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Stitch Fix Pins Revenue Growth on ‘Rapid Sourcing’

Stitch Fix pleasantly surprised Wall Street analysts with its first-quarter results, seeing earnings of 9 cents per share on $9.5 million in net income, while net revenue rose 10 percent to $490.4 million. These totals exceeded the average analyst estimates for a per share loss of 18 cents and net sales of $481 million, according to Bloomberg data. Shares have risen more than 45 percent in the hours since the aftermarket earnings release Monday.

In a Nutshell: Bucking the trends brought on by Covid-19, Stitch Fix is one of few fashion firms reinstating its guidance numbers, expecting to deliver net revenue growth of 12 percent to 14 percent year over year in the second quarter, and full-year 2021 revenue growth of 20 percent to 25 percent.

Active clients who checked out a “fix” or purchased via direct buy in the past year grew to 3.76 million, a 10 percent year over year increase. The quarter-over-quarter increase of 240,000 active clients was the online personal stylist’s highest sequential client addition on record.

Net revenue per active client fell for the third straight quarter, dropping 4 percent from $486 per shopper to $467. But in the company’s first-quarter earnings call, founder and CEO Katrina Lake said that the company’s “fix” customers, those who buy using the company’s personal styling option, are demonstrating both “strong purchase behavior and satisfaction.”

Defining a successful first fix as the percentage of customers who purchase at least one item in their first fix and look forward to their second fix, Lake said that in each of the past two quarters, nearly 80 percent of the company’s first fixes met this criteria, the highest level seen in five years. While Stitch Fix might deem a one-time follow-up a success, it is unclear how many pieces or fixes on average are needed for Stitch Fix to turn a profit.

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In the quarter, Stitch Fix delivered first fix growth exceeding 25 percent year over year.

“The strength of these recent cohorts are due in part, to our ability to shift our inventory to meet the client in the moment but also our longer-term efforts in improving our recommendations by leveraging our growing data set to bolster our style graph and power our algorithmic models,” Lake said in the earnings call. “We believe that establishing a favorable first fix outcome is a strong indicator of future client engagement and retention that will serve as a tailwind in the quarters to come. We saw strong client outcomes in our newest clients and also in our broader existing client base. We’re pleased to share that, across our entire fix offering, we’ve increased success rate every year on record.”

Lake highlighted Stitch Fix’s abilities to adapt its inventory assortment to the Covid-19 environment, pointing out that the company has grown its athleisure assortment as a percentage of women’s inventory by more than 150 percent compared to pre-Covid levels.

Additionally, Lake said that the company is sourcing a “meaningful portion” of some of its most in-demand styles using a “rapid sourcing model” where product arrives to distribution centers in as little as 10 weeks. According to Stitch Fix’s November factory list, most of the products come from China’s 44 factories, while the company works with 17 factories in Vietnam, 11 in Turkey and eight in India, among many others worldwide.

The rapid sourcing contributed to a back-to-school season that saw the e-commerce service grow first fix shipments by 60 percent year over year. The company also widened its assortment of more affordably priced products across categories, which have “resonated well with women’s and men’s clients and led to outsize success rates,” Lake said.

Stitch Fix ended the quarter with no debt and $429.9 million in cash, cash equivalents and highly rated securities.

In the call, Lake introduced Dan Jedda as Stitch Fix’s new chief financial officer. Replacing current president, chief operating officer and interim chief financial officer Mike Smith, who is transitioning into a board role with Stitch Fix as he launches a new venture capital firm, Jedda’s background dovetails with where Stitch Fix wants to go next.

In 15 years at Amazon, he most recently served as the divisional chief financial officer of the company’s digital video, digital music and advertising businesses.

Net Sales: In the first quarter, Stitch Fix generated net revenue of $490.4 million, representing 10 percent growth over the $444.8 million in the year-ago period, and 11 percent growth quarter over quarter.

For the second quarter, Stitch Fix aims to deliver net revenue of $506 million to $515 million, reflecting 12 percent to 14 percent growth year over year.

Net Earnings: The online personal styling company saw net income of $9.5 million, a strong performance compared to the $178,000 lost in the third quarter last year. The company saw earnings of 9 cents per share in the quarter compared to zero cents per share in the year-ago-period.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $6.85 million.

Gross margin in the quarter was 44.7 percent, representing a 60-basis-point (.6-percentage-point) decline from last year, driven by higher shipping expenses and partially offset by lower inventory reserves and clearance rates.

CEO’s Take: Lake emphasized the company’s direct buy business model, which diverts from the company’s primary “fix” model of curated customized boxes of clothes sent to customers on an incremental basis.  In November, Stitch Fix expanded its direct buy capabilities with the beta launch of Shop by Category, which leverages algorithms to deliver relevant recommendations built around specific themes, like athleisure, sweaters or seasonal staples.

“In addition to our strong outlook for fix demand, we believe that direct buy will serve as another catalyst as we attract new clients, convert prospective clients and reactivate lapsed clients,” Lake said. “We’ve continued to see direct buy’s penetration grow across our men’s and women’s client base, and we plan to introduce it to new and prospective clients later this fiscal year. These strong trends we’ve seen in our business, combined with ongoing market share shift to Stitch Fix, gives us excitement for the quarters ahead. In Q1, the combination of record quarterly client additions, strong auto-ship retention, multiyear highs and successful first Fix rate and our highest success rate to date demonstrate the resonance of our offering and the power of the personalization engine that fuels our business.”