Stitch Fix Q4 Loss of $44.5M Shakes Wall Street

After a tough third quarter due to the coronavirus pandemic, Stitch Fix was itching to tell a comeback story in its next earnings report. But for the fiscal fourth quarter, the San Francisco-based online styling company had some good news and bad news.

On Tuesday, the company posted a net loss of $44.5 million, or 44 cents a share, far greater than the 18 cents a share expected and disappointing Wall Street, which sent the firm’s stock price plunging more than 14 percent in after-hours trading.

And for the year, Stitch Fix reported a loss of $67.1 million, or 66 cents a share.

But the company also pointed out that its net revenue of $443.4 million in the quarter represented a jump of 11 percent year-over-year, sailing over the consensus estimate of $415.2 million. And its 3.5 million active clients edged out the 3.4 million expected, amounting to an increase of 9 percent compared to last year. For the year, Stitch Fix pegged reported net revenue as $1.71 billion, for an increase of 11 percent.

Naturally, executives see the figures as proof that it’s successfully beating back the pandemic’s ill effects.

“I’m very pleased with our strong Q4 results and our return to top-line growth,” said Stitch Fix founder and chief executive officer Katrina Lake in a statement. Previously, the ceo said she expected a rebound in revenue growth by the fourth quarter and remained bullish about her business model, describing a rapid “step change” in how consumers were shifting their online buying behaviors.

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“I’m proud of our team for successfully navigating through the deepest impacts of COVID-19 and am excited to bring our model of an individual and deeply personalized shopping experience to even more consumers as they transition to a future of online shopping,” she added.

The company has seen heightened demand for ath-leisure offerings, which matches trends across the apparel sector. It also noted bustling interest in plus sizes and kids, the latter of which exceeded even its pre-COVID-19 expectations, and plans to double down on these areas, as well as its U.K. market in the future.

Strategically, it makes sense. In the fourth quarter, annual net revenue per active client was $486. While that’s an uptick of 2 percent year-over-year, it falls short of analysts’ predictions, which were $498.02. Whatever the company can do to bolster these figures would help take the edge off a year that has put various parts of the retail sector in critical condition.

One might have expected that Stitch Fix, being digitally native, would soar during a year that has drastically accelerated online purchasing. Yet in the third quarter, Stitch Fix’s profitability and user growth took a hit, thanks to coronavirus-related challenges. Revenue dropped 9 percent quarter-over-quarter compared to the previous three months’ 22 percent growth, with a $34 million net loss reported. The company blamed supply chain disruptions, including the temporary closure of several distribution centers, for stifling product fulfillment, while stock issues hamstrung efforts like cross-promotions.

Whether the company could stabilize seemed to be an open question at times. Prior to the company unveiling its latest figures, the market anticipated that Stitch Fix would report a year-over-year drop in earnings on lower revenues. But others showed more optimism.

Analysts at Deutsche Bank believed that ”Stitch Fix is likely to be one of the biggest beneficiaries of the lockdowns and accelerated store closures, especially as it extends the direct-buy feature to nonsubscribers over the next couple of quarters. We believe this will materially expand its addressable opportunity, which has largely gone unrecognized, and which creates potential for Stitch Fix shares to outperform peers.”

That seems to be Stitch Fix’s view as well, which is very enthusiastic about its direct-buy business.

Elizabeth Spaulding, Stitch Fix’s president, said “it’s still early days, but the ability to shop personalized items and outfits in our feed-based experience is clearly resonating with our clients.”

She pointed out that the new feature Trending for You grew weekly direct-buy orders by more than 30 percent, and pointed to the success of other changes. Its algorithmic recommendations engine, which is based on direct-buy data sets instead of subscription-based recommendations, infuses intelligence into the direct-buy business, even if a customer had never shopped with Stitch Fix before. Its latest shopping cart feature has proven popular with shoppers, as it also consolidates shipping for multiple products.

Direct-buy return rates now have less than half of that in traditional apparel e-commerce, she noted, and these shoppers have proven to be repeat customers, with nearly two-thirds making a subsequent purchase.

“While we won’t share direct-buy penetration every quarter, we will note that women’s penetration grew into the high-teens percent, while men’s grew into the high single digits, with both categories demonstrating strong traction, but also meaningful headroom for growth,” Spaulding explained.

Encouraged by these early successes, the company plans to expand investments in the business.

“When retail spend rebounds in the coming months, we expect more than $30 billion of market share to move online over a 12- to 18-month period,” Spaulding said, and Stitch Fix plans on capturing “more than our fair share.”

And the way to do that, in Stitch Fix’s view, is to buck sector trends. “Many in our industry pulled back their growth investments in response to COVID-19,” Spaulding said. “We did the opposite and we see results.”

As for any nerves around the company’s numbers, Mike Smith, president, chief operating officer and interim chief financial officer, addressed that head on for WWD: “We essentially had a non-cash valuation allowance that affected earnings per share, and that was driven primarily by a deferred tax asset, based on our net operating losses over the last few quarters,” he explained. “That’s how they value whether or not that asset is realizable or not. But it’s noncash, it has nothing to do with operating the business.

“We beat on everything meaningful — revenue, active clients, we feel very, very good on the underlying health and the underlying metrics in the business, [with our] accelerated growth in the back half of the year,” he said. “We feel good about where the business is trending. We’re well positioned, both financially and strategically, to take share in this environment.”

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