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Stitch Fix Is Down On Earnings: Management To Turn A New Leaf?

Stitch Fix might need a quick fix following quarterly earnings — customer retention fell, margins decreased, marketing spend is on the up.

This was a turning point in the Stitch Fix (NASDAQ: SFIX) story, to say the least. While the long-term prospects could hold true for the company’s vision, the model isn’t perfected yet, and Stitch Fix investors will need to practice patience while the company enacts new strategies. 

Why is Stitch Fix stock down?

I’ll summarise in a few quick points:

  • Active clients declined 4% quarter-over-quarter — this equates to a 160,000 decrease in customer headcount
  • Apple’s iOS 14.5 update caused difficulties with targeting new audiences
  • Its ‘Freestyle’ product hasn’t performed as well as expected
  • The company did not provide Q4 EBITDA guidance, based on changes being made to its marketing strategy
  • Supply chains issues led to several week-long product delays 
  • The disappointing results led to a slew of analyst downgrades

Stitch Fix’s latest quarterly results

Active clients increased just 4% from the year prior to 4 million, and total revenue grew just 3% year-over-year (YoY) to $517 million. Stitch Fix posted a net loss of $30.9 million for the quarter. A silver lining is visible, however, in that the company’s revenue per average customer (RPAC) rose to a record high of $549 this quarter.

Difficulties arose in relation to shipping and supply chain constraints and adoption of its ‘Freestyle’ division fell short of the company’s expectations. The segment grew 29% from the year prior, but it disclosed it was having difficulties onboarding clients, and that promotional efforts may have actually harmed other product categories such as ‘Fix’.

The company is now adjusting its approach to marketing in a way that it can better navigate the privacy changes enacted by Apple — and those that Google has announced will follow — by curtailing advertising spending and pursuing other marketing initiatives.

Is now a good time to invest in Stitch Fix?

Stitch Fix excels in how it provides styling choices to customers — and despite the poor results now — over 2.5 million outfits have been created using its ‘Freestyle’ to date, suggesting customers see value in the service, and Stitch Fix says this has boosted overall sales.

This is all well and good, but we must also acknowledge that the majority of economies have returned to normal, and in-store foot traffic is going to continue to rise back towards pre-pandemic levels eventually. This could reduce the appeal of its online service seeing as people are happy to get back out browsing socially and visiting more shopping malls as opposed to using e-commerce as their only resort.

More worrisome though, is the company’s neglect when it comes to marketing. The update that has greeted many digital-only businesses with a fresh dash of pain in the customer acquisition department has been ongoing for months. Stitch Fix clearly hasn’t moved fast enough to find a resolution for this issue, noting on the earnings call that it hasn’t even explored search engine marketing (SEM) or search engine optimization (SEO) as alternative strategies yet. Margins have already fallen from prior quarters, and increased marketing spend — while necessary — won’t help give them a boost.

Despite all of this, CEO, Elizabeth Spaulding stated:

“We remain confident in our long-term strategy, and are resolutely focused on building and enhancing the overall client experience for Fix and Freestyle with an emphasis on growing active clients.”

From my perspective, the roadmap for Stitch Fix’s profitability has been lengthened considerably now. While I see the point of Stitch Fix management and believe the company offers a unique differentiated service to customers, these hiccups could set the company back a few steps and a reorganization at the company is certainly needed.

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