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How Shipping Delays Impacted Q2 Revenue, ‘Cycle Times’ at Stitch Fix

The shipping delays at key West Coast ports appear to have hampered the holiday results of yet another apparel retailer. Stitch Fix, the online personal stylist service, said the delays directly prevented the company from recognizing all the revenue from the shipments it made during the quarter.

Net sales at Stitch Fix rose 11.6 percent to $504.1 million in the second quarter, but fell short of the expectations from Wall Street analysts polled by Refinitiv, which anticipated sales of $512.2 million.

In the quarter, the company also reported a net loss of $21 million, or 20 cents per share, better than the 22-cent loss per share expected, but down from a profit of $11.4 million, or 11 cents per share, a year earlier.

In a Nutshell: Katrina Lake, CEO and founder of Stitch Fix, said on an earnings call that the company saw increased “cycle times” that impacted its revenue totals due to the shipping delays. The cycle times are defined as “the duration between when we style items for a Fix and when we receive and process any items back from the client in our warehouse.”

According to Lake, unlike other e-commerce companies, Stitch Fix recognizes revenue when shoppers check out after already trying on their Fix of clothes at home, instead of at the point of shipment.

Shipping delays over the holiday season meant that the company was forced to work through a backlog and couldn’t record revenue for all boxes shipped during the quarter. Additionally, the longer it takes clients to receive a Fix, the longer it will likely be before they purchase the next one.

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Adjusting for the impact of these increased cycle times, Lake said second-quarter revenue would have been within the company’s initial guidance range.

“In response to these delays, we’ve made adjustments in our ship planning process to ensure we meet our promised delivery dates,” Lake said. “We are taking steps to diversify our outbound carrier mix, and we are partnering with our primary carrier, the United States Postal Service, to process our returns more efficiently.”

The biggest highlight for Stitch Fix in the quarter was the women’s category, which delivered its highest year-over-year “first Fix” growth in the past five years, at nearly 50 percent year over year. The first Fix consumers are those who buy using the company’s personal styling option for the first time.

The growth resulted in a quarter-over-quarter increase in active clients of 110,000, more than twice what Stitch Fix delivered in its prior holiday quarter. Active clients are defined as those who have made a purchase via Stitch Fix once in the past 12 months.

In total, Stitch Fix has an active client base of nearly 3.9 million, an increase of 408,000 or 12 percent year over year.

Gross margin was impacted in the quarter by the increased shipping expenses, largely due to higher rates with its carriers. The metric declined from 44.8 percent of sales in last year’s second quarter to 42.9 percent this year.

In addition, the dip was impacted by increased inventory reserves due to higher inventory levels, as well as some select men’s inventory targeted for near-term clearance.

Inventory jumped significantly quarter over quarter to $182.4 million, a robust 46.2 percent over the $124.8 million held in inventory in the first quarter of 2020.

For the fiscal third quarter, Stitch Fix is expecting net sales of $505 million to $515 million, representing growth of 36 to 39 percent, and an adjusted loss before interest, taxes, depreciation and amortization (EBITDA) of $5 million to $9 million.

The longer purchase cycles could effect the company for the remainder of the fiscal year. For 2021, the company now expects revenue to grow 18 to 20 percent, down from its prior outlook of 20 to 25 percent.

Net Sales: Stitch Fix saw net revenue rise 11.6 percent to $504.1 million in the second quarter, but net revenue per active client decreased 6.8 percent to $467 from $501 last year, the company said.

Net Earnings: The online personal stylist service swung to a net loss of $21 million in the quarter on diluted losses per share of 20 cents. In the prior-year quarter, Stitch Fix generated net income of $11.4 million, or 11 cents per share, a year earlier.

Stitch Fix also saw an adjusted EBITDA loss of $8.9 million.

CEO’s Take: Beyond the longer cycle times in the second quarter, Lake expressed slight concern about the timing of new feature launches in its new a la carte segment, which saw lighter than anticipated purchases from existing clients during the holidays.

“We expect some product feature rollouts tied to the direct buy launch to first-time clients to move to later in this fiscal year, which would push out some of the anticipated revenue growth,” Lake said.