While revenue for Stitch Fix Inc., the data-driven online personal-styling service, grew 25.3% in its fiscal first quarter, its net income only inched up 2.3%. That sharp dichotomy, the result of Stitch Fix spending more money than analysts expected to expand into new apparel categories, led to the retailer’s biggest stock price decline since becoming a public company.
Expenses in the fiscal first quarter, which ended in October, rose 43% to $119.5 million on higher advertising and hiring costs, Stitch Fix said Tuesday in its first earnings report following a November initial public offering. Gross margins also narrowed from a year earlier, in large part due to new product lines for men and plus-sized women, the company said.
Shares fell as much as 17% Wednesday morning and were down 7.8% to $22.83 at 9:49 a.m. in New York.
Stitch Fix touted its subscriber growth during its conference call with analysts, noting that its subscriber base rose 29.7% to nearly 2.4 million customers. CEO Katrina Lake noted that it expects to continue that strong growth by leveraging the data that it has gathered about its existing customer base to market to similar consumers.
“We have significant opportunities to acquire new clients through efficiently leveraging our performance marketing capabilities to attract new clients in existing categories and increasing our brand awareness among the millions and millions of potential clients who are currently totally unaware of our service,” she said, noting that in fiscal 2017 it launched men’s and plus-size lines.
“These investments are important for long-term growth,” she said. “The price that we’re choosing to pay is in short-term profitability.”
Stitch Fix, No. 134 in the Internet Retailer 2017 Top 1000, started as an online subscription company for women’s clothing, capitalizing on a spike in consumer interest in recurring boxes of various goodies. Lake focused on collecting data and using it to tailor the boxes to customers’ tastes in fashion. The company has since expanded to multiple categories to appeal to a broader customer base and is working to focus more sales around specific events, like date nights. While many other subscription box companies faltered, Stitch Fix gained ground in part by offering more flexible options and on-demand deliveries.
Each new category adds potential customers that Stitch Fix could reach, with men’s boxes doubling the company’s potential market in the U.S., said Mike Smith, the retailer’s chief operating officer.
Software + Stylists
Customers only pay for the articles of clothing they keep and send back what they don’t want. Stitch Fix employs about 3,400 stylists who, helped by software that sifts through data and comes up with recommendations, determine what each box of clothes should contain.
While the company doesn’t break down clients by category, Smith said that within six months of launching men’s boxes, male customers on average bought an equivalent number of items per delivery as female customers. Stitch Fix also had a waiting list of more than 75,000 women for plus-sized apparel boxes prior to the category’s launch in February, he said.
The company also plans to expand inventory in apparel priced in the $20 to $50 range, lower price points than its traditional assortment. While that will result in a lower average order value, it’s another category that significantly widens the potential client base and has resulted in better retention, Lake said.
Stitch Fix is still in its proving stage. It had a rocky start with an initial public offering last month that was met with a tepid response from investors. The company, which combines big data and traditional retail, shrunk the offering size and cut the price to $15 a share from as much as $20, raising less than it planned. On its first day of trading, shares ended only 1% higher.
Since then, however, the stock had risen 65% through Tuesday. Analysts are now generally positive on the company, which has no sell ratings.
The early success in customer satisfaction and purchasing habits shows the company’s effort to spend on expanding its fashion categories is worth the investment, Smith said. And over time, Stitch Fix expects better gross margins from the new categories as they grow, similar to how the main women’s business became more profitable with size.
Adjusted earnings before interest, tax, depreciation and amortization for the current quarter will be $11.5 million to $15.5 million, the San Francisco-based company said. Analysts on average expected $15.5 million.
Stitch Fix is atypical in that it has been profitable and has a clean balance sheet. It had gross margins of 44% in 2017, an unusual feat when many consumer startups struggle to break even.
Lake, who founded Stitch Fix in 2011, was the only female tech chief executive officer to take a company public in 2017. She also only raised $42 million before going public, despite having an operations-heavy business requiring its own fulfillment centers.
Critics have questioned whether Stitch Fix will be able to continue growing its customer base. Its business model is to collect information on a customer’s style, size and price preference and send them five pieces of clothing for a $20 styling fee. While revenue is still increasing by double digits, growth is slowing.
“In the last three quarters, we’ve consistently delivered north of 20% growth,” Lake said. “That’s a great number for us to be at.”
For the fiscal first quarter, ended Oct. 28, Stitch Fix reported:
- Revenue of $295.6 million, up 25.3% from $236.0 million.
- Net income of $13.5 million, up 2.3% from $13.2 million.
- Gross margin of 43.7%, down from 46.6%.
Bloomberg contributed to this report.