Stitch Fix (SFIX -1.80%) stock plunged 16.3% in after-hours trading Thursday, following the online personalized-apparel retailer's release of its results for its fiscal 2022 third quarter. That drop was preceded by the stock's 10.5% decline during Thursday's regular trading session.
The daytime slump was attributable to media reports that the company was laying off a sizable portion of its salaried staff -- reports that management confirmed in the earnings release.
The main catalysts driving the after-hours sell-off were earnings that missed analysts' consensus estimate, a decline in the company's number of active clients, and disappointing revenue guidance for its fiscal fourth quarter.
Here's an overview of Stitch Fix's quarter and outlook that focuses on seven key metrics.
Image source: Stitch Fix.
1. Revenue declined by 8%
In its fiscal Q3, which ended April 30, net sales fell 8% year over year to $492.9 million, which was essentially in line with the $493.2 million Wall Street had expected. That result was also in line with the company's own guidance for net sales in the range of $485 million to $500 million.
On the earnings call, CEO Elizabeth Spaulding said Freestyle revenue grew 13% year over year. With Freestyle, customers choose their own items from selections generated by the company's personalized styling engine. So, we can conclude that revenue for the flagship Fix offering -- which involves Stitch Fix's stylists selecting items for clients -- dropped more steeply than the overall 8% revenue decline.
As a high-bar point of comparison, athletic wear retailer Lululemon (LULU +2.83%) grew its revenue 32% year over year in its most recently reported quarter. Moreover, it turned in great bottom-line results and issued robust guidance.
2. Active clients fell by 5%
Consider Stitch Fix's two key customer engagement metrics:
| Metric | Fiscal Q3 2022 | Change (YOY) |
|---|---|---|
| Number of active clients | 3,907,000 | (5%) |
| Average net annual revenue per active client | $553 | 15% |
Data source: Stitch Fix. The company considers an active client to be any customer who has bought at least one item in the past 52 weeks.
In the reported quarter, U.S. consumers continued to refresh their wardrobes as many ventured out more often and returned to their workplaces. Thus, the decline in Stitch Fix's number of active clients seems more of a company-specific issue rather than an industrywide one.
Management has pointed to issues with its process for onboarding new clients as a contributor to its struggles to grow its customer base and revenue, and it has been working on solving them. It seems probable to me that another issue is that the company's core Fix offering just isn't resonating with that many consumers.
3. Operating loss widened by 217%
Stitch Fix's operating loss was $76.9 million, compared to an operating loss of $24.2 million in the prior-year period.
4. Loss-per-share quadrupled
Its net loss was $78 million, or $0.72 per share, compared to a loss of $0.18 per share in the year-ago period. This result fell short of the loss of $0.55 per share that analysts had anticipated.
NASDAQ: SFIX
Key Data Points
5. Cash flow from operations was negative $30.5 million
In its fiscal Q3, Stitch Fix used $30.5 million in cash running its operations, compared to $40.8 million in the year-ago period.
The company ended the quarter with $234.7 million in cash, cash equivalents, and short-term investments on its books.
6. Fiscal fourth-quarter revenue is expected to decline by about 14%
Management guided for fiscal fourth-quarter revenue in the range of $485 million to $495 million. That would amount to a drop of 13% to 15% year over year.
7. About 15% of salaried staff are being laid off
In the earnings release, Stitch Fix said its workforce "reduction includes approximately 15% of salaried positions, and represents approximately 4% of roles in total. Most of the reductions are in non-technology corporate roles and styling leadership roles."
The company projects these job cuts and other planned organizational changes will cut its costs in fiscal 2023 by $40 million to $60 million. It also expects to incur restructuring and other one-time charges of about $15 million to $20 million in the fourth quarter of fiscal 2022.
NASDAQ: LULU
Key Data Points
Another disappointing quarter
In short, Stitch Fix turned in another weak quarter, and investors pushed its share price down to an all-time low. Yet even at that level, Stitch Fix stock is not a buy, in my view. Investors would be better off paying up for shares of companies with business models that have proven capable of generating profitable and solid revenue growth, such as Lululemon.
If the U.S. economy falls into a recession, most consumer discretionary companies will be hurt. The shares of those that aren't profitable -- a category that includes Stitch Fix -- will be particularly vulnerable.
