Stitch Fix (SFIX -1.73%) recently announced that it is laying off employees in some areas of the business after net losses roughly doubled from fiscal Q2 to Q3. The e-commerce apparel seller is looking to save as much as $60 million each year from the move, which is part of a broader restructuring plan.
CEO Elizabeth Spaulding said in a conference call with Wall Street analysts that management is moving "with a sense of urgency" to try to get the business back on a steadier path in terms of growth and earnings. But the cost challenges aren't the biggest problem facing Stitch Fix right now.
Growing the business
After the company shocked investors by showing slowing user growth back in March, management said that Stitch Fix would soon be on a better growth path. The company at the time noted two major problems hurting sales, which both seemed fixable.
First, Stitch Fix had confused some clients who become fans of its curated apparel-selling model when it introduced its new direct-buy functionality . Second, the changes to Apple's privacy rules had made its advertising less effective since it was harder to find potential customers.
The latest results didn't show much progress on either score. Sure, Stitch Fix hit management's target for Q2 sales. But it was still jarring to see sales fall 8% as the company lost 200,000 active buyers, representing 5% of its customer base.
Stitch Fix executives said that they made the client signup process less confusing to apparel shoppers, for example by directing them to schedule a fix immediately after they fill out their style preferences . But clothing browsers aren't transitioning into buyers at a high enough rate to satisfy management. "We are still not yet at our desired conversion level," Spaulding said in the conference call.
Stitch Fix also tried to mitigate the hit from Apple iOS privacy changes by pushing into other advertising channels, including TikTok. Yet the company still expects new customer additions to worsen over the short term rather than improve.
Looking ahead
That short-term outlook calls for sales to drop by as much as 15% in the current fiscal quarter. The good news is that average annual spending per customer is still growing, reaching another record at over $550. However, Stitch Fix's forecast implies that it might lose close to 10% of its user base in fiscal Q4. Investors are right to demand more from a growth stock.
That tough outlook helps explain why management is aggressively cutting costs, including reducing staffing levels by 15%. These cuts might help Stitch Fix return to profitability, which hit a high of around 3% of sales just before the pandemic struck.
SFIX Operating Margin (TTM) data by YCharts
Since then, the appeal of its curated apparel service has waned. Stitch Fix hasn't demonstrated that its push into direct retailing is resonating with users, either. Until it can fix that core problem and return to steady customer growth, the stock is likely to remain under pressure, especially in a bear market.
Stitch Fix's cost cuts will give management time and flexibility to work on getting the business back in track. But investors might want to look elsewhere for stock buys while they wait for concrete evidence of that rebound.
