Of all the collapses in the stock market over the last few years, only a handful have been as dramatic as Stitch Fix (SFIX 5.45%). Shares of the online styling service have fallen a whopping 97% since they peaked in early 2021.

The company has gone from a rapidly growing e-commerce stock with disruptive potential in the apparel industry to a declining business that looks utterly broken. Revenue fell 22% in its fiscal first quarter, marking six straight quarters of decelerating revenue growth, and the company expects a similar slide in revenue for the current fiscal year.

Management blamed a difficult macroeconomic environment and a renewed focus on profitability, meaning the company is cutting costs and scaling back on investments in growth. It said on the first-quarter earnings call that it is now focused on reducing costs by $135 million this year. 

However, blaming macro headwinds isn't a satisfying explanation for the stock's collapse over the last two years and the reversal in the business's fortunes. After all, other e-commerce and apparel companies are facing similar challenges, but Stitch Fix's peers haven't seen the same decline in performance.

In reality, a range of factors, both internal and external, hammered Stitch Fix over the last two years. Let's take a closer look.

Person sitting on a couch with an open laptop while holding a credit card.

Image source: Getty Images.

A series of unforced errors

At the time of Stitch Fix's IPO five years ago, the company had already demonstrated its ability to be profitable. In 2016, it reported GAAP net income of $33.2 million on $730.3 million in revenue, showing that it could be profitable even while growing the business rapidly.

However, over the last five years, Stitch Fix made a number of mistakes that led it to report a GAAP net loss of $207.1 million in its most recent fiscal year.

First, it seems to have overestimated the market for its online styling services.

Stitch Fix clearly has a customer base, as it still has 3.7 million active clients, but only a fraction of overall clothing shoppers are going to be interested in the Fix model. Traditionally, Stitch Fix has sent its clients a box of five items at regular intervals. The customer keeps what they want and returns the rest. 

Overestimating the market for its services seems to have caused the company to spend too aggressively to recruit customers that haven't become recurring shoppers on its platform. 

Additionally, the company also seems to have botched the rollout of Freestyle, the formerly highly anticipated direct-buying platform that allows shoppers to choose clothes from a curated selection based on their style, fit, and budget. Stitch Fix initially offered Freestyle only to customers who had ordered a Fix before expanding it to new customers. It then reversed that decision, and restricted Freestyle to only customers that had ordered a Fix.

Stitch Fix had hoped that Freestyle would tap into a larger market, but instead it seems to have cannibalized the Fix business, and active clients have declined since it introduced the offering.

The company also steered away from human stylists in favor of its data science and algorithms, but that hasn't produced the margin improvement that management expected -- and it may have interfered with its customer satisfaction and growth. According to stylist reports, the technology also makes basic mistakes like recommending sweaters in the summer.

Finally, there's been high turnover in the C-suite, and founder Katrina Lake's decision to step down last April looks like a mistake, while the promotion of Elizabeth Spaulding to CEO seems questionable as well. Spaulding had spent her career as a consultant with Bain, and had no experience in apparel. On Glassdoor, just 39% approve of Spaulding as CEO and only 47% of respondents would recommend working there.

The outside pressures

In addition to the company's own misfires, it's also faced multiple macro challenges, including the recent headwinds in e-commerce and apparel. The remote work trend has almost certainly been a negative for Stitch Fix, as workwear appears to be a major use case for its services, and the company isn't the only subscription styling service to face challenges.

After acquiring Trunk Club, another styling service, Nordstrom said it was shutting it down earlier this year, and ThredUp ended its subscription box service last year.

Those challenges show that consumers in general may have turned away from the subscription box model. It's possible clothing subscriptions may be more of an unsustainable fad than a lasting business model.

Can Stitch Fix turn it around?

With revenue falling sharply and losses mounting, the future looks bleak for Stitch Fix. Cost-cutting programs can help trim the company's losses, but ultimately, Stitch Fix needs to return to revenue growth if the stock is going to have a chance at making a comeback.

If that doesn't happen in the next year, then it's probably time for investors to demand a leadership change. As the Glassdoor reviews show, Spaulding has not been popular with Stitch Fix's employees, and the business has badly eroded under her stewardship. 

The company needs a new direction, and the longer the business declines, the harder it will be for it to recover. If there's any good news here, it's that those challenges seem to be priced into the stock, but a lot needs to change before it can start moving in the right direction.