Seeing strength in Stitch Fix’s membership improvement and strong revenue, investors sent its stock soaring by more than 30 percent after the subscription service released its third-quarter results following market close Wednesday.
In a Nutshell: So far in FY19, Stitch Fix has grown its membership base to 3.1 million, marking 17 percent growth over the comparable period. As a result, the brand is raising the lower end of its full-year guidance, a clear signal to investors that Stitch Fix leadership is confident in its success over the second half of the year.
During the brand’s Q3 conference call, Stitch Fix founder and CEO Katrina Lake said the brand was excited about its position in the retail landscape. The company’s success in the face of such challenging conditions, Lake said, was both a sign of the times and Stitch Fix’s commitment to improving its customer experience.
For example, Stitch Fix’s Style Pass, an additional subscription that eliminates the $20 styling fee that comes with each new box, has led to reduced friction and improvements in client retention and purchase frequency throughout the year. As of Q3, one-year renewal rates for Style Pass exceeded 70 percent.
Additionally, Stitch Fix has made improvements to distribution by adding men’s wear to an additional fulfillment center and with the addition of own-brands—which have seen high sell-through and inventory turn. The subscription service also recently applied an improved algorithm that better tracks new, high-quality clients, i.e., those that frequently purchase at least one item from each box.
Sales: Revenue for Stitch Fix during Q3 totaled $408.9 million, beating analyst expectations of $394.85 million and increasing by 29 percent over FY18. During Q3, revenue per active client also increased by 8 percent, year-over-year.
Margins were up for men’s wear in Q3 as the service worked to improve the category’s assortment by providing additional choices for both tailored apparel and activewear. Specifically, Stitch Fix stylists expanded the options for men when it came to everyday activewear and tailored items for special occasions, which it said has received a positive response from consumers.
On the back of the strong performance, Stitch Fix raised its full-year revenue guidance to a range of $1.57 billion to $1.58 billion from the $1.53 to $1.56 billion range the company set at the beginning of the fiscal year.
Earnings: Net income of $7 million in Q3 earned Stitch Fix a diluted EPS of 7 cents, compared to the loss of 3 cents that analysts expected.
Despite investments toward building out Stitch Fix services for both children and users in the United Kingdom, the company was able to boast 29 percent growth in net income during the third quarter. Stitch Fix said this growth was driven by both an increase in performance marketing and lower clearance activity that improved its gross margin by nearly 100 basis points.
Additionally, over the second half of the year, Stitch Fix plans to raise its marketing budget above the 12.3 percent share of SG&A expenses it currently demands to promote the addition of new categories and U.K. members.
CEO’s Take: Lake praised the company for its strong third-quarter performance and suggested Stitch Fix was more than prepared for rapid growth.
“Q3 was another strong quarter for us, delivering net revenue of $408.9 million, exceeding our guidance and representing 29% year-over-year growth,” Lake said in a statement. “We grew our active clients to 3.1 million, an increase of 17% year over year. At the same time, we continue to drive engagement with our existing client base, growing revenue per active client 8% year over year. These results demonstrate our ability to attract new clients and to serve our existing clients well. The continued strength of our women’s category and the growth of our men’s category give us even more confidence in our ability to scale new categories and geographies. As I look forward, I’m excited about the opportunities ahead to delight even more clients around the world.”