Stitch Fix swings to a loss as inventory piles up

Dive Brief:

Stitch Fix on Monday said that second quarter net revenue rose 12% year over year to $504.1 million, as net revenue per active client fell 7% to $467, results that missed its own and some analyst expectations.
In the period, the company's holiday quarter, the number of active clients rose by 408,000 or 12% year over year to nearly 3.9 million, according to a company press release.
In part due to shipping delays and higher freight costs, the e-retailer swung to a $21 million net loss from $11.4 million in net income a year ago, with an adjusted EBITDA loss of $8.9 million. Gross margin declined 190 basis points to 42.9%, CFO Dan Jedda told analysts, according to a Motley Fool transcript.

Dive Insight:

Stitch Fix, a direct-to-consumer company that, unlike others, has adamantly resisted including brick-and-mortar in its still-evolving sales model, hasn't been spared the troubles of the apparel market.

The company started with a styling service where curated boxes were sent to subscribers regularly but has since tweaked that in several ways. That includes a "direct buy" option where customers can choose items rather than wait to see what the company's algorithms choose for them. More recently, Stitch Fix is rolling out a program in the U.K., to be tested in the U.S., where customers can preview their scheduled boxes and reject items before they arrive.

The company's algorithms are fueled by data gleaned from past purchases, style quizzes and customer communications, but haven't escaped the perennial challenge in fashion of figuring out which styles actually sell. Its direct buy and men's sales in the quarter were softer than expected, for example.

"We believe the miss in men's was self-inflicted, as specialty peers haven't called out a softer men's business," MKM Partners Roxanne Meyer said in emailed comments, adding that it could take a quarter or longer to adjust.

The apparel market was already under siege before the pandemic weakened demand further, and Stitch Fix, like most in the space, boosted inventory of comfortable clothes and activewear to serve what demand there was. By the holiday quarter, most stores were open to shoppers, but not all were comfortable shopping online. That helped fuel e-commerce at the holidays as it did for most of last year. Any boon that Stitch Fix as an online retailer may have seen from that was undermined by consumers' tendency to shop for others rather themselves, however, executives said.

Inventory piled up as a result, with analysts noting a 24% rise year over year. Like Nordstrom and others, Stitch Fix is mitigating some of its risks by shifting to a "multi-inventory" model that includes vendor-managed inventory and drop shipping, Stitch Fix President Elizabeth Spaulding said Monday.

The company saw a record number of "first Fixes," a reflection of its rise in active clients. But MKM Partners' research found that 48% of those that got their first Fix in the last six months "were heavily incentivized." As the pandemic gets further under control and people venture out, Stitch Fix could relinquish some of the advantages it has as a pure-play digital retailer, as MKM analysts also note that average order value and transactions could take a hit in the short to medium term "should consumers choose to flock to stores as life re-opens."