Stitch Fix (SFIX 3.69%) posted its latest earnings report on March 7. In the second quarter of fiscal 2023, which ended on Jan. 28, the online apparel retailer's revenue fell 20% year over year to $412 million and missed analysts' estimates by $1 million. Its net loss widened from $31 million to $66 million, or $0.58 per share, and missed expectations by $0.25.
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 63% to $4 million, which reduced its adjusted EBITDA margin from 2% to less than 1%.
Those headline numbers were ugly, but Stitch Fix's stock barely budged following that report and remains 95% below its all-time high. Could it be a deep value play for investors who are willing to ride out the near-term headwinds?
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Stitch Fix offers a disruptive approach to online shopping
Stitch Fix challenges traditional apparel retailers by shipping curated selections of products to its customers. Its customers only pay for the products they keep from that random selection and ship the rest back for free.
Those "fixes" are curated based on an online survey, which is administered for a one-time styling fee that can be deducted from the first order. Its customers also receive a discount if they keep all five of the products in a single package.
Stitch Fix seemed like a smart way to reach shoppers who didn't want to spend too much time picking out their clothes. It also continued to gain more active clients through the pandemic, even as it struggled with disruptions to its logistics network.
Why did Stitch Fix's stock plummet?
Stitch Fix hit a peak of 4.18 million active clients in the first quarter of fiscal 2022, but that core growth metric dropped to just 3.8 million by the end of that year. It ended the first half of fiscal 2023 with only 3.57 million active clients -- which represented an 11% decline from the previous year.
Its net revenue per active client also dropped to $516 in the second quarter of fiscal 2023, compared to its peak of $553 in the third quarter of 2022. As a result, Stitch Fix's revenue dipped 1% in fiscal 2022, representing its first top-line decline as a public company, and dropped another 21% year over year to $868 million in the first half of fiscal 2023.
That's why it wasn't surprising when CEO Elizabeth Spaulding stepped down this January. Spaulding was succeeded by the company's founder and former CEO Katrina Lake, who blamed its troubles on a "complicated macroeconomic environment and tighter client wallets" during its latest conference call. Apple's privacy update for iOS, which allowed users to opt out of data tracking features, had also caused problems for its app's personal stylist features.
Under Spaulding, Stitch Fix had been trying to counter those headwinds with Freestyle, a newer feature that lets its customers directly buy products on its website instead of receiving personalized "fixes" of five random products, but that strategy could potentially cannibalize its core business and erode its defenses against other apparel retailers.
As Stitch Fix's top-line growth stalls out, its margins are being compressed by higher logistics and marketing costs. It's been unprofitable on a generally accepted accounting principles (GAAP) basis for the past three and half fiscal years, and its adjusted EBITDA margins came in at -0.9% in fiscal 2022 and -0.4% in the first half of fiscal 2023.
Are brighter days ahead for Stitch Fix?
For the third quarter of fiscal 2023, Stitch Fix expects its revenue to decline 20% to 22% year over year as its adjusted EBITDA margin comes in between -1% and 1%. For the full year, it expects its revenue to drop another 21%-22%, with an adjusted EBITDA margin of less than 1%.
That outlook is dismal compared to other traditional apparel retailers like Abercrombie & Fitch and American Eagle Outfitters, which are both expected to grow their revenues by about 2% this year. Gap's revenue is only expected to decline by 5% despite all of its recent problems.
Stitch Fix plans to focus on cutting costs, as it already did by laying off 20% of its workforce earlier this year, to weather the near-term headwinds. But its leadership remains unstable: Katrina Lake only plans to lead the company on an interim basis, so it's still searching for a permanent CEO, and CFO Dan Jedda recently tendered his resignation. Jedda will be succeeded by the company's SVP of Finance, David Aufderhaar, in early April.
On the bright side, Stitch Fix's insiders still bought more than 10 times the shares they sold over the past 12 months. The stock also trades at just 0.3 times this year's sales, so any positive news about the company might drive its stock higher. But for now, the company still needs to get its house in order, stabilize its margins and free cash flow and prove its business model is sustainable. Investors shouldn't buy this out-of-favor stock until it checks all those boxes.
