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Here’s Why Stitch Fix Wants to Style Customers in ‘Lower-Price Products’

On the surface, Stitch Fix Inc. turned a profit and booted sales from the year-ago quarter, but there are indications that sales could be slowing down–not to mention lower total revenues on the horizon as the company broadens its merchandise range to include lesser-priced products.

In a Nutshell: The personal styling service firm has 3.5 million active clients, representing an increase of 17 percent year-over-year. That seems like a nice gain from last year, but a deeper dive reveals order values coming in lower than initially expected.

“We are pleased to deliver another strong quarter in Q2…our seventh consecutive quarter of growth and a reflection of our unique personalization capabilities,” founder and CEO Katrina Lake said.

“Stitch Fix has generated positive adjusted EBITDA every fiscal year since 2015, which has allowed us to reinvest in our business and in new category growth,” Lake told analysts during a conference call after the company posted second-quarter results Monday. EBITDA, or earnings before interest, taxes, depreciation and amortization, is a measure of a company’s operating profitability.

In addition to falling short of analysts’ sales projections for the quarter, the company also lowered its guidance for annual adjusted EBITDA. Even though Lake told analysts that the company drove healthy active client growth, she also noted that heightened promotional activity across retail translated into clients spending less on their monthly “fixes” in the quarter, on average, which then resulted in lower order values than the company had expected.

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“We think it’s responsible to reflect this trend in our second half forecast. Our strategy to continue to grow our assortment of lower-price products to serve a broader universe of clients also impacts this guidance,” Lake said.

For now, the global COVID-19 health emergency has yet to have a material impact of Stitch Fix’s business. “That said, we continue to monitor developments and are working closely with our brand and manufacturing partners to mitigate future impacts,” she said, adding that “it’s too early for us to quantify total potential supply chain or client demand impact at this point.”

Net Sales: Net revenues jumped 22 percent to $451.8 million from $370.3 million. Net revenue per client rose 8 percent to $501, but analysts were expecting revenues of $452.6 million and net revenue per client of $503.70.

Earnings: Net income slipped 4.5 percent to $11.4 million, or 11 cents a diluted share, from $12.0 million, or 12 cents, in the year-ago quarter.

Stitch Fix now expects net revenue for fiscal 2020 to fall between $1.8 billion and $1.84 billion, below prior guidance of $1.9 billion to $1.93 billion. Annual adjusted EBITDA is projected at between zero and $10 million, a cut from prior estimates of between $18 million to $32 million.

For the third quarter ending in April, sales are projected in the range of $465 million to $475 million, versus Wall Street’s expected $506.3 million.

The company also attributed its weaker guidance update to reflect anticipated lower revenue from the U.K..

CEO’s Take: “This quarter, we are excited to expand our new direct buy offerings to even more clients. As we continue to evolve our personalization capabilities, we’re confident in our ability to capture additional market share, and deliver on our mission to transform the way people find what they love,” Lake said.