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Stitch Fix Earnings: A New Profitability Challenge

By Demitri Kalogeropoulos - Mar 11, 2021 at 2:20PM

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Investors were hit with whiplash as management dialed back its outlook after raising it in early December.

Three months after shocking Wall Street with strong growth metrics, Stitch Fix (SFIX 0.85%) just surprised investors in the opposite direction. The online apparel retailer this week revealed weaker sales growth in the second quarter while projecting a tough second half ahead for its 2021 fiscal year.

CEO Katrina Lake and her team see lots of reasons for optimism about Stitch Fix's broader growth outlook. But they still reduced the 2021 outlook on both the top and bottom lines.

Let's take a closer look.

A delivery man dropping off boxes at a home.

Image source: Getty Images.

Sales grew 12% year over year but missed expectations

Sales landed at $504 million, equating to a 12% increase from last year. While that result was an acceleration over the prior quarter's 10% boost, it was surprisingly weak. Stitch Fix had predicted back in December that sales would land between $506 million and $515 million for the period.

Customer engagement metrics were strong, with the active user base rising 12% and repeat orders continuing to climb. But the business was harmed by rising delivery times that delayed sales. Stitch Fix books revenue after a customer checks out their order, not when the order is initially sent. That leaves the company exposed to the speed of its delivery partners. And those partners were swamped over the holidays. "Adjusting for the impact of these increased cycle times," Lake told investors, "revenue would have been within our guidance range."

Net losses were worse than projected

The shipment carriers also raised their rates in late 2020. That move helped pressure profits and contributed to a $9 million adjusted loss in the period.

Management had forecast a more modest loss of between $3 million and $6 million. Stitch Fix also spent more heavily on wages and on advertising and marketing. These outlays pushed expenses up dramatically, up to 51% of sales from 43% a year ago. The result is that the business has generated an $11.5 million net loss in the past six months compared to an $11 million profit a year ago.

Executives said their confidence about the long-term growth profile is as strong as ever. They cited industry factors like the trend toward e-commerce along with Stitch Fix's specific successes in areas like customer acquisition and improvements to the styling algorithm. Even after the pandemic threat subsides, Lake said, "We [believe] we will be incredibly well positioned to win."

Lowering the outlook for fiscal year 2021

That bullish long-term outlook contrasted with management's sour expectations for the current fiscal year. Sales and profits will both be weaker than they projected back in December due to the challenges that hurt the business in late 2020. Stitch Fix's sales should also be pinched by a delay in the wide rollout of its direct-buy offering, which isn't quite ready for release.

The outlook shift is modest, with sales now expected to grow by between 18% and 20% this year compared to the 20% to 25% spike Stitch Fix forecast in early December. Hitting that lowered target would still translate into market-share growth and a booming client base.

However, Stitch Fix's results contained some warning signs around profitability and around the platform's exposure to third-party package delivery giants. And the fact that these issues caught management by surprise shows how unpredictable its short-term growth path can be. While Stitch Fix can still realistically target a far higher sales base over the next five years, the last two earnings reports suggest investors will have to endure some more volatile periods along the way.

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