| MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 ended August 1, 2026 ("fiscal 2026") and August 2, 2025 ("fiscal 2025") consisted of 52 weeks, and the fiscal year ended August 3, 2024 ("fiscal 2024") consisted of 53 weeks. Throughout this Annual Report, all references to quarters and years are to our fiscal quarters and fiscal years unless otherwise noted.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Special Note Regarding Forward-Looking Statements", Item 1, Item 1A, and Item 8 of this Annual Report. In addition, refer to our discussion and analysis of our financial condition and results of operations from fiscal 2025 to fiscal 2024 in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended August 2, 2025.
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. We do this through our unique business model that pairs expert Stylists with best-in-class AI and recommendation algorithms. Clients primarily 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"). For
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the Fix experience, 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.
FINANCIAL OVERVIEW
Revenue, net for fiscal 2026 was $1,348.1 million, representing a year-over-year increase of 6.4% compared to the prior year. As of August 1, 2026, we had approximately 2,277,000 active clients, representing a year-over-year decline of 1.4% compared to the prior year.
Net loss from continuing operations for fiscal 2026 was $12.6 million, compared to Net loss from continuing operations of $28.8 million for the prior year.
Refer to "Factors Affecting Our Performance" and "Results of Operations" herein for additional information.
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 other (income) expense, net as these items are not components of our core business;
•Adjusted EBITDA does not reflect provision for income taxes, which may increase or decrease cash available;
•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 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 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;
•Adjusted EBITDA excludes non-ordinary course legal fees for specific proceedings that we have determined arise outside of the ordinary course of business and are nonrecurring, infrequent, or unusual; and
•Free Cash Flow does not represent the total residual cash flow available for discretionary purposes and does not reflect future contractual commitments.
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Adjusted EBITDA
We define Adjusted EBITDA as net loss from continuing operations excluding interest income, other (income) expense, net, provision for income taxes, depreciation and amortization, stock-based compensation expense, restructuring and other one-time costs, and non-ordinary course legal fees 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:
| For the Fiscal Year Ended | ||||||||||||||
| (in thousands) | August 1, 2026 | August 2, 2025 | ||||||||||||
| Net loss from continuing operations | $ | (12,606) | $ | (28,844) | ||||||||||
| Add (deduct): | ||||||||||||||
| Interest income | (8,661) | (10,709) | ||||||||||||
| Other income, net | (767) | (173) | ||||||||||||
| Provision for income taxes | 338 | 821 | ||||||||||||
| Depreciation and amortization | 23,501 | 27,860 | ||||||||||||
| Stock-based compensation expense | 46,401 | 56,727 | ||||||||||||
Restructuring and other one-time costs (1) | 958 | 3,228 | ||||||||||||
Non-ordinary course legal fees (2) | 4,223 | 229 | ||||||||||||
| Adjusted EBITDA | $ | 53,387 | $ | 49,139 | ||||||||||
(1) For fiscal 2026, other one-time costs were $1.0 million for net costs related to an early sublease termination by a sublessor. For fiscal 2025, restructuring charges were $1.2 million, primarily in severance and employee-related benefits and other restructuring costs, and other one-time costs were $2.0 million for one-time bonuses for certain continuing employees.
(2) Non-ordinary course legal fees include costs related to a specific class action lawsuit.
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 used in operating activities from continuing operations, the most comparable GAAP financial measure, to Free Cash Flow for each of the periods presented:
| For the Fiscal Year Ended | ||||||||||||||
| (in thousands) | August 1, 2026 | August 2, 2025 | ||||||||||||
| Free Cash Flow reconciliation: | ||||||||||||||
| Net cash provided by operating activities from continuing operations | $ | 39,070 | $ | 25,575 | ||||||||||
| Deduct: | ||||||||||||||
| Purchases of property and equipment | (19,224) | (16,293) | ||||||||||||
| Free Cash Flow | $ | 19,846 | $ | 9,282 | ||||||||||
Net cash used in investing activities from continuing operations | $ | (15,396) | $ | (59,121) | ||||||||||
| Net cash used in financing activities from continuing operations | $ | (42,325) | $ | (14,967) | ||||||||||
OPERATING METRICS
| August 1, 2026 | August 2, 2025 | |||||||||||||
Active clients (in thousands) | 2,277 | 2,309 | ||||||||||||
Net revenue per active client | $ | 592 | $ | 549 | ||||||||||
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 what 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. A single person could have multiple accounts and count as multiple active clients. We had approximately 2,277,000 and 2,309,000 active clients as of August 1, 2026, and August 2, 2025,
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respectively, representing a year-over-year decrease of 1.4%. The decrease in active clients is due to inactive clients outpacing 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 $592 and $549 as of August 1, 2026, and August 2, 2025, respectively, or a year-over-year increase of 7.8%.
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, recessionary concerns, and general uncertainty regarding trade policies, including tariffs and other restrictions, and the overall future political and economic environment, we cannot predict whether or when such circumstances may improve or worsen. Beginning in the fourth quarter of fiscal 2026, we began to see impacts from these conditions. We anticipate that macroeconomic uncertainty will continue to place pressure on consumer discretionary spending, which we expect to negatively impact our business in fiscal 2027.
CLIENT ACQUISITION AND ENGAGEMENT
To grow our business, we remain focused on retaining current clients, attracting new clients, improving client conversion, and enhancing our overall client experience for new and existing clients. Our marketing strategy aims to preserve liquidity and achieve profitability, while simultaneously attracting long-term clients 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, and public relations expenses. 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 ("SG&A") in the consolidated statements of operations and comprehensive loss. The largest component of our marketing expense is advertising, which was $129.6 million and $117.3 million for the fiscal year ended August 1, 2026 and August 2, 2025, respectively. We will continue to be methodical about our approach when we are making advertising decisions, and may adjust our spending up or down based on performance.
AI USE IN OUR 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. AI continues to gain momentum in the economy and we are responding by continuing to integrate AI into our internal business processes and operating strategy, focusing on seeking and retaining AI talent, and utilizing AI to enhance client-facing experiences.
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 conversion and retention, we may at times optimize our inventory strategy to prioritize long-term client retention over short-term gross margin impact.
To ensure sufficient merchandise availability, we generally enter into purchase commitments well in advance and frequently before apparel trends are fully established by client purchasing behavior. As a result, we are vulnerable to shifting client demand, pricing volatility, trade policy changes, and merchandise availability at the time of purchase. Moreover, our inventory investments will fluctuate to align to our business needs.
While we do not pay tariffs directly to customs authorities, tariffs imposed on certain of our suppliers have resulted in higher vendor source costs. We have partially mitigated these cost pressures through selective pricing adjustments on certain merchandise. Despite these price increases, our cost of goods sold increased in fiscal 2026 and we expect will continue to rise, primarily due to higher transportation cost from rising oil prices and continued merchandise assortment investments. As a result, we expect cost of goods sold as a percentage of revenue to fluctuate based on supply chain dynamics, inventory management, and merchandise mix.
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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 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 in an effort 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, NET
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 that impact our gross margins, payment processing fees, and packaging materials costs, offset by the recoverable cost of merchandise estimated to be returned. Our classification of cost of goods sold may vary from other companies in our industry and may not be comparable.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
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, facility costs for our fulfillment centers and office, professional service fees, information technology costs, and depreciation and amortization expense. 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, cash equivalents, and investments in available-for-sale securities.
PROVISION FOR INCOME TAXES
Our provision for income taxes from continuing operations 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.
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RESULTS OF OPERATIONS | ||
The following table summarizes our financial results from continuing operations:
| For the Fiscal Year Ended | % | |||||||||||||||||||
| (in thousands) | August 1, 2026 | August 2, 2025 | Change | |||||||||||||||||
| Revenue, net | $ | 1,348,119 | $ | 1,267,171 | 6.4 | % | ||||||||||||||
| Cost of goods sold | 759,628 | 704,232 | 7.9 | % | ||||||||||||||||
| Gross profit | 588,491 | 562,939 | 4.5 | % | ||||||||||||||||
| Selling, general, and administrative expenses | 610,187 | 601,844 | 1.4 | % | ||||||||||||||||
| Operating loss | (21,696) | (38,905) | (44.2) | % | ||||||||||||||||
| Interest income | 8,661 | 10,709 | (19.1) | % | ||||||||||||||||
| Other income, net | 767 | 173 | 343.4 | % | ||||||||||||||||
| Loss before income taxes | (12,268) | (28,023) | (56.2) | % | ||||||||||||||||
| Provision for income taxes | 338 | 821 | (58.8) | % | ||||||||||||||||
| Net loss from continuing operations | $ | (12,606) | $ | (28,844) | (56.3) | % | ||||||||||||||
The components of our results from continuing operations as a percentage of revenue were as follows:
| For the Fiscal Year Ended | ||||||||||||||
| August 1, 2026 | August 2, 2025 | |||||||||||||
| Revenue, net | 100.0 | % | 100.0 | % | ||||||||||
| Cost of goods sold | 56.3 | % | 55.6 | % | ||||||||||
| Gross margin | 43.7 | % | 44.4 | % | ||||||||||
| Selling, general, and administrative expenses | 45.3 | % | 47.5 | % | ||||||||||
| Operating loss | (1.6) | % | (3.1) | % | ||||||||||
| Interest income | 0.6 | % | 0.8 | % | ||||||||||
| Other income, net | 0.1 | % | - | % | ||||||||||
| Loss before income taxes | (0.9) | % | (2.2) | % | ||||||||||
| Provision for income taxes | - | % | 0.1 | % | ||||||||||
| Net loss from continuing operations | (0.9) | % | (2.3) | % | ||||||||||
Note: Due to rounding, percentages in this table may not sum to totals.
REVENUE, NET AND GROSS MARGIN
Revenue, net in fiscal 2026 increased by $80.9 million, or 6.4%, compared to the prior year. The increase was primarily due to an improvement in net revenue per active client of 7.8% year over year and higher average order values, driven by the number of items kept by our clients per Fix increasing and higher average unit retail prices. This increase was partially offset by a 1.4% decrease in active clients from August 2, 2025 to August 1, 2026.
Gross margin for fiscal 2026 decreased by 70 basis points compared to the prior year. The decrease was primarily driven by higher transportation costs and lower product margins, partially offset by improved costs related to inventory health management.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
SG&A in fiscal 2026 increased by $8.3 million, compared to the prior year. The increase was primarily driven by higher advertising spend and professional fees, including $4.2 million in non-ordinary course legal fees.
SG&A as a percentage of revenue decreased to 45.3% for fiscal 2026, compared to 47.5% for the prior year, primarily driven by lower compensation and benefits expense as a percentage of revenue.
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PROVISION FOR INCOME TAXES
The following table summarizes our effective tax rate from loss from continuing operations for the periods presented:
| For the Fiscal Year Ended | ||||||||||||||
| (in thousands, except percentages) | August 1, 2026 | August 2, 2025 | ||||||||||||
| Loss from continuing operations before income taxes | $ | (12,268) | $ | (28,023) | ||||||||||
| Provision for income taxes | 338 | 821 | ||||||||||||
| Effective tax rate | (2.8) | % | (2.9) | % | ||||||||||
Our continuing operations are subject to income taxes in the United States. Our effective tax rates for fiscal 2026 and fiscal 2025 differ from the federal statutory income tax rate, primarily due to a decrease in capitalized research and development costs. The tax provisions for fiscal 2026 and fiscal 2025 comprised primarily of state taxes.
LIQUIDITY AND CAPITAL RESOURCES | ||
SOURCES OF LIQUIDITY
Our principal sources of liquidity are our cash, cash equivalents, investments, cash flows from continuing operations, and borrowing capacity under our credit facility. As of August 1, 2026, we had $95.3 million of cash and cash equivalents attributable to continuing operations, and $125.6 million of investments.
Credit Facility
As of August 1, 2026, we have a revolving credit facility with borrowing availability of $50.0 million, and excess availability of $33.1 million as a result of outstanding letters of credit, and no outstanding borrowings.
Refer to Note 7 in Part II, Item 8 of this Annual Report for information on the terms of the Credit Facility.
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. From time-to-time, we also use cash to repurchase shares of our Class A common stock.
We believe our existing principal sources of liquidity 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 our existing cash and cash equivalents or future cash flow. The repurchase program may be modified, suspended, or terminated at any time. Refer to Note 12 in Part II, Item 8 of this Annual Report for information on the 2022 Repurchase Program.
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CASH FLOWS | ||
The following table summarizes our cash flows for the periods indicated below:
| For the Fiscal Year Ended | ||||||||||||||
| (in thousands) | August 1, 2026 | August 2, 2025 | ||||||||||||
| Net cash provided by operating activities from continuing operations | $ | 39,070 | $ | 25,575 | ||||||||||
| Net cash used in investing activities from continuing operations | (15,396) | (59,121) | ||||||||||||
| Net cash used in financing activities from continuing operations | (42,325) | (14,967) | ||||||||||||
| Net decrease in cash and cash equivalents | $ | (18,651) | $ | (48,513) | ||||||||||
CASH PROVIDED BY OPERATING ACTIVITIES FROM CONTINUING OPERATIONS
During fiscal 2026, cash provided by operating activities from continuing operations was $39.1 million, which consisted of a net loss from continuing operations of $12.6 million, adjusted by non-cash charges of $68.6 million and change in net operating assets and liabilities of $16.9 million. The non-cash charges were primarily driven by $46.4 million of stock-based compensation expense and $22.6 million of depreciation, amortization, and accretion. The change in net operating assets and liabilities was primarily driven by $13.2 million decrease in operating lease right-of-use assets and liabilities from usual business activities and $2.8 million increase in gross inventory balances due to higher inventory receipts and investment in greater assortment.
During fiscal 2025, cash provided by operating activities from continuing operations was $25.6 million, which consisted of a net loss from continuing operations of $28.8 million, adjusted by non-cash charges of $87.2 million and a $32.8 million change in net operating assets and liabilities. The non-cash charges were primarily driven by $56.7 million of stock-based compensation expense and $26.1 million of depreciation, amortization, and accretion. The change in net operating assets and liabilities was primarily due to a $24.8 million increase in gross inventory balances due to higher inventory receipts.
CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
During fiscal 2026, cash used in investing activities from continuing operations was $15.4 million. This was primarily due to purchases of securities available-for-sale of $119.0 million and purchases of property and equipment of $19.2 million, partially offset by sales and maturities of available-for-sale securities of $122.8 million.
During fiscal 2025, cash used in investing activities from continuing operations was $59.1 million. This was primarily due to purchases of securities available-for-sale of $197.9 million and purchases of property and equipment of $16.3 million, partially offset by the sales and maturities of available-for-sale securities of $155.1 million.
CASH USED IN FINANCING ACTIVITIES FROM CONTINUING OPERATIONS
During fiscal 2026, cash used in financing activities from continuing operations was $42.3 million primarily due to repurchases of common stock of $26.4 million and payments for tax withholdings related to vesting of share-based awards of $17.6 million.
During fiscal 2025, cash used in financing activities from continuing operations was $15.0 million, primarily due to payments for tax withholdings related to vesting of share-based awards of $16.0 million.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS | ||
Our most significant contractual obligations relate to purchase commitments of inventory and operating lease obligations related to our fulfillment centers and corporate office. As of August 1, 2026, we had remaining commitments of $182.3 million for inventory purchases, predominantly due within one year, and $54.4 million for other service agreements due over the next one to three years.
Refer to Note 4 and Note 8 in Part II, Item 8 of this Annual Report for information on our operating lease obligations and purchase commitments of inventory, respectively.
CRITICAL ACCOUNTING 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
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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 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 1, 2026, would result in a change in reserves of approximately $2.6 million.
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 2026 or 2025.
STOCK-BASED COMPENSATION
Our stock-based compensation plans allow for the Company to grant performance restricted stock unit ("PSU") awards and nonqualified stock options to employees, directors, and non-employees under terms and provisions established by our Board of Directors. PSU awards and stock options require certain estimates and judgments to determine the fair value of the award. We recognize stock-based compensation expense based on the fair value of such awards at the award grant date, net of estimated forfeitures. We estimate forfeitures based on our historical forfeiture of the respective award.
To determine the fair value of market-based PSU awards with a market-based vesting condition, the Company uses a Monte Carlo simulation, which uses subjective assumptions and simulates multiple stock price paths of the common stock. Stock-based compensation expense is recognized using an accelerated attribution method over the lesser of the derived performance periods or explicit achievement of the stock price hurdles. Compensation expense is recorded regardless of whether the market condition will be ultimately satisfied.
To determine the fair value of stock options, the Company uses the Black-Scholes option-pricing model.
The Black-Scholes option-pricing 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 have not granted market-based PSU awards or stock options in fiscal 2026.
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 2026 or 2025.
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RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Note 2 in Part II, Item 8 of this Annual Report for information on recent accounting pronouncements.