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Stitch Fix Misses Q3 Revenue Estimates But Active Customers Climb 9%

Whereas the apparel industry has been under major duress during the COVID-19 pandemic, Stitch Fix was buoyed by its positioning as a digital-only fashion player, seeing third-quarter net revenue of $371.7 million, a decrease of 9 percent year over year. The sales totals were well under Wall Street expectations of as much as $418.2 million, but the declines are tepid compared to most recently announced quarterly results across apparel.

Founder and CEO Katrina Lake said she anticipates Stitch Fix will return to positive revenue growth in the fourth quarter, a positive sign for the online personal styling service, which still saw active clients and revenue per active client increase in the third quarter.

In a Nutshell: The e-commerce company, which combines input from human stylists and complex algorithms to determine a personalized “fix” of five apparel items for shoppers, hasn’t delivered good news recently. On June 1, the company told 1,400 of its California-based stylists—or 18 percent of its staff—that they would be laid off in September. In their place, 2,000 new stylists are expected to be hired in lower-cost locations including Cleveland, Dallas, Minneapolis, Pittsburgh and Austin, Texas, starting this summer.

But while shoppers remained in their homes through the second half of the February through April quarter, Stitch Fix was able to further grow its consumer base and withstand losses that many larger store-reliant fashion companies couldn’t.

Active clients jumped to 3.4 million, an increase of 9 percent year over year. Stitch Fix defines active clients as shoppers in the past year who have either checked out a shipment, or “fix,” or purchased through the recently expanded direct-buy functionality, which enables shoppers to purchase single items.

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In the quarter, direct-buy revenue more than tripled quarter over quarter. Total percentage of existing women’s customers who bought individual apparel items grow from 5 percent in February to 13 percent in May.

The direct-buy functionality is intriguing for the go-forward business model of Stitch Fix, which initially started and grew as a styling service that sends out customized boxes of clothes to customers on an incremental basis. Shoppers could request to receive a box of items—curated both by personal stylists and algorithms that track prior purchasing habits and consumer tastes—every two to three weeks, every month, every other month or every three months.

To promote direct buy as a new shopper-acquisition vehicle, Stitch Fix introduced “Trending for You,” a beta test for a new offering, earlier this month. Shoppers no longer must have previously purchased an item in order to receive product recommendations; instead, the new feature enables men and women to shop for personalized looks based solely on their style profiles.

Although Stitch Fix is an online-only player, it dealt with its own share of problems stemming from the COVID-19 pandemic. In March, the company closed three of its distribution centers—in San Francisco, Dallas and Bethlehem, Pa.—shifting management of its inventory and serving clients from its three other U.S. distribution centers. By the end of the month, the company’s U.S. warehouse capacity had fallen by nearly 70 percent, with its “fix” backlog doubling week-over-week in the last two weeks of March.

In a letter to shareholders, Stitch Fix said it exited the third quarter at approximately two-thirds’ capacity within the reopened warehouses, with the company on track to eliminate the backlog by the end of June.

Net Sales: Quarterly revenue fell to $371.7 million, down 9 percent from $408.9 million a year ago. Wall Street expected $418.2 million.

Net revenue per active client also increased to $498, an average of 6 percent year over year and the eighth consecutive quarter of growth in that metric.

In April, weekly net merchandise revenue grew each week.

Earnings: Stitch Fix posted a loss of $33.9 million, or 33 cents per share, in the quarter, swinging from a profit of $7.0 million, or 7 cents per share, a year ago. Wall Street expected a 15-cent loss for the latest quarter.

Adjusted EBITDA loss for the third quarter reached $40.3 million, compared to just $310,000 in adjusted losses last year. When excluding the impact of stock-based compensation expenses, which are typically given to employees, executives and directors of a company with shares of ownership in the business, the loss was $20.7 million.

CEO’s Take: “We believe our business model and balance sheet uniquely position us to thrive in retail’s next era, and we’re excited to demonstrate that in the quarters ahead,” said Lake. “Our results give us confidence in the resilience and increasing relevance of our model as more people than ever before seek out a better online shopping experience, rooted in what is meaningful and right for them. Through a combination of innovating the fix model and expanding direct buy, we are excited to expand the Stitch Fix ecosystem, and unlock personal styling for everybody.”