Personalized online apparel business Stitch Fix's (NASDAQ:SFIX) stock has had a tough run recently. Shares are down more than 60% since the middle of September as concerns mount about the company's long-term growth prospects. Management's slowing active client growth, in particular, spooked some investors when the company reported its fiscal first-quarter results earlier this month.
For investors interested in taking a closer look at Stitch Fix after its stock's sharp decline, management provided a helpful window into the company's business during its first-quarter earnings call. Here are some key takeaways from the call.
Stitch Fix's revenue growth drivers
Key to understanding Stitch Fix's business are the company's key growth drivers. "Our net revenue is a function of the number of clients we serve and how well we serve them, which are reflected in our active client count and net revenue per client, respectively," said Stitch Fix CEO Mike Smith during the call. The CEO also noted that these factors ultimately "reflect our strategic decisions and action."
In Stitch Fix's first quarter, active client growth was up 22% year over year. Though this was a deceleration from 25% growth in the company's fourth quarter of fiscal 2018, Stitch Fix has benefited from two quarters in a row of growth in net revenue per client. Net revenue per active client for the 12 months ending Oct. 27 was up 2.3% year over year, management said in Stitch Fix's first-quarter shareholder letter.
Growth in revenue per active client
Going into its fiscal first quarter, management had guided for active revenue per active client to decline. The company said it expected its expansion in Men's, Plus, and Kids, as well as more aggressive price offerings, to weigh on revenue per active client. It was a surprise, therefore, when the metric was actually up meaningfully for the quarter.
Stitch Fix CFO Paul Yee explained the better-than-expected growth for the metric during the company's earnings call.
The upside that we saw in Q1 versus our guidance was really the fact that we're seeing strength in our revenue per client. A lot of initiatives that we put in place to understand our clients better such as the Style Shuffle game and to be able to really ensure the products that we have available and have the right algorithms to match up products with clients is translating to higher revenue per client.
Understanding Stitch Fix's holiday marketing strategy
Though some investors may be disappointed with Stitch Fix's guidance for active clients to be "relatively flat" sequentially, this is part of a deliberate strategy, according to management. The company intentionally reduces its advertising spending as a percentage of sales as the company's clients focus on buying gifts for others over the holidays.
Yee provided further context on this strategic decision during the earnings call:
And then from a marketing perspective, it's just a very busy time in terms of lots of noise and communications to clients and consumers out there. So, we actively choose to lower our spend from a marketing perspective. And therefore, there is an impact ... on active client count.
A balanced approach to growth
Management encourages investors not to read too much into quarter-to-quarter fluctuations in active-client and revenue-per-active-client growth rates. These metrics are ultimately tools, management explained, for the company to maintain its 20% to 25% year-over-year target revenue growth rate.
In addition, investors shouldn't get their hopes up for revenue growth that exceeds this long-term target range. "We think 20% to 25% growth in terms of a rate is good for our clients, allows us to be able to serve them consistently," Yee explained. Growing at this pace allows Stitch Fix to ensure its inventory lines up with its logistics while continuing to serve clients well and grow active clients.