Stitch Fix (NASDAQ:SFIX) didn't have the best outing in its fiscal third quarter. Results came in well below expectations, causing the stock to fall about 8% since the earnings release on Monday.
Revenue decreased by 9% year over year to $371.7 million. That was below the consensus estimate of $406.7 million. Stitch Fix also missed the ball on the bottom line, with earnings per share coming in at a net loss of $0.33, compared to estimates for a net loss of $0.15.
But those headline numbers don't tell the whole story. Here are three reasons why Stitch Fix is poised to bounce back in the short term.
1. Back to full capacity
At the start of March, Stitch Fix was on pace to have a strong quarter (the period ended May 2). From February through the second week of March, net merchandise revenue was up approximately 20% year over year.
As the coronavirus outbreak spread in the U.S. during March, Stitch Fix shut down half of its fulfillment capacity, closing three distribution centers -- in San Francisco; Dallas; and Bethlehem, Pennsylvania. "Excluding the impact of our warehouse disruptions from COVID, we believe that we would have generated positive year-over-year net revenue growth in Q3," CEO Katrina Lake said during the conference call.
Stitch Fix ended March with its warehouse capacity down nearly 70% as its backlog doubled week over week in the final week of the month.
The good news: Management put in place a plan to improve operations. "We're pleased to share that, as of today, we've effectively executed against our strategy and are approaching full capacity," Lake said. "With this capacity, we're tracking to eliminate our Fix backlog by the end of June, putting us in more of a position to play offense in the coming quarters."
2. Outperformed apparel industry
Stitch Fix had a key advantage going into this crisis. A large percentage of its 3.4 million clients have their Fixes shipped on a regular basis with autoship. This, coupled with the direct-buy service, allowed Stitch Fix to weather the storm much better than other retailers.
"While massive apparel retail declined by 80% in recent months, we saw only a 9% year-over-year dips," Lake said.
Lake believes this is evidence of how Stitch Fix is gaining market share as apparel spending shifts online. "As consumers rapidly shift their purchase behavior online at a step change in historic rates, we believe our model will outperform and continue to take share, which we began to see play out in Q3 and in the early weeks of Q4."
3. Self-inflicted losses
Management has typically run the business just above breakeven, as it continues to invest in hiring, marketing, and technology to drive growth.
Two things caused the lower-than-expected net loss. First, management gave its warehouse associates four weeks of paid leave while its facilities were closed.
Second, Stitch Fix pulled back on marketing expense to ease the strain on the limited warehouse capacity. Overall, advertising expense decreased by 25% year over year, even though Stitch Fix started to see consumer optimism return in April. There were clearly sales left on the table during April.
But during the whole quarter, the performance of existing clients was positive. Net revenue per active client increased by 6%. Additionally, Stitch Fix managed to grow its client base to 3.4 million, up 9% year over year, although that growth rate is about half of what it typically is.
Stitch Fix will be stronger than before
With Stitch Fix approaching full capacity, the worst is behind the business. More consumers are starting to shop online as a result of the pandemic. During the call, Lake mentioned that "20% of consumers who had not previously bought apparel online are doing so for the first time in March and April."
Stitch Fix is in a great position to gain wallet share of these new customers. The $17 million of advertising expense that didn't get spent in the last quarter will roll forward to future quarters, as management explained, and that could allow Stitch Fix to reaccelerate its sales growth and bounce back strong.
While Stitch Fix is not giving specific guidance, net merchandise revenue returned to growth in May. "As a result, we expect these trends will continue and will deliver positive year-over-year net revenue growth in Q4, adjusted for the impact of the 14 week in Q4 of '19," COO Mark Smith said.