Dive Brief:

• After earlier announcing layoffs of more than 300 salaried positions, or 15% of that workforce, Stitch Fix on Thursday said that Q3 net sales fell 8% year over year to $492.9 million. Its number of active clients fell by 200,000 or 5% year over year, per a company press release.

• Gross margin contracted by 340 basis points year over year to 42.6%, driven by transportation costs and tightening product margins, Chief Financial Officer Dan Jedda told analysts Thursday.

• The apparel e-retailer’s net loss widened to $78 million, from an $18.8 million loss a year ago. Savings from the layoffs plus downsizing its real estate should yield annual cost savings of $40 million to $60 million in fiscal year 2023, the company said.

Dive Insight:

The late-pandemic apparel boom seen at other retailers seems to have largely passed Stitch Fix by, as the e-retailer continues to struggle to add traditional e-commerce, dubbed “Freestyle,” to its legacy styling “Fix” service.

“At a higher level, with consumer spending on apparel still ~25% above 2019 levels [year to date, Stitch Fix’s] accelerating declines stand out as the model continues to face challenges,” Wells Fargo analysts led by Ike Boruchow said in emailed comments.

Spaulding pushed back on that notion Thursday, bypassing a question about the closet refresh that has boosted clothing sales in recent months.

“I think we're always going see consumers seeking out newer, better ways to shop,” she said. “One of the things we saw during the pandemic was just a systemic shift of more consumers shopping online. Now, stores took back a little bit of that in the last few quarters, but by and large consumer behavior has shifted, and there's always going to be shifts in preferences for different types of apparel.”

The company did benefit from shifts in apparel demand, with special occasion and social wear like dresses helping to push Freestyle sales up 13%, she also said. About 20% of the company’s Freestyle customers return to buy again within 30 days, she said.

A lot is riding on Freestyle, which enjoys a much larger addressable market than the niche clothing box business. Still, for now, the Fix business is still being emphasized, Spaulding said. “Until our brand awareness for Freestyle and the fact that you can shop with Stitch Fix gets higher, we're going to focus [the website] as a Fix-first channel, and then immediately into Freestyle,” she said. “We anticipate that over time that would change, but we feel like that's the best way to serve our client demand right now through Stitchfix.com.”

Nordstrom recently ended its similar Trunk Club service, joining ThredUp in giving up on the model.

Freestyle's “slow ramp” and the company’s declining client base are creating uncertainty in the business, William Blair analysts led by Dylan Carden said in emailed comments.

Stitch Fix said it expects net revenue to fall 13% to 15% for the current quarter. The company had previously estimated growth for the year would reach about 15%; Wells Fargo analysts this week said they expect a 1% decline for the year.