Stitch Fix Needs Fixing

On Tuesday after the bell, Stitch Fix Inc SFIX topped fiscal first-quarter expectations by reporting a narrower-than-expected loss and beating analysts' sales expectations as sales were fueled by new customers of its direct-buy option. However, the online shopping and styling company cut its revenue outlook for the fiscal year due to ongoing supply chain pressures, causing shares to plummet 18% in extended trading as the company still needs to educate consumers on its Freestyle option. Despite topped analyst expectations, investors focused more on red flags reflected by slowing user growth and a weaker revenue outlook.

Fiscal First Quarter Results

Revenue increased 19% from last year as it rose to $581 million, topping the $571 million Wall Street expected. Active clients grew 11% to 4.18 million, which came in lower than the 4.23 million FactSet projected. Moreover, only 15,000 of those were net new adds which is the lowest quarter count it has ever reported, excluding the one quarter that was smashed by the COVID-19 pandemic. Active clients are defined as users who either ordered from the traditional Fix subscription or bought an item directly from the website in the preceding 52 weeks from the final day of the quarter. Net revenue per active client hit a record as it rose 12% $524 with Spaulding attributing it to more customers buying extra items of clothing, along with their subscriptions.

Moving down to the bottom line, Stitch Fix delivered a net loss of $1.83 million, or 2 cents per share whereas it made a net income of $9.54 million, or 9 cents per share during last year's comparable quarter. Still, it topped 14 cents loss per share analysts expected.

The direct-buy platform Freestyle was opened to the public in the fourth quarter after only being available to subscribers and now anyone can purchase a single item. But this experience is yet to be materialized.

A Disappointing Outlook

Stitch Fix is in a transition period as it brings on new users and educates them amid supply crunches. The fact that the number of active customers fell short is a sign of slowing demand. Revenue is anticipated to increase at a high single-digit rate, down from the company's prior outlook of 15% growth with analysts expecting a 15.7% YoY growth rate.

Investors Are Concerned

Investors were expecting to see better results of the direct-buy Freestyle option being open to the public. As a result, shares fell 24% on Wednesday as apparel retailers have hit what seems to be a ‘growth wall'.

CEO Elizabeth Spaulding said the retailer is undergoing a "multi-quarter transformation" with its core Fix offering likely having matured out in the U.S. market. The new offering could become a new growth avenue, but it is taking longer than the company had anticipated to kick in and there's no guarantee it will end up being as successful. The supply chain issues are expected to subside over the coming year and management is learning a lot right now with Spaulding confident that things will get better over the coming quarters. But investors are clearly doubtful.

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