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Stitch Fix Couldn't Escape the Promotional Retail Environment During the Holidays

By John Ballard - Mar 10, 2020 at 9:39AM

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Customer order values were lower during the quarter, which weighed on sales growth.

Shares of Stitch Fix (SFIX 1.08%) were trading down about 30% in pre-market trading on Tuesday after missing sales estimates for the fiscal second quarter, which ended Feb. 1.  

For the quarter, revenue was $451.8 million, an increase of 22% year over year, but analysts expected $452.5 million in sales. That small miss doesn't warrant a huge sell-off, but the market seems to be more concerned about the outlook.

Stitch Fix expects revenue to grow between 17% and 19% in fiscal 2020 adjusted to reflect a 52-week year. That is below the more than 20% growth investors are used to seeing from the company. Management blamed a promotional retail environment that led to lower order values in the last quarter, so the outlook was updated to reflect a continuation of this trend through the end of fiscal 2020. 

A woman going through the contents of a box from Stitch Fix.

Image source: Stitch Fix.https://newsroom.stitchfix.com/resources/#images 

Things are not as bad as they seem

As for COVID-19, management has not seen a material impact on the business yet. However, CEO Katrina Lake said, "While it's too early for us to quantify total potential supply chain or client demand impact at this point, it's reasonable to expect we'll see some impact." The expectation that the coronavirus outbreak will eventually cause disruption also contributed to management's conservative outlook.

On the brighter side, Stitch Fix sees a long-term growth opportunity to expand its men's category and continue investing in direct-buy offerings, which allows customers to buy specific items directly from Stitch Fix based on personalized recommendations. 

Stitch Fix is in the process of shifting its marketing message to highlight the direct-buy offering, so they will be spending less on marketing in the short term. That may help profits but could negatively impact sales growth in the next few quarters. 

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