Good afternoon and thank you for joining us on the call today to discuss the results of our third quarter of fiscal 2022. Joining me on today's call are Elizabeth Spaulding, CEO of Stitch Fix; and Dan Jedda, CFO. We have posted complete third quarter 2022 financial results and a press release 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 the result to differ, in particular, our press release issued and filed today as well as the risk factor section of our quarterly report on Form 10-Q for our second quarter previously filed with the SEC and the quarterly report on Form 10-Q for our third quarter, which we expect to be filed today. Also note that the forward-looking statements on this call are based on 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. Reconciliation to the most directly comparable GAAP financial measures are provided in the press release 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 Elizabeth.

Elizabeth Spaulding - Chief Executive Officer

Thanks, Alexandra, and thank you all for joining us for Stitch Fix's Q3 2022 earnings call. Before we dive into our financial results, I'd like to take a moment to remind everyone where we are in the broader Stitch Fix journey to put into context the actions we're taking to improve performance. As you know we are in a period of transformation from a Fix-only business to a Fix plus Freestyle ecosystem. This enables us to serve our clients' on-demand styling needs as well as to begin to acquire new clients through personalized shopping. That's opening up a much larger opportunity with a TAM that is 2 times to 3 times greater than the Fix-only business.

We are building upon our core strategic assets of rich data science plus the personal touch of human stylists. This is a necessary and significant undertaking that requires us to adjust our original systems, marketing tools and selection to ultimately deliver enhanced customer experiences. While Freestyle has already demonstrated strong unit economics and meaningful client value, expanding Freestyle into a client acquisition vehicle is an iterative process. As we discussed previously, establishing a Fix plus Freestyle ecosystem will take time and will not be linear. We are moving forward deliberately and thoughtfully with a sense of urgency addressing the areas that are within our control.

In Q2, we saw that our new on-boarding flow created friction for customers eager for our Fix. Therefore, impacting conversion. In parallel, similar to many in our industry, we continue to navigate the ongoing effects of the Apple privacy changes, which is impacting traffic to our site. Both of these have made new client acquisition challenging. We are working through both of these with tremendous focus. Today, I will provide more detail on steps we have taken to mitigate these challenges and what is to come. Additionally, as we promised in our last call, our team has taken a deep look at our business and our cost structure. We have done a detailed review of how we deliver our experience and we've begun to take action to become more efficient and deliver profitable growth over time. Both Dan and I will spend time on this momentarily.

Now, on to our Q3 financial and operating results. While we are confident in the strategy we have in place, we are not satisfied with our Q3 performance. We can and must do better and we're focused on execution as a team. Top line results as well as active client counts were largely within our expectations. We generated net revenue of $493 million, reflecting an 8% decline year-over-year and an adjusted EBITDA loss of $36 million. Active clients declined 5% year-over-year and 3% on a sequential basis, ending Q3 at 3.9 million. We have made several improvements to the new client engine, which I will speak to in a bit.

Revenue per active client or RPAC reached $553, our sixth consecutive quarter of RPAC growth and our 90-day RPAC also remained strong. This RPAC expansion is a result of the incrementality of Fix plus Freestyle usage by our clients as well as the ongoing benefit of keep rates with Fix Preview. Resale revenue grew 13% year-over-year with outsized growth in categories like special occasion and social wear. In fact, Freestyle revenue from dresses grew more than 75% year-over-year, which is over 5 times the rate of growth of dresses in Fixes. Freestyle continues to drive incrementality in client spend once inside our ecosystem and we are increasingly encouraged by the activity of our emerging Freestyle First customer base. Today, approximately 20% of Freestyle First customers come back and purchase again within 30 days.

To improve our clients' experiences, we recently updated our core recommendation algorithm to a novel client time series model architecture, which unifies data from client interactions across both Fix and Freestyle. Historically, our algorithm is focused on understanding a client set of specific attributes. In contrast, this model focuses on understanding the client through their interactions with Stitch Fix over time. I tested this new model demonstrated significant improvements to client outcomes with nearly 6% lift in Freestyle revenue and a 4% lift in Freestyle reorders over a 30-day period compared to our previous algorithm. It is now rolled out across the Freestyle experience.

Now, onto our progress on conversion and marketing. Given that conversion of new visitors was not where we wanted it to be in the second quarter, we took action to refine onboarding experience and our landing page. This has resulted in approximately 40% improvement in new client conversion in the third quarter as compared to the second quarter. First, we began directing all Stitch Fix.com traffic to simplified Fix First onboarding path. Now, clients entering through Stitch Fix.com are directed to schedule a Fix upon completing a style profile. After scheduling, their Freestyle shop is unlocked.

Second, our landing page experience better clarifies our offering and highlights our key differentiators. We now feature more community-based stylist content and we enable visitors to interact with Style Shuffle before creating an account. While this is indeed positive progress, we are still not yet at our desired conversion levels. In addition, overall new client traffic to our website was down in Q3. As I noted at the outset of the call, both factors, conversion and traffic ultimately played a role in the 3% decline in our total active client count quarter-over-quarter. We are deeply focused on driving traffic into our ecosystem and reigniting new customer conversion. As part of these efforts, we are further diversifying our marketing portfolio with the support of our new Chief Marketing Officer.

We are moving more into digital channels such as Tik Tok and YouTube, as well as leaning into the use of influencer partnerships. To that end, we recently launched an integrated men's campaign with Keegan-Michael Keith called Stitch Fix It. During this campaign, we not only saw an increase of over 60% in men's traffic than over the prior weeks, but also strong efficiencies in our direct response ads, PPAs. Additionally, as we said we would do last quarter, we have successfully rolled out Personalized Search. With this feature, clients search results are based on relevance and only show in-stock items that match individual style preferences, fit and size. We believe this will drive continued engagement once inside our ecosystem for our clients, as this has been their most highly requested new feature.

Now, I want to shift to what I mentioned at the top of the call regarding decisions we are making to adapt how we operate to position ourselves for profitable growth. In light of our recent business momentum and an uncertain macroeconomic environment, we have taken a renewed look at our business and what is required to build our future. Today, we are assuring changes that we estimate will result in FY '23 annual expense savings of $40 million to $60 million. These savings will predominantly come from the difficult decision to reduce our workforce. This includes a reduction of approximately 15% of salaried positions and represents approximately 4% of our roles in total. Dan, will spend time going into detail on our broader cost structure and expected savings.

We also expect to see meaningful operational improvements from this restructuring. We are centralizing a number of key capabilities and streamlining decision-making to drive efficiencies in how we operate and deliver experiences. We are also ensuring that we are allocating resources to our most critical priorities. Going forward, we will continue to innovate our client experience and broaden our offerings. In parallel, we will continue to identify opportunities to drive efficiencies in how we operate and deliver our experiences, while investing strategically in both technology and product. I would like to thank those team members with whom we are parting ways for their many contributions to Stitch Fix and to our clients. Our priority is to support them through this transition in every way that we can.

In summary, we strongly believe in and remain focused on our mission. We are transforming the way people find what they love by combining data science and a personal touch of human stylus. While we have work to do to expand our Fix plus Freestyle ecosystem and reignite our new client engine, we have made progress in key areas in the third quarter. We remain focused on executing our Fix plus Freestyle strategy with excellence. We are thoughtfully and deliberately making the necessary decisions to drive our business forward and we commit to providing you updates as we make progress on our efforts.

I will now hand it over to Dan.

Dan Jedda - Chief Financial Officer

Thanks, Elizabeth, and hello to everyone joining us. I'll first spend some time on the drivers of our Q2 results and the actions we are taking to position ourselves for profitable growth. And then I'll walk through our Q4 financial outlook.

In Q3 we generated net revenue of $493 million, representing an 8% decline year-over-year. This reflects the compounding effects of lower net active clients year-to-date, which ended Q3 at 3.9 million. Active clients declined 200,000 or 5% year-over-year and 112,000 or 3% quarter-over-quarter. Well, largely expected, this decrease is primarily related to ongoing conversion challenges, which we are working through, as well as lower traffic, which many are experiencing across our market segment. While we continue to diversify our marketing portfolio, it will take time for new channels to drive meaningful traffic and new clients.

Q3 gross margin was 42.6%, 340 basis points lower than Q3 of last year, driven by increased transportation costs and tightening product margins. Transportation cost increased due to increased shipping rates, including fuel surcharges and higher split shipments in Freestyle. Product margins were impacted by higher product costs as a result of rising inflation and increased penetration of national brands in our brand mix. We expect to continue to see elevated product and transportation costs in Q4 and therefore expect similar gross margins in Q4 compared to Q3.

Q3 advertising was in line with expectations at $51.5 million or 10.4% of net revenue, reflecting increased spend in the influencer channel. Other SG&A, excluding advertising, was $235 million or 47.8% of net revenue, an increase of 640 basis points year-over-year. The increase is primarily due to higher fixed labor costs, including stock-based compensation. Q3 adjusted EBITDA was negative $36 million, reflecting lower net revenue, lower gross margins and higher fixed labor cost versus last year.

Net inventory ended the quarter at $213 million, a decline of approximately 1% year-over-year. Throughout Q3, we experienced delayed receipts of three to four weeks on a subset of inventory due to the ongoing nature of shipping delays and port congestion within the global supply chain. We do not believe our revenue was impacted in the quarter with the exception of a few categories in our men's business where we saw higher than normal sell-through rates. Similar to our spring-summer buys, our buying team is working proactively on our fall-winter buys to get ahead of any delays that may occur due to the global supply chain challenges.

Finally, during the quarter, we repurchased $19 million worth of company stock or $30 million year-to-date. We ended Q3 with no debt and $283 million in cash, cash equivalents and highly-rated securities. We have the financial flexibility to execute our strategy as we move towards profitability. Turning to our cost structure, as Elizabeth discussed, we undertook a detailed review of our business and the cost structure needed to support it in order to ensure we are positioned for profitable growth in the future. As a result of this review, we've identified approximately $40 million to $60 million of expected annual savings in FY '23, driven by a reduction in our workforce. These expected savings are calculated off our annualized Q3 expense base and are inclusive of investments in areas such as product and technology.

The impact of positions, which include approximately 15% of our salaried positions and 4% of roles in total spend all our general and administrative functions and levels as well as styling leaders. As a result of this action, we expect to incur restructuring and other one-time charges of approximately $15 million to $20 million to be recognized in Q4. We are also looking at other fixed and variable operating costs, including rationalization of our real estate footprint.

Now, onto our outlook. In Q4, we expect net revenue in the range of $485 million to $495 million, representing a year-over-year decline of 15% to 13%. As a reminder, last year we saw a greater increase in net revenue from Q3 to Q4 than we did pre COVID, due in part to macroeconomic factors. Excluding restructuring and one-time charges of $15 million to $20 million, we expect Q4 adjusted EBITDA in the range of negative $30 million to negative $25 million or EBITDA margins of negative 6% to negative 5% of net revenue. This guidance assumes that net active clients will be slightly down quarter-over-quarter.

In terms of the current macroeconomic environment, we continue to navigate the ongoing uncertainties that many in our industry are experiencing, including supply chain constraints, global inflationary pressures and potential shifts in customer demand. We are optimistic about our path to capturing the opportunities ahead. While these transformation moments take time, we are confident in the company we are building and our ability to overcome our current challenges. We are committed to optimizing and managing our cost structure within our business as we focus on returning to profitable growth.

With that, we're now ready for your questions. Operator, I'll turn it over to you.

Question & Answers

Operator

Thank you. [Operator Instructions] And we'll take our first question from Jian Li with Evercore ISI.

Jian Li - Evercore ISI - Analyst

Great, thank you for the question. And so I just wanted to, Dan, if you could just unpack a little bit your last comment about the shifting in customer demand. Is this, if you can kind of I guess unpack a little bit, is there shift in categories and verticals? Are you seeing any kind of recessionary pressure or wallet shift, kind of a pull back into away from discretionary? Just wanted to see kind of, have you guys have seen any impact, kind of that recessionary impact on the consumer demand?

The other thing is, I appreciate the color on the net adds for the next quarter, overall, how should we think about the recovery path? The landing page experience like should we see that kind of normalizing over the next couple of quarters? If you can give us a timeline on on when the trough is? Thank you.

Elizabeth Spaulding - Chief Executive Officer

Thanks for the question. Appreciate it. I think your first question was asking about recessionary effects and if we're seeing a shift so far in consumer demand. And as we look at our consumer behavior, we can unpack different price point preference consumers, different demographics and really over Q3, we did not see a meaningful impact within our customer cohorts. As we mentioned, in terms of RPAC, we saw continued strength there and when we dissect that by user group and user segment, we continue to see year-on-year growth across our different demographic and user groups.

I think what Dan was referring it to is just an anticipation that we are continuing to see inflationary pressure for the broader US consumer and UK consumers that we serve and that we know that typically heading into what many are predicting as a recessionary period that we may see an impact. So to date, we've seen real strength in our consumers, but we're just letting folks know that like many others we're thinking about that.

The second question, I think you were asking was more on net client normalizing and what we saw was, as we mentioned, we were due in Q2 real strength and improving our conversion funnel. That was up 40% quarter-on-quarter. We see actually more opportunity for upside there. The challenge that I think we continue to face like many others has been more the traffic to our site and so we have made progress diversifying our marketing channels and we have more work in front of us and we know it will take time. And so one of the, I'd say top priorities for us right now is just reigniting that net active client growth flywheel and we'll continue to make progress updates on that each quarter.

Jian Li - Evercore ISI - Analyst

Great, thank you.

Operator

Thank you. We'll take our next question from Youssef Squali with Truist Securities.

Youssef Squali - Truist Securities - Analyst

Hi, can hear me?

Elizabeth Spaulding - Chief Executive Officer

Yeah. Hey, Youssef.

Youssef Squali - Truist Securities - Analyst

Excellent. Hey, Elizabeth. Hi, guys. Thank you for taking the questions. I have two. One, just going back to the conversion issue, so I think you talked about the improvement that you've seen sequentially the 40%, but maybe you can frame that relative to kind of where you are relative to where you need to be? And I guess, as kind of a related topic in terms of your willingness to kind of leaning into marketing. We've seen recently that you've started leaning in and I think you can spoke to it a little bit, but how far are you from getting to a point where you want to actually lean in a lot more aggressively to try to reignite the growth that you kind of have spoken to? And one last question for Dan, if I may, are the cost savings from the latest round of layoffs enough to get you back to profitability in 2023, at least on an EBITDA basis? Thank you, guys.

Elizabeth Spaulding - Chief Executive Officer

Thanks, Youssef. I can take the first couple questions and then hand it over to Dan. Yeah. As I mentioned, we did make real progress on the conversion funnel and when I talked about conversion that was through our core domain of Stitch Fix.com and we are pleased with the progress that we've made there. We think there is more upside if we just look longitudinally over the last couple of years. So, we think that we still can get some upside. I think we've made the majority shift, but there is still some left there that we could see continued improvement on. What we know is part of our future is Freestyle becoming a first time customer acquisition vehicle and diversifying our marketing channels and we are still very early in that journey.

I did mention on the call the fact that we now have this cohort of Freestyle First customers. We're encouraged by what we're seeing in terms of their repeat purchase behavior. We continue to be very encouraged by our ecosystem customers using Fix and Freestyle. We really have not ignited marketing spend to your question on leaning in to Freestyle becoming a customer acquisition vehicle and that's really through high intent shopping. We know that half of all apparel shopping begins with a pretty high intent purchase.

So, when people search for something through Google or other sources, they see an influencer ad with a particular product. That is all net new marketing for us and as we see improved conversion rates on folks landing on our product detail pages, we will eventually be un-gating our category pages, that's when we really intend to start to layer in more marketing spend and lean in. So, more to come on that. We're incredibly focused on improving the customer experience to do that. And then we are learning with some of these channels we have historically been less focused on like influencers and integrated marketing and we're encouraged by the early results we're seeing like that men's campaign I mentioned and more work to do to make sure the experience is where we want it to be before we more deeply invest.

On the path to profitability, I'll hand that to Dan.

Dan Jedda - Chief Financial Officer

Yeah. Thanks, Elizabeth and hi, Youssef. As we move through our transformation of Fix and Freestyle, we are positioning ourselves for profitable growth in the future. And as Elizabeth alluded to, that will come from net active client growth with the client experience that we're investing in and also the optimization of our cost structure, which we talked to on the call. We'll give you updated guidance along the way. And I don't have a specific timeline in mind yet, especially given all the macroeconomic factors. That said, we believe Q4 is our trial on profitability and we believe that FY '23 at some point we can return to profitability. So, I don't have specific timing in mind, but we'll give more guidance along the way.

Youssef Squali - Truist Securities - Analyst

Okay. That's great. Thank you both.

Operator

Thank you. We'll now take our next question from Trevor Young with Barclays.

Trevor Young - Barclays - Analyst

Great. Thanks. On the inventory side, up 16% Q-on-Q, it seems like there is still some of the residual inventory delays at three to four weeks versus four to five weeks last quarter and perhaps that's maybe a little more narrow in scope. How are you balancing kind of that existing inventory build versus some of the commentary you mentioned about preparing for the winter inventory versus some of the consumer softness that maybe you're seeing? And more broadly, I guess, how comfortable are you with current inventory levels, product assortment and the outlook for promotional environment as we head into the back half of the year?

Elizabeth Spaulding - Chief Executive Officer

Thanks, Trevor. I will let Dan largely take that question. One thing I'll just comment on at the beginning, then he can talk about the levels we're at. For Q3, similar to the prior quarter, we did see some delays, but we felt like we were in a good position with our women's business. With our men's business, we did see longer delays that once that product came in we saw good performance with. So, we're just really making sure we have the right product at the right time for our customers and in many situations we have increased how we're buying ahead to be prepared to have the right goods at the right time.

On that kind of levels and outlook, I'll let Dan take that.

Dan Jedda - Chief Financial Officer

Yeah. Again, we were slightly down year-on-year as we go into our - really into our, the end of our spring and into our of course summer selling season. So, much of the sequential increase that you did see was for seasonal merchandise that, that we were happy to see as we get ready for the summer sales. So, that - we feel very good about the inventory position we're in on a year-on-year basis. We feel like we don't have the success of inventory that many in our industry are experiencing. We feel like we are managing the global supply chain well. We did order and are ordering our fall-winter buying now early to get ready for that in anticipation of, but we feel really good about the health of our inventory, the assortment that we can give within Fix and Freestyle going forward. Not much to say beyond that and again, it's a position that we want to be in with the right assortment currently.

Trevor Young - Barclays - Analyst

Great. Thank you both.

Dan Jedda - Chief Financial Officer

Sorry, I guess I didn't answer the second part. We have experienced limited time offers and clearance event in the past. You mentioned about sales on that and we will likely continue some of that with Freestyle in the future and we'll update you more on that as we go forward.

Operator

Thank you. We'll now take our next question from Cory Carpenter with JP Morgan.

Cory Carpenter - JP Morgan - Analyst

Hey, thanks for the questions. Just on the restructuring, just curious why right now you thought was the right time for that? And then should we expect any impact to growth from the restructuring? And then separately, maybe Elizabeth, could you talk a bit about Fix Preview? I think you mentioned earlier that you're seeing improvement to take rate, but if you could just talk about an update on the type of adoption and the results that's driving, that'd be great. Thank you.

Elizabeth Spaulding - Chief Executive Officer

Yeah. Thanks, Cory. On the why now, we know that we're in a tough macroeconomic time period. We also want to make sure that our cost structure in our operating model is positioned to build our future and we saw areas of opportunity in some places where we could centralize and simplify some of functions. We also wanted to be cognizant of setting ourselves up for profitable growth as we head into FY '23 and beyond. And so, the timing was right. It was a responsible thing to do for the business and really being focused on setting ourselves up for FY '23 and beyond.

In terms of it impacting growth, I mean we were very, very focused as we mentioned on the call and making sure we're continuing our investments in the areas that most impact our customer experience. Those areas being technology, our product functions, continued investments in the areas that most differentiate that client experience and helps us to continue to build out this Fix plus Freestyle ecosystem and the diversification of our marketing channels. So, we were very cognizant of making sure we can continue to make those investments as Dan and I both alluded to.

On Fix Preview, I think maybe what you're referring to is, I just mentioned that our RPAC continues to demonstrate the positive impact we've seen from the ecosystem adoption of Freestyle, as well as the full rollout of Fix Preview. So really, no new news there. As we mentioned multiple quarters ago, as we had done the work to build that product experience and then rolled it out. That is an experience relative to our legacy Fix offering does provide higher keep rate and higher average order values and we have continued to see that play out over time. We will be lapping that in the future now that we are entering a time period where it was fully rolled out, but we're happy with the results from that and we continue to see.

We will make ongoing improvements to Fix Preview. One of the learnings we've had is if a client gets a Preview and they don't accept anything from the Preview that can be not surprisingly a moment where the client says, ah, are you going to have what I want. And so we've been testing new features to make sure that we can immediately address that type of a Preview to make sure that it's a positive client experience. So, we're encouraged that we can now start to make the next wave of improvements to that product feature. But overall, it's been a win, both for the US and the UK market.

Operator

Thank you. We'll take our next question from Kunal Madhukar with UBS.

Kunal Madhukar - UBS - Analyst

Hi, thank you. Thank you for taking the question. Quick one, on the Personalized Search that you just launched, I mean, I would have thought with all the data that you have, the Personalized Search option would have been probably the first thing to launch. Why did it take this long to launch a Personalized Search?

Elizabeth Spaulding - Chief Executive Officer

Hey, Kunal, thanks for the question. The original Fix, sorry, the original Freestyle experience began as really an add-on to our Fix business where we knew that clients would love to purchase items that we would go with items that they had gotten in their Fix and so filling out an outfit, filling out things that they could complete their looks with. And we know it's still that 40% of our sales. In a much more fulsome Freestyle experience, albeit that one that we're still building out still come from outfits, that is a key differentiator for our experience.

And as we embarked on building out more Freestyle over the last year, we added things like product categories, more new brands. We now have a home feed where you can shop looks in your community using computer vision. But really, our first part of call had been being able to just serve up personalized recommendations through outfit feeds and categories. And so, I think there's just many features that we still have yet to offer and Personalized Search was one. That was one that was highly demanded and we wanted to make sure that as we launched it, we both tested it, but also that we are serving up items that are ones that will fit our clients, they will reflect things that are immediately in stock that will fulfill their price preferences. And now, we'll start to layer on things to that Personalized Search feature like outfits given how compelling it is. So, I think it's just one of many things in our product roadmap that we will be rolling out over time.

Kunal Madhukar - UBS - Analyst

Thanks. If I could follow-up with maybe another couple if I could. One would be on the inventory side. So, you kind of talked about the slightly higher inventory on a Q-o-Q basis. But then when we look at like across different retailers, physical retailers, almost all of them have like very, very high inventory. So, as you look at like maybe a higher promotional environment going into fiscal fourth quarter, would the average - would the RPAC levels be similar? How do you think about like RPAC back levels for the fourth quarter? And then a follow-up on the restructuring that just happened. With the restructuring, how does it impact or will it impact your personal styling process for the Fixes? Thank you.

Elizabeth Spaulding - Chief Executive Officer

Thanks. I think your - the first part of your question was on our inventory and I think it was a little bit more around the broader environment of whether or not we're in this promotional time period. I mean, as you know, Stitch Fix typically is not a highly promotional retailer. We focus on getting clients goods that are the perfect fit and style for them and really this notion of getting a client the one pair of jeans they love versus showing them tons of jeans that are on sale. Like our goal is to get you the item that you love. And so, in general, we're focused on delivering that kind of personalized experience to our clients. We did test in Q3 a limited time offer where we did test some of our goods, a very small number of goods on a promotional discount and we were encouraged by what we saw in terms of the halo effect on our broader consumption within Freestyle and we know that there are goods that we want to be able to clear out of our inventory. So, it is something we anticipate doing in the future, but we don't anticipate that impacting our RPAC. If we do anticipate that, we would share it.

But in general, we feel like what we're doing is really creating more purchase occasions, more product categories our clients can love through the expansion of Freestyle together with Fix and typically, we're solving three big problems for our clients; discovery of items they wouldn't have found on their own, tremendous fit and then the relationships with our styling community and the relationship through styling outfits. And so our focus is making sure that's done at a value but not winning on promotional pricing. And then on the restructuring question, I think you're asking about our styling community. We did have an impact to the leadership wear, but we did not reduce our styling team. So, there is no change in how we're delivering our styling experience right now.

Kunal Madhukar - UBS - Analyst

Got it. Thank you so much.

Elizabeth Spaulding - Chief Executive Officer

Thank you.

Operator

Thank you. We'll take our next question from Simeon Siegel with BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets - Analyst

Hi, this is Gerrick Johnson on for Simeon today. So, a couple of quick questions if you don't mind and thanks for taking my question. So first of all, on the, on the cost savings, given most of those, you mentioned most of those are labor-related. Are those going to be mean what we're going to see the kind of the immediate impact of that in 1Q of next year? Is that - or is that going to kind of ramp over time? And then secondly, I'm kind of curious, you - I believe it was mentioned that 90-day RPAC growth was up again. Did you give a number on that? I think you did last quarter.

Elizabeth Spaulding - Chief Executive Officer

Thanks for the questions. I'll take the second one and then Dan can talk more about when the cost savings will materialize. We did not share our 90-day RPAC number on this call. We did share just the continued strength we're seeing in RPAC overall and just the continued incrementality of both Fix and Freestyle. On the cost savings, why I don't I hand that one over to Dan.

Dan Jedda - Chief Financial Officer

Yeah. On the labor side, we will see an immediate impact of that. We might have some smaller one-time charges in Q1, but the ongoing impact that will be immediate. But part of the $40 million to $60 million was over and above the labor savings, just other cost saving initiatives, like I said, rationalizing our real estate footprint, specifically in our fulfillment network that will happen over time. As we sublease our excess capacity that we have, there is demand out there for warehouse space, et cetera. But we will see an immediate impact from Q4 into Q1 on fixed OpEx savings specific to labor.

Gerrick Johnson - BMO Capital Markets - Analyst

Got you. Appreciate it. And then real quick, if you don't mind, a follow-up. I believe you talked about kind of lease cuts with RPAC growth was driven albeit from Preview and then Freestyle helping in there. I'm just curious if you could give a breakdown within RPAC of what's the kind of the breakdown was price versus units index? What that would look like within there? What kind of drove the broader increase, if you wanted to break it down in those components if possible?

Elizabeth Spaulding - Chief Executive Officer

We don't actually break that out, but I will say, as we've shared in the past with Fix Preview that, that's had a positive benefit largely on keep rate, meaning the number of items that our clients maintain. In part, if you think about what that customer experience is about, is the clients getting really two chances to weigh in on what they get in their Fix, both when it shows but beforehand giving feedback of 10 items that we spend in a Preview. So not surprisingly, that results in a higher keep rate. And so that's the biggest driver Fix Preview.

And then the combination of now 30% of our clients, we've shared in the past within our women's business for example, using both experiences, those are incremental. It's different product categories that they tend to be purchasing in Freestyle, we see outsized performance in things like second layers and footwear and dresses and so it's really the incrementality of more units for the most part. There may be small pricing benefits but for the most part, it's that we're selling more goods to our clients through a broader experience.

Gerrick Johnson - BMO Capital Markets - Analyst

Okay. Thank you so much.

Operator

Thank you. We'll take our next question from Lauren Schenk with Morgan Stanley.

Lauren Schenk - Morgan Stanley - Analyst

Great, thanks. I wanted to ask about the customer on-boarding process in your comments about directing all customers to the Fix business? And then once they scheduled, Freestyle is unlocked. So I guess, is the idea that a customer could be a Freestyle-only customer has that changed? And if so, is that sort of a permanent decision or are you still sort of iterating? Thanks.

Elizabeth Spaulding - Chief Executive Officer

Thanks, Lauren for the question. It is still possible to be a Freestyle First customer. One of the things that I think we've learned over the past several months is if you're really high intent shopper, a lot of that traffic is coming through a search of looking for a particular item, they might be coming from some of the new work that we're doing and other new marketing channels where we're talking about a particular item. And so those clients land on our product detail page and over the coming quarters, they will also be able to land on a product category page and explore our catalog. Those clients can become Freestyle First clients immediately. It's still a small population.

And to the question that Youssef asked earlier on when are we going to start to really lean into that marketing, as that experience continues to improve, we think that will become a bigger source of our customer base, a bigger source of our ad spend. And so that high intent shopping, we really view as the vehicle for Freestyle becoming a customer acquisition vehicle. On the core Stitch Fix.com, until our brand awareness for Freestyle and the fact that you can shop with Stitch Fix gets higher, we are going to focus that as a Fix First channel and then immediately into Freestyle. We anticipate that over time that would change, but we feel like that's the best way to serve our client demand right now through Stitch Fix.com.

Lauren Schenk - Morgan Stanley - Analyst

Right. Thank you.

Operator

Thank you. We'll take our next question from Ike Boruchow with Wells Fargo.

Jesse Sobelson - Wells Fargo - Analyst

Hey guys, this is Jesse Sobelson on for Ike. I was just wondering if you could remind investors of your inventory acquisition strategy. It's all based on acquiring full-priced goods and then as you look forward and work with your partners to acquire inventory for the following winter, what are you hearing from them when it comes to inventory availability and what they're planning for the remainder of the year? Thanks.

Elizabeth Spaulding - Chief Executive Officer

Yeah, I can start and then Dan, feel free to add on. I mean, the way that we work with our vendors - so if you think about our goods maybe just to step back for a second, we have our own exclusive brands, we have goods that are Stitch Fix-only that we work with third-party suppliers that they are producing only for us, and then we have a number of more established brands that we work with, whether those are up and coming - up and coming D2C brands or big established national brands. The majority of our sales actually come from the first two in terms of exclusive brands and Stitch Fix-only. And so we have a lot of discretion within those in terms of working with our suppliers to get those goods produced.

In general, as everyone knows, the supply chain has slowed down and so we're typically just buying ahead in a longer timeframe, although, some of our goods, such as our exclusive brands, we still have a lot of flexibility on. So, I'd say the one thing that has changed in particular is just having more foresight to what we're buying into and then really leveraging as much adaptability is possible within things like our exclusive brands and Stitch Fix-only because we have very, very high control there. And so that is probably one of the biggest shifts we've made. And one of the big benefits of our business is how much client data and signal we get. So, we can make adjustments pretty rapidly, especially given the nature of how many of our goods we're actually in control with directly.

Dan, anything else?

Dan Jedda - Chief Financial Officer

I'll just add, in terms of availability, we're not seeing a direct impact of anything related to COVID lockdowns in China. There is some indirect impact, just delayed shipments that have been ongoing. But with respect to where we source from everything is up and running. So, there has been no real impact on that side, just indirect, which we are managing through ordering early and just managing the global supply chain.

Jesse Sobelson - Wells Fargo - Analyst

Thank you very much.

Operator

Thank you. We'll take our next question from Ashley Helgans with Jefferies.

Blake Anderson - Jefferies - Analyst

Hi, it's Blake on for Ashley. Thanks for taking our question. I first wanted to ask about the, about the restructuring savings of $40 million to $60 million. Just wondering if you could kind of maybe rank the biggest increases in cost you've seen versus last quarter that seem like they're going to maybe offset that next year? I know you mentioned inflation, supply chain, some things like that. If you could just maybe talk a little bit more about those categories.

Elizabeth Spaulding - Chief Executive Officer

Yeah, I can let Dan take that. I guess one clarifying point that I would make is the cost improvements that we made through the restructuring are really in our fixed cost basis and some of the things that you just mentioned, which are more in our gross margin. So, in essence though, I think there is work that we're doing on both fronts, but, Dan, I'll let you maybe add on to that.

Dan Jedda - Chief Financial Officer

Yeah, maybe if you could clarify specifically, I wasn't quite following the $40 million to $60 million, which as we said earlier is a reduction of our SG&A and the way to think about that is our SG&A, excluding advertising and SBC, it is a reduction from that base. But let me have you ask the question again just so I make sure I answer it.

Blake Anderson - Jefferies - Analyst

Yeah, sure. I guess you mentioned some pressure on the gross margin, I guess. You mentioned earlier that you hope to get breakeven EBITDA next year, which is a little bit less than consensus was modeling. So, just trying to think of the main offsets to these incremental cost saves.

Dan Jedda - Chief Financial Officer

Yeah, I think the way I would look at that is the comment we made sometime in FY '23, we would, we are, we are planning to be profitable. The timing of that is uncertain just given all the macroeconomic factors that we're going through. On - I've talked about the cost saving side, on the gross margin side, I think we talked about Q4 being similar to Q3. And I think we've said before we would expect ongoing inflationary pressures from a product cost standpoint as well as higher fuel charges mainly due to pricing and fuel surcharges and I also mentioned higher split shipments in freestyle. So, we would expect those to continue on closer to the current run rates and that will have some impact in FY '23. But again, we'll provide more guidance on FY '23 when we report Q4.

Blake Anderson - Jefferies - Analyst

Okay, that's super helpful. And on that note, did you, I might have missed it, but did you say what marketing was supposed to be in Q4? I know you've talked about 10% of sales recently, but did you give that guidance?

Dan Jedda - Chief Financial Officer

We didn't. But it is, we expect it to be in that 9% to 10% range that we normally see of revenue.

Blake Anderson - Jefferies - Analyst

Got it. And then one last question. I know this might be hard to answer, but you mentioned just from a high-level over time as Freestyle changes as maybe the bigger customer acquisition source, how do we think about the timing of that?

Elizabeth Spaulding - Chief Executive Officer

Yeah, I can touch on that. I mean I - we don't have any specific timing to share right now. I mean we are just very focused on continuous new feature rollout and continuous improvement of that customer experience. The examples we share today were around things like Personalized Search or the algorithm that has really improved the customer experience of our recommendations and so we're just in a continuous drumbeat of expanding those features. I think one of the big things that we're working on right now is un-gating a category-based shopping experience and that will, I would imagine, take the next few quarters. We will give updates along the way and as that experience gets better and better, we will begin to spend more into marketing to direct traffic to that channel.

We know that's a big part of how shopping occasions begin and we know we can do that in a highly differentiated way given the nature of the way we can present outfits and item recommendations that really saves consumers time and helps with their discovery. So, no exact timing to share yet, but we know that that presents a lot of opportunity for us in the future and albeit small, the population of Freestyle First customers we have today, we're encouraged by what we're seeing. And we're also encouraged by helping those Freestyle First customers also experience a broader Fix offering as well. So, more to come, but that and just the overall new active clients [Indecipherable] is by far the biggest focus for us as a team.

Blake Anderson - Jefferies - Analyst

That's super helpful color. Thanks again.

Operator

Thank you. We'll take our next question from Tom Nikic with Wedbush Securities.

Tom Nikic - Wedbush Securities - Analyst

Hey, good afternoon. Thanks. Thanks for taking my question. When you look at the apparel industry broadly this year and the general commentary has been that there has been this big kind of closet refresh this year and people are restocking on wear to work and wear to weddings and wear to social events for the categories. It seems like an opportune time for your business to have these on-boarding issues and things like that. Like, is there any concern that you've kind of sort of missed a bit of a golden opportunity to bring in a new cohort of clients when they're really looking to refresh their closets or do you think you will be able to pick up these customers on down the road?

Elizabeth Spaulding - Chief Executive Officer

Yeah, I mean I think we're always going to see consumer seeking out newer better ways to shop. One of the things we saw during the pandemic was just a systemic shift of more consumers shopping online. Now stores took back a little bit of that in the last few quarters. But by and large consumer behavior has shifted and there is always going to be shift in preferences for different types of apparel. In this moment, there is a big shift to dresses and vacation wear. We saw 25% increase in vacation requests in this quarter. That was on top of actually 300% last year. So, we actually saw a lot of that going out again coming out of COVID last year in addition to this year.

And so those changes we think are always going to be occurring. And what's so unique about our model is we can adapt to what consumers are looking for, their preferences, we've been able to adapt and have the right product in terms of these dressier occasions, we're seeing strength in our own brands that we've launched even in light of athleisure and some of that category slowing down a little bit. We've actually seen increased performance in our own exclusive brand of We Wander that we launched. So, I think what's unique about our model is, I think just fundamentally, a lot of consumer behavior will continue to shift and we're really just focused on being a better way for people to find what they love and that is a pretty age-old problem that we don't see going away regardless of an economic cycle.

Tom Nikic - Wedbush Securities - Analyst

Got it. Thanks a lot. And best of luck for rest of Q4 and into FY '23.

Elizabeth Spaulding - Chief Executive Officer

Okay, thank you.

Operator

Thank you. And we'll take our next question from Mark Altschwager with Baird.

Mark Altschwager - Baird - Analyst

Hi, good afternoon. Thanks for taking my question. So, just starting out kind of a higher level question, but revenue per client continues to look pretty healthy. I think you called out higher keep rates with Fix Preview. And then some of the issues that are weighing on the traffic and conversion do seem somewhat company specific. So, I guess we're all watching the same macro headlines and data obviously, but I'm trying to get a better sense of what you might be seeing in terms of your customer behavior that has you concerned, the macro concerned of maybe a bigger slowdown?

Elizabeth Spaulding - Chief Executive Officer

Yeah, thanks for the question, Mark. We are encouraged by what we've continued to see on RPAC and client spending inside our ecosystem, both the adoption of new categories, the continued health overall of keep rate as well as buying into new product categories with Freestyle and on a year-on-year basis, I think our cohorts, we just continue to really like what we're seeing. I think to your point, for us, it's really about getting this new active clients why we are going. And part of that for us has been macro. I think the impact of Apple privacy has been one that we've continued to navigate through and just really start to evolve how we're driving traffic to Stitch Fix. In terms of the broader macro backdrop, I mean we do anticipate that consumers are going to be seeking more value and we just need to make sure we have the right product at the right time. We play across a very wide portfolio of price points. We know we can provide a lot of value with many of our exclusive brands. So, we're just making sure we're serving the right product at the right time and just every - serving one client at a time every day.

Mark Altschwager - Baird - Analyst

Thank you. And just a follow-up for Dan then on the SG&A. As we think about what next year might look like, could you just give us a little bit more color on what the mix between fixed and variable expenses looks like in that other SG&A after we incorporate the $40 million to $60 million in restructuring savings?

Dan Jedda - Chief Financial Officer

Yeah, I think without giving too specific because we don't break out fixed and variable, we do see that $40million to $60 million, a good chunk of it is fixed, but we'll also be in variable productivity, we are seeing that. We are, that is part of the $40 million to $60 million. So, I do think though the bulk of it will come on the fixed side, simply because of the actions that we're taking today as well as rationalizing the real estate footprint that's all part of our fixed cost structure. So, the bulk of it will be in that area and a lot of the variable in addition to efficiencies will come along the lines with respect to revenue, which will guide more in - when we have our Q4 earnings call.

Mark Altschwager - Baird - Analyst

Great. Thanks for the detail.

Operator

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STITCH FIX INC

Q3 2022

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