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Stitch Fix CEO Katrina Lake: "Customers' Embrace of Our Offering Is Here to Stay"

By Demitri Kalogeropoulos - Mar 16, 2021 at 7:50AM

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Management sounded optimistic earlier this month despite having just reduced their 2021 outlook.

Stitch Fix (SFIX -3.65%) shares tumbled after the company announced its fiscal 2021 second quarter earnings results. While both sales and profits were just slightly lower than expected, the bigger problem was the downgrade to management's short-term outlook, just three months after the company issued a bullish full-year 2021 forecast. The quick change in tone spooked investors who had pegged Stitch Fix as an accelerating growth story.

In the earnings call, CEO Katrina Lake and her team said they remained confident in the company's long-term outlook, but a few surprise developments combined to knock Stitch Fix off the trajectory they had envisioned in early Dec. 2020.

A man enters his credit card information into a laptop.

Image source: Getty Images.

What went wrong

[R]evenue for the quarter was impacted both by increased cycle times for fixes [...] as well as softer-than-anticipated direct-buy performance during the holiday period.
-- CFO Dan Jedda

Sales landed at $504.1 million, or just below the guidance range management previously issued. The main driver behind that miss was overwhelmed shipping carriers, which took longer to deliver packages (or "fixes") to customers. The delay pushed some expected revenue out of the quarter.

There were other unfavorable surprises too. The men's segment was weaker than expected as that division is taking longer to recover from the COVID-19 slump. Stitch Fix also noticed slower direct-buy purchases in December, likely due to a shift toward gifting rather than personal shopping. "We learned more during the holiday period about seasonality of direct buy," Lake said.

The good news

We are seeing strong new client acquisition trends, healthy autoship retention levels, and increased client engagement with direct buy.
-- Jedda

The good news is that Stitch Fix is still winning market share and seeing healthy levels of customer satisfaction and engagement. In fact, the 351,000 new client additions in the first half of fiscal 2021 have already outpaced the full-year results for fiscal 2020. The level of first fix shipment growth in the women's category also hit a five-year high in the second quarter.

Management is just as excited about wider industry trends that imply booming e-commerce growth ahead. Customers should still shop enthusiastically for apparel online after the pandemic fades, and Stitch Fix can capitalize on that preference using its large client base, coupled with a deep pipeline of upgrades to the user experience.

"Customers' embrace of our offering is here to stay," Lake said, before adding, "[O]ur model of personalized discovery and radical convenience position us well to capture more than our fair share."

Looking ahead

Given these moving parts, we believe it's prudent to adjust our revenue outlook for the fiscal year.
-- Lake

The short-term outlook isn't as bright as management had indicated last December. Slower uptake of the direct-buy option, increased delivery times, and weaker growth in the men's segment all combined to convince management to scale back the aggressive forecast the company previously issued. Sales are now predicted to grow 18% to 20% in fiscal 2021, down from the prior range of 20% to 25%.

None of this means Stitch Fix has lost its long-term growth potential, but it does suggest management lacks a clear picture into how shoppers react to different selling conditions. Three months ago, that uncertainty sparked a sharp stock price rally when it looked like growth was accelerating. Now, the surprise has gone in the other direction.

The main takeaway for investors should be to expect this kind of volatility in a growth stock, especially one that is pioneering a new selling model. Ideally, the management team's learnings will help it avoid amplifying those swings by issuing significant changes to the short-term outlook.

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