Stitch Fix (NASDAQ:SFIX) shares were sliding after its second quarterly report as a publicly traded company yesterday, as the company beat revenue estimates but whiffed on the bottom line.
Despite the sell-off, it was another solid performance for the online styling service as revenue increased 24.4% to $295.9 million, ahead of expectations; and active customer count, which measures the number of people who have used the service in the last year, increased 30.6% to 2.5 million. On the bottom line, adjusted net income fell from $13.8 million to $6.8 million, or $0.07 per share, due to lower gross margin and higher selling, general and administrative expenses. GAAP earnings per share were $0.02, which was below estimates at $0.06.
Beyond the headline numbers, there were some key details that investors should be aware of. Let's take a closer look.
1. Customer satisfaction is improving
Stitch Fix took a number of steps to improve its service in the quarter, including expanding its activewear selection with partnerships with Beyond Yoga and Sweaty Betty, and the company is launching a pilot program with Nike this spring. Stitch Fix also expanded its relationships with popular brands like Calvin Klein, Levi's, and Tommy Hilfiger after adding them in the first fiscal quarter, the previous period.
Management noted a significant improvement in satisfaction and sales with XXL-sized men. And by building new size specifications, the company saw success rates for "husky" men improve by 36.6%. The company also added new price points in men's, offering lower-priced options as well as new higher-priced brands.
Separately, the company recently started using algorithmic repurchasing tools that help buyers reorder more-popular items. Stitch Fix's business model involves sending clothes that the company thinks will be a good match for customers, with the goal being to have the customer keep and purchase as many items per "fix" -- or delivery -- as possible. Management said that its tools are working, noting, "This data-driven repurchasing strategy has resulted in a significant increase in client satisfaction across style and fit." In men's, an enhanced algorithm led to an increase in the average numbers of items purchased per fix.
Customer satisfaction is especially important for Stitch Fix. Increased satisfaction will not only led to higher sales, as customers keep more of the items they receive, but will also lead to more frequent reordering, and more new customers through word of mouth. Unlike a retail store, Stitch Fix won't get impulse, walk-in, or last-minute shoppers -- so it's especially important that the company keep and please new and returning customers.
2. Revenue per client is falling, but that's by design
Subscription-based businesses often experience a Catch-22. If revenue increases faster than customer count, investors question customer growth. If it's the other way around, as it was for Stitch Fix this past quarter, the market is concerned that customers are spending less. Revenue per active client fell 3.9% to $437, but the company said that was expected due to its expansion into men's clothing and the increase in lower-price-point merchandise.
Management said that male clients have lower purchase frequency, meaning that average revenue per client should decline as men become a greater share of the clientele, but it added: "We continue to be pleased with the revenue contribution and profitable unit economics of the men's category. Similarly, we've been encouraged by our ability to serve lower-price-point clients effectively, and plan to further penetrate this market."
While sales per client may continue to fall, it's much more important for the company to expand its active client base, as the company seeks to serve a wider range of customers (including the recently added men's and plus-size categories) and a range of price points.
3. Two new frictionless experiences
CEO Katrina Lake spent much of her time on the earnings call talking up two new initiatives the company has taken to eliminate the friction of the Stitch Fix shopping experience.
First, the company launched Style Pass, which allows unlimited fixes for an annual fee of $49, which compares to the standard one-time styling fee of $20, both of which are credited toward any purchases. The company has found that Style Pass increases client satisfaction, engagement, and average revenue per client, and believes it will help keep the service at the top of customers' minds when they need new clothes.
Second, Stitch Fix launched Extras, giving customers the chance for the first time to buy essential items like underwear, socks, and bras directly without a styling experience. That move should help the company retain additional spending that might otherwise go to competitors, and is another way for it to leverage its exclusive brands.
While the bottom-line numbers may not have met the market's expectations, Stitch Fix continues to execute its strategy, and is making smart moves to grow its customer base. With revenue expect to grow 22% to 25% this year to $1.2 billion, Stitch Fix looks like it has a bright future.