The pandemic isn't Stitch Fix's only problem

Dive Brief:

Stitch Fix this week reported that fourth-quarter net revenue rose 11% year over year to $443.4 million, on an adjusted basis (accounting for an extra selling week last year). Its active client base expanded by 9%.
But the company swung to a $44.5 million net loss as the pandemic dampened demand for apparel, according to a company press release.
The company launched its Trending For You program in June, which helped push up its direct buy orders, or items bought without a subscription "Fix," over 30%, Stitch Fix President Elizabeth Spaulding told analysts, according to a Motley Fool transcript.

Dive Insight:

Stitch Fix didn't take the hit that many apparel retailers have in recent months as the pandemic drastically dampened apparel demand. In a month that reflected some recovery as stores reopened across the country, August apparel sales plummeted 23.7% year over year, and department store sales (heavily dependent on apparel) fell 16.5%, according to the U.S. Commerce Department's monthly report.

That shines a cheery spotlight on Stitch Fix's revenue rise in its most recent quarter. The company doesn't run stores, so didn't see the kind of channel throttling that many apparel retailers did. And the expansion of its activewear assortment in recent years paid off, as that segment thrived in a period when people are working and studying from home. Women's activewear revenue grew more than 350% year over year on an adjusted basis in the quarter, according to CEO Katrina Lake.

But analysts nevertheless saw some cause for worry. Looming holiday shipping cost increases are set to hit any company dependent on e-commerce, but could hurt Stitch Fix especially hard, according to an August note from Wells Fargo analysts led by Ike Boruchow.

"[Stitch Fix] generates almost all of their revenue domestically, which means that they will basically face higher costs on almost every transaction they make," Boruchow said. The impact is mitigated by the company's relatively high average order value, which Wells Fargo in August pegged at about $120, and which executives this week said grew in the fourth quarter.

The Fix setup, where subscribers receive curated boxes on a regular basis, by definition means a high rate of returns, with shipping both ways free to the customer. "[M]ost of the company’s 'fixes' result in at least 1 item being returned — meaning that they have to pay for shipping twice on almost every transaction they make," Boruchow said.

Enter the company's moves to provide options to buy outside a "Fix" subscription, including its Shop Your Looks innovation. This week Lake asserted "our expansion into direct buy, a critical part of our future, has shown unabated growth, both pre- and post-COVID, and we believe it will unlock our total addressable market in new and very material ways."

However, MKM Partners Managing Director Roxanne Meyer warned that could yet cannibalize Stitch Fix's core advantage, its membership. Moreover, the company will likely have to better manage inventory for direct consumers than it has so far, according to Meyer.

"[W]e believe [Stich Fix] has the potential to inflect, as an evolving model that incorporates Direct Buy and consumer choice should help expand [the total addressable market] and accelerate growth in active clients as well as average order value," Meyer said in a Sept. 16 client note ahead of the company's quarterly report. "However, the success of this model will be based, as it is for any retailer, on the appeal of the offering, particular for the non-FIX customer, an ability to buy and allocate inventory appropriately, and the infrastructure investments and marketing to support growth."

The pandemic is confusing things somewhat for Stitch Fix's direct buy performance. "While fewer new customers in 3Q were attributed to the [first half-year] slowdown (in light of the strong contribution of repeat Fixes), it provides perspective that the impact of record new customer growth in 4Q and accretion from Direct Buy — while impressive — are too small to move the needle," Meyer said in a Sept. 23 note, after the company's report.