Skip to main content

Why Investors Weren’t Happy With Stitch Fix’s Q4 Report

While Stitch Fix‘s report of fourth-quarter earnings results on Tuesday looked good, with an active client base that rose 18 percent plus gains in both revenue and profits, investors weren’t happy with the firm’s softer projections for the first quarter.

In a Nutshell: Katrina Lake, founder and CEO of the online personal styling service, said the fourth quarter was a strong one for the company as it also grew its active clients to 3.2 million, an increase of 18 percent year-over-year.

In a letter to shareholders, the company said it introduced in the quarter its direct-buy functionality through a Shop New Colors program to better service clients as well as increase the company’s share of wallet, such as allowing them to buy previously purchased items in new colors and prints.

“It is based on items that clients have already purchased from us, and presents a highly personalized subset of algorithmically generated items, delivered to clients in the form of shoppable styling recommendations for pieces already in their closets,” the letter said of Shop New Colors. While the company has “tens of thousands of items available” in its assortment, the personalized algorithms narrows that choice down to an average of 30 items to 40 items at any one time.

Following an eight-week beta test period, “over one-third of clients that purchase through Shop Your Looks engage with us multiple times, and approximately 60 percent of clients who buy through the offering purchase two items or more.”

The company also noted its interactive platform called Style Shuffle, designed to engage clients and collect actionable feedback, and fuel strategic decisions across the Stitch Fix business. Previously used mostly to match stylists with clients, the platform is now used to improve product recommendations to clients, such as through the use of visual galleries.

Related Stories

“Since adding visual style galleries into our styling program, we’ve increased the number of items purchased per Fix, average order value and client satisfaction,” the letter said.

Net Sales: For the quarter ended Aug. 3, the company reported a 35.8 percent gain in revenues to $432.1 million from $318.3 million a year ago.

In the same letter, the company told shareholders it posted a gross profit of $190.4 million, or 44.1 percent of net revenue, a slight dip from 44.4 percent in the fourth quarter of fiscal 2018. The company said the change was due to an increase in inventory reserves year-over-year. And its largest active client base at 32 percent are women and men between ages 30 to 39.

The company said inventory assortment grew throughout fiscal year 2019, noting that it grew the number of brands shipped to female customers by nearly 50 percent. In its men’s business, the overall assortment grew in general, while in activewear specifically, the company doubled the number of products and brands over the past year to more closely align with clients’ style and fit preferences.”

Inventory turn at Stitch Fix is at a “rate of more than six times annually.” Stitch Fix added that its “capital-light business model has also allowed us to generate strong free cash flow even as we invest in new merchandise offerings and expand our client base through category expansions.” For fiscal year 2019, the company’s capital expenditures totaled $30.8 million, or 2 percent of net revenues. Free cash flow generated totaled $47.8 million.

Earnings: The company reported a 60.7 percent decline in revenue to $7.2 million, or 7 cents a diluted share, from $18.2 million, or 18 cents, a year ago.

Still, earnings of 7 cents a share was better than Wall Street’s consensus estimate of 4 cents a share.

What investors weren’t thrilled about was the softer guidance for the first quarter of fiscal year 2020, ending Nov. 2, 2019.

Net revenues were guided to between $438 million to $442 million. The company said it planned for lower growth because summer products carry lower average unit retails and average order values, adding that it spent less on marketing in the fourth quarter and is expecting new clients to contribute to revenue. Investors sent shares of Stitch Fix down nearly 8.3 percent to $18.40 in after-market trading at 6:00 p.m.

For fiscal year 2020, ending Aug. 1, 2020, the company projected net revenue between $1.90 billion to $1.93 billion, taking into account the return to a 52-week year versus 2019’s 53 weeks.

CEO’s Take: According to Lake, “For the full year, we grew new revenue 29 percent year-over-year to $1.6 billion and captured more of our large addressable client base by adding nearly half a million active clients in 2019. In addition, we consistently demonstrated our ability to deliver great client experiences, growing revenue per active client in every quarter of fiscal 2019, including 9 percent year-over-year in [the fourth quarter].”