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Stitch Fix Lays Off Hundreds of Employees

Stitch Fix is the latest company feel the heat of the uncertain macroeconomic environment.

The online data-driven personal styling service is cutting approximately 15 percent of salaried positions—nearly 330 employees—representing approximately 4 percent of total roles at the company. Most of the reductions are in non-technology corporate roles and styling leadership roles, according to Stitch Fix.

The layoffs come as the service saw third-quarter revenue slump 8 percent year over year to $492.9 million, leading to a net loss of $78 million. Shares in the company plummeted more than 17 percent on the news in early Friday morning trading, dropping as low as $6.18. The company had traded as high as $65 over the last 12 months.

In a Nutshell: Stitch Fix doesn’t have a rosy outlook for the for its upcoming fourth quarter either, with net revenue expected to land between $485 million and $495 million, which would be a drop of between 15  and 13 percent. Adjusted EBITDA losses are expected to tally between $25 million and $30 million.

As a result of the layoffs and other changes, Stitch Fix expects annual cost savings of $40 million to $60 million in fiscal year 2023. The company expects to incur restructuring and other one-time charges of approximately $15 million to $20 million to be recognized in the upcoming fourth quarter.

Making matters worse, active clients who bought from Stitch Fix in the past year are declining at a rate of 4.9 percent, dropping approximately 200,000 to 3,9 million consumers.

In a third-quarter earnings call, Stitch Fix CEO and president Elizabeth Spaulding called attention to declines in new client traffic to the company’s website, saying that the stylist service had trouble converting new customers due to friction within the website’s recently redeveloped onboarding process. She also laid blame on Apple iOS privacy changes. Spaulding said the company has since again refined the website onboarding experience and landing page, resulting in an approximately 40 percent improvement in new client conversion in the third quarter on a sequential basis.

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“First, we began directing all traffic to a simplified “fix-first” onboarding path. Now, clients entering through the site are directed to schedule a fix upon completing a style profile,” Spaulding explained. “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 level.”

The one positive that the personal stylist might be able to take from this is that net revenue per active client (RPAC) is $553, a year-over-year increase of 15 percent, indicating that those who are still using the service are willing to significantly boost their spending. This is the sixth-straight quarter of RPAC growth, Spaulding said.

Stitch Fix has seen success with its recently opened direct buy channel, dubbed Freestyle, which saw revenue grow 13 percent with outsized gains in categories like special occasion and social wear. Revenue from dresses bought via Freestyle grew more than 75 percent year over year, which is over five times the rate of growth of dresses and fixes.

Inventory totaled $213 million, up just 0.3 percent over the $212.3 million carried in the third quarter of 2021.

Due to ongoing shipping delays and port congestion, Stitch Fix experienced delayed receipts of three to four weeks on a subset of inventory. But for the most part, the company said revenue was not impacted in the quarter with the exception of a few categories in the men’s business, which saw “higher than normal” sell-through rates.

“As everyone knows, the supply chain has slowed down. And so, we’re typically just buying ahead in a longer time frame, although some of our goods such as our exclusive brands, we still have a lot of flexibility on,” said Spaulding. “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 as possible within things like our exclusive brands and Stitch Fix only because we have very, very high control there.”

Chief financial officer Dan Jedda said in the call that Stitch Fix is not seeing a direct impact of the Covid-19 lockdowns in China, with only indirect impact involving ongoing shipping delays.

Gross margin for the third quarter decreased by 340 basis points (3.4 percentage points) to 42.6 percent, from last year’s 46 percent, which was primarily driven by higher merchandise costs, shipping costs and inventory reserves.

Jedda said to expect similar gross margins in the fourth quarter as Stitch Fix continues to see elevated product and transportation costs.

Stitch Fix ended the third quarter with no debt and $283 million in cash, cash equivalents and securities.

Net Revenue: For the three months ended April 30, 2022, Stitch Fix reported $492.9 million in net revenue, representing a year-over-year decline of 8 percent from the 2021 third quarter’s $535.6 million.

Net Earnings: In the third quarter, net losses amounted to $78 million on a diluted loss per share of 72 cents, widening from the prior-year period’s losses of $18.8 million on a diluted loss per share of 18 cents.

Adjusted EBITDA losses amount to $36 million, a downward swing from the $11.6 million generated in the 2021 third quarter.

CEO’s Take: Despite the losses, Spaulding remained upbeat about the potential for the Freestyle direct buy service, saying that approximately 20 percent of customers who try the service once 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 algorithms focused on understanding a client set of specific attributes,” Spaulding said. “In contrast, this model focuses on understanding the client through their interactions with Stitch Fix over time. A test of this new model demonstrated significant improvements to client outcomes with a nearly 6 percent lift in Freestyle revenue and a 4 percent lift in Freestyle reorders over a 30-day period compared to our previous algorithm. It is now rolled out across the freestyle experience.”