After an utter and complete collapse over the last two years, Stitch Fix (SFIX 3.69%) is finally facing the music.
The once-promising online styling service announced the departure of CEO Elizabeth Spaulding on Thursday and said it was cutting 20% of its salaried positions, its second round of layoffs in just a few months. It's also closing a distribution center in Salt Lake City that it opened in 2021.
Katrina Lake, the founder and chair of the board, will become interim CEO for six months or until a successor is found. Investors cheered the news, sending the stock up 9% on Thursday.
The decision comes after Stitch Fix stock has plunged 97% from its peak two years ago, going from a rapidly growing potential disruptor in the apparel market to a company in disarray after its revenue fell 22% in its most recent earnings report, and it forecast a similar decline for the current fiscal year.
Image source: Getty Images.
Why Spaulding had to go
It's hard to overstate the failure of Stitch Fix under Spaulding's watch. The stock has collapsed, revenue is nosediving, and the business seems to lack direction.
For example, the company launched Freestyle, its program that allows shoppers to buy from a curated selection of clothes on its site instead of through its traditional Fix model, where shoppers get a box of five items shipped to their homes. Freestyle has not become the incremental revenue driver Stitch Fix expected and instead seems to have mostly cannibalized the Fix business. The company also seems unsure of who Freestyle is designed for. Initially, it was offered only to Fix customers, but then the company expanded it to new customers. It then walked that back, restricting Freestyle to customers who had ordered a Fix.
Additionally, during Spaulding's tenure, the company has accelerated a shift away from human stylists in favor of its data-science algorithm, but that seems to be one of the reasons why revenue is declining. The company's Glassdoor reviews are full of criticism from stylists who say the algorithm makes basic mistakes, recommending seasonally inappropriate attire like sweaters in summer, for example. Many insist the algorithm simply isn't ready to take over yet.
Spaulding herself gets poor ratings on the job-review site with just 39% of respondents saying they approve of her as CEO.
With no previous experience in retail or as a CEO, it now seems clear that Spaulding, who had previously worked as a consultant leading the digital practice at Bain & Co., wasn't the right person for the job.
One step in the right direction
The decision for Spaulding to step aside in favor of Lake is just the first step in the company's turnaround efforts. The company posted a letter that Lake had sent to employees explaining the layoffs and the change in the CEO position.
Lake did not discuss any initiatives or a turnaround strategy, but she reclaimed the CEO role as of Jan. 5. It was also unclear why she originally stepped down as CEO. Lake, who's only 40 now, still has much of her career ahead of her, though she seemed to want to move on from the day-to-day demands of running a publicly-traded company.
Of course, a change in leadership alone isn't a turnaround strategy, and Lake isn't even planning to stay at the job permanently, though finding a successor right now won't be easy.
With the stock down substantially, the announcement may seem like a buying opportunity, but investors would be better off waiting for indications that the business is starting to improve. I'd like to see revenue growth; meaningful profitability at least on an earnings before interest, taxes, depreciation, and amortization (EBITDA) basis; and a clear strategic direction communicated to investors, rather than the platitudes that had become too common in the Spaulding era.
At the time of its initial public offering in 2017, Stitch Fix had already been profitable. The business model has worked before, and it should be able to do so again. If Lake can get the company back on its feet, there is significant upside potential, but a lot of work needs to be done before then. Investors are better off waiting for clear turnaround signals to emerge before buying the stock.
