $73.2 million, which consisted of a net loss from continuing operations of $150.3 million, adjusted by non-cash charges of $145.0 million and a change of $78.5 million in our net operating assets and liabilities. The non-cash charges were primarily driven by $102.1 million of stock-based compensation expense, $42.1 million of depreciation and amortization, and $16.9 million in asset impairment charges. The change in net operating assets and liabilities was primarily due to a change of $76.0 million in our inventory balance due to a decline in inventory receipts to bring inventory balances in line with current demand, and a cash inflow of $53.0 million from income tax refunds, partially offset by a decrease of $60.1 million in accounts payable and accrued liabilities due to timing of payments.

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During fiscal 2022, cash provided by operating activities from continuing operations was $75.2 million, which consisted of a net loss from continuing operations of $181.6 million, adjusted by non-cash charges of $182.9 million and a change of $73.9 million in our net operating assets and liabilities. The non-cash charges were primarily driven by $126.1 million of stock-based compensation expense, $35.7 million of depreciation and amortization, $14.7 million in inventory reserves, and $6.2 million in asset impairment charges. The change in net operating assets and liabilities was primarily due to an increase of $67.4 million in accounts payable balance due to timing of inventory receipts and payments.

Cash Provided (Used in) by Investing Activities from Continuing Operations

During fiscal 2024, cash used in investing activities from continuing operations was $78.7 million. This was primarily due to the purchase of available-for-sale securities of $97.3 million and the purchases of property and equipment of $14.0 million, partially offset by the maturities of available-for-sale securities of $32.2 million.

During fiscal 2023, cash provided by investing activities from continuing operations was $64.5 million, primarily related to net cash flow from purchases, sales, and maturities of $82.5 million of highly rated available-for-sale securities, partially offset by $18.9 million in purchases of property and equipment.

During fiscal 2022, cash provided by investing activities was $11.6 million, primarily related to net cash flow from purchases, sales, and maturities of $56.6 million of highly rated available-for-sale securities, partially offset by $45.0 million in purchases of property and equipment.

Cash Used in Financing Activities from Continuing Operations

During fiscal 2024, cash used in financing activities was $15.5 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $16.1 million, partially offset by proceeds from the exercise of stock options of $1.0 million.

During fiscal 2023, cash used in financing activities from continuing operations was $15.1 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $15.1 million.

During fiscal 2022, cash used in financing activities from continuing operations was $59.6 million, which was primarily due to payments for tax withholding related to vesting of restricted stock units of $31.1 million and repurchases of common stock of $30.0 million, partially offset by proceeds from the exercise of stock options of $1.5 million.

Effect of Exchange Rate Changes on Cash and Cash Equivalents

Cash and cash equivalents at both August 3, 2024 and July 29, 2023 were impacted based on fluctuations in the exchange rate of the British pound sterling to the U.S. dollar.

Contractual Obligations and Other Commitments

Our most significant contractual obligations relate to purchase commitments of inventory and operating lease obligations on our fulfillment centers and corporate office. As of August 3, 2024, we had $132.9 million of enforceable and legally binding inventory purchase commitments, predominantly due within one year. For information on our contractual obligations for operating leases, refer to Note 4, “Leases” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 Financial Statements and Supplementary Data of this Annual Report.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and the related disclosures. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

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, net

Inventory, net consists of finished goods which are recorded at the lower of cost or net realizable value using the first-in-first-out (“FIFO”) method. We establish a reserve for excess and slow-moving inventory we expect to write off or sell below cost as liquidations based on historical trends, which considers factors such as the age of the inventory and sell through rate for a particular item. In addition, we estimate and accrue shrinkage as a percentage of inventory out to the client and also accrue for damaged items and items we intend to liquidate. Estimates are made to reduce the inventory value for lost, stolen, damaged, or liquidated items to net realizable value. If actual experience differs significantly from our estimates due to changes in client merchandise preferences, client demand, or economic conditions, additional inventory write-downs may be required which could adversely affect our operating results. A 10% change in our inventory reserves estimate as of August 3, 2024 would result in a change in reserves of approximately $2.4 million.

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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 fiscal 2024 or fiscal 2023.

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 an even blend of historical and implied volatility of our common stock;

•Expected term of our stock options—the period that our stock options are expected to be outstanding based on historical averages.

•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.

Revenue Recognition

Revenue is recognized net of sales taxes, discounts, and estimated refunds. 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.

We also sell gift cards to clients and establish a liability based on the face value of such gift cards. 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 fiscal 2024.

Recent Accounting Pronouncements

For recent accounting pronouncements, refer to Note 2, “Significant Accounting Policies” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.