Sometimes big, innovative companies that quickly attract consumers in their early days can become more of a niche novelty. This is the case of Stitch Fix (NASDAQ: SFIX), fashion e-commerce company that is known for having personal stylists who send customers a “Fix” with pre-packaged items that consumers can choose to keep or return.
Five years after its IPO, Stitch Fix is struggling to maintain its identity. Its founder and CEO has stepped down and the company is looking more and more like a traditional e-commerce store with its “Freestyle” offerings. Although Stitch Fix has spurred growth over the past few years by expanding its categories and geographic coverage, the company now seems out of options.
Since the beginning of the year, Stitch Fix has lost about half of its value. And from all-time highs above $90 reached in January 2021, the company is trading at a mere fraction of what it once was.
Earlier this year, in January, I issued a bullish “buy the dip” recommendation on Stitch Fix as it traded at its teenage peak. I admit it here: it was a wrong call. At the time, I argued that investors were putting the cart before the horse for judging Stitch Fix’s 2022 calendar forecast harshly before seeing actual results decline.
However, the story only got worse. Stitch Fix recently released fiscal second quarter results (January quarter), showing revenue flattening. Active customers have held steady, but that’s more down to how Stitch Fix defines its customers (any buyer who’s made a purchase in the last 12 months – which masks any recent defections). Looking ahead, Stitch Fix expects revenue to decline, impacted by a slowdown in Fix business as well as tougher comps compared to last year’s pandemic period.
In my opinion, Stitch Fix is caught in a bind. All e-commerce stocks are down, but Stitch Fix is in worse shape, partly because A) its products are quite expensive and don’t quite fit the “athleisure” trend that has accelerated since the pandemic, and B) the types of clothing offered by Stitch Fix are best picked up at actual retail stores, which are now open nationwide. Stitch Fix may have a small fanbase, but it’s unclear if the company is alienating its base by focusing so much on its direct-buy “Freestyle” format.
Additionally, raw material price inflation and logistical constraints will put immense pressure on Stitch Fix. The company has always offered free shipping and free returns, and unless the company also starts inflating prices (at the risk of generating an already fleeting customer base), its margin profile will be under threat.
The bottom line here: I’m not as optimistic about Stitch Fix as I used to be. I am now bearish on this stock and recommends cutting losses here. There’s tremendous value to be found in the e-commerce and retail sectors (names I like in those two spaces include Chewy (CHWY), Gap (GPS) and Farfetch (FTCH)) – but in the case of Stitch Fix, don’t get caught in the value trap. It is a company that started with a truly innovative and differentiating brand, but trying to be “everything for everyone”, the company is now struggling to retain customers and convert new buyers to its model. confusing economics.
Now let’s cover Stitch Fix’s most recent quarterly results in more detail, which sparked even more loss of confidence in the name.
As can be seen in the chart above, the best that can be said for Stitch Fix’s activity is that it’s…pretty flat. Revenue was up just 3% year-over-year to $517 million, essentially in line with Wall Street expectations as well as the company’s earlier forecast that it would grow 0-3 % year-on-year.
Importantly, growth has slowed sharply from 19% year-over-year growth in the first quarter. Sequentially, growth was also down -11% quarter-over-quarter from Q1, which is an atypical seasonality for Stitch Fix – which grew 3% from Q1 to Q2 this fiscal year. 21.
An additional concern here: net revenue per active customer increased 18% year-over-year, while “active customers” (defined as someone who made a purchase in the last twelve months) also increased 4% year-over-year. a year. The fact that revenue grew only 3% year-over-year despite these measures is an indicator that many of Stitch Fix’s 4.01 million so-called “active” customers are in fact inactive. In fact, the company noted that it did a big referral campaign last year that ended in the third quarter of 2021. While many of those referrals were one-time buyers, we’ll see those active customers drop between the next quarter of the fourth quarter.
Here are some insightful comments from CEO Elizabeth Spaulding’s prepared remarks on the second quarter earnings call discussing the recent weakness seen by the company:
Two factors had a big impact on the raw adds: firstly, the conversion of new visitors like for Fix and Freestyle is not where we want it to be; Second, given the changes in iOS 14, the marketing channels that have always worked for us are challenging and effectively targeting customers. I will develop each of these points later. However, as a result, we experienced a decline in gross customer additions and also elected to reduce our marketing spend in the second quarter. We invested 6.8% of net sales for the second quarter compared to 8.3% for the same period last year.
Additionally, higher dormancy contributed to a lower number of active customers for the quarter. As a reminder, we had higher dormancy in the second quarter due to the overlap of last year’s high dollar benchmarks, which we ended in the third quarter of 2021.
I want to address the point I mentioned earlier about conversion and provide some additional information. In our efforts to launch and promote Freestyle, we have chosen to direct visitors coming to stitchfix.com to the Freestyle experience. It is important to note that stitchfix.com is the primary landing page for customers wishing to order a patch. Therefore, by guiding customers to the Freestyle experience first, we have inadvertently created friction for those talking about Fix. To ease this friction, we’re starting to direct stitchfix.com traffic down a clear and easy Fix onboarding path. We expect this to drive conversion of new Fix customers over time.”
In simpler terms: Freestyle’s original intention was to add incrementality to Stitch Fix buyers (the company was hoping customers would continue to order patches while buying Freestyle add-ons), but it appears to be cannibalizing Fix instead. Management’s confidence in the business has waned, as evidenced by Stitch Fix’s forecast – it expects revenue to fall between -10%y/y and -7%y/y in the third quarter:
Profitability news is a bit better. Gross margins rose two points year-over-year to 45% in the quarter, driven by higher orders, but fell two points from the first quarter due to an increase in inventory reserves (a concern that investors need to think about). The company pulled 150 basis points from its marketing spend, reacting to weaker performance seen in the Fix business.
Year-on-year operating cost improvement helped Stitch Fix grow adjusted EBITDA to $10.1 million, representing an adjusted EBITDA margin of 2%, from a loss of -$8.9 million , or a margin of -2%, in the second quarter of the previous year.
That being said, with Stitch Fix expecting lower revenue, the story isn’t going to be so rosy going forward (the forecast is for EBITDA margins to drop from -5% to -6% in during the quarter, and the company also withdrew its full-year profitability guidance citing uncertainty in the business).
Key points to remember
Stitch Fix’s fundamental profile has warped tremendously over the past year. Freestyle, originally touted as a move that could give the company a big boost to growth, is increasingly looking like a blunder that is diluting Stitch Fix’s brand and making it look like just another of its dozens of competitors in the trade. electronic. With Stitch Fix’s grip on customers fading, I would recommend retiring that name.