Investors sent shares of Stitch Fix (SFIX -0.89%) cratering just after its second-quarter earnings report, which included a sour forecast for fiscal 2022 around growth and profits. The apparel retailer is struggling to convince new users to sign up for its online-styling plans even as it expands its popular direct-purchasing platform.
The stock recovered much of its early losses as Wall Street got a clearer picture from CEO Elizabeth Spaulding and her team during their conference call with investors. Let's take a look at the details that paint a more encouraging picture of Stitch Fix's long-term opportunities.
About that slowdown
The initial bleak takeaway from the fiscal Q2 announcement was that Stitch Fix has a major growth challenge on its hands. New-user gains slowed to just 4% compared to 11% in the previous quarter. Management said in a press release that this slump reflected "challenges with onboarding and conversion of clients."
Executives described two factors driving the slowdown in a conference call, suggesting they're both short term in nature. First, users were confused with how the company led them between its fix service, which involves curated batches of apparel, and its "freestyle" offering that's more like traditional e-commerce shopping. "We inadvertently created friction," Spaulding said, while trying to promote the freestyle offering.
Image source: Getty Images.
The second problem was that changes to Apple's mobile platform made it much harder to target users who might want to sign up for Stitch Fix deliveries. After noticing the declining effectiveness, management pulled back on advertising spending. Marketing fell to 6.8% of sales from 8.3% a year ago.
Good news
There were a few bright spots in the latest results. Average annual spending for existing customers jumped to a record $549, suggesting strong engagement and shopper satisfaction. Stitch Fix made progress in its push into new geographies and demographics. The kids niche and the U.K. market each contributed solid growth through late January.
And the freestyle platform, which management sees as a huge growth opportunity over the next several years, grew 30% even though the platform requires a different marketing and selling strategy from Stitch Fix's core business. "We're still learning," Spaulding said, "and recognize we have work to do on the freestyle experience."
The path forward
Management is expecting sales to drop by as much as 10% in the current quarter with growth pressure continuing through fiscal 2022. The company had to reduce its 2022 forecast to account for its underperformance on converting new fix delivery customers. That missed opportunity will hurt sales for the next several quarters, even if Stitch Fix quickly recovers its growth momentum.
But management isn't predicting a quick rebound. Sales will likely decline in 2022 as the company redirects marketing spending and improves its onboarding process.
The freestyle shopping service initially seemed like a great way to multiply the company's addressable market, even as it builds its subscription footprint. These Q2 results suggest that these services aren't easy to bring together under one brand.
