The retailer started its fiscal third quarter strong, with sales in February through the second week of March growing roughly 20% year over year. But everything changed once the coronavirus pandemic swept across the U.S.

Online apparel subscription retailer Stitch Fix Inc. reported online sales for its fiscal third quarter ended May 2 decreased 9.1% to $371.7 million from $408.9 million in the year-ago quarter.

It also reported a net loss of $33.9 million for the quarter compared with a net income of $7.0 million. The retailer pointed to the coronavirus pandemic and its related challenges, such as fulfillment issues, lower gross margins and variable labor expenses, as the reason for the net loss. Stitch Fix is No. 40 in the 2020 Digital Commerce 360 Top 500.

Stitch Fix, however, remains optimistic for the rest of 2020 for several reasons, including that its active customer base grew by 285,000 shoppers to 3.4 million active clients for the quarter, a 9.1% year-over-year increase from 3.1 million in Q3 2019. Plus, net revenue per client increased 6% year over year in Q3 to $498 in the trailing four quarters.

The retailer started its third quarter strong, with sales in February through the second week of March growing roughly 20% year over year, CEO Katrina Lake told investors on an earnings call transcribed by Seeking Alpha. However, everything changed once the coronavirus pandemic swept across the U.S. and local municipalities issued shelter-in-place orders, she said.

Stitch Fix says the majority of its customers buy its apparel boxes on a recurring basis, such as every 2-3 weeks, monthly or quarterly. In the third week of March, however, it had an increase in opt-out rates for these shipments, Lake said without revealing exact figures. She emphasized the opt-out rate started to recover by the next week, and by the end of April, it had the strongest level of auto-ship retention in the last 3 years.

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Stitch Fix’s fulfillment backlog

In the second week of March, Stitch Fix closed its facilities in southern San Francisco, Dallas and Bethlehem, Pennsylvania, which is half of its U.S. warehouses. That meant it could not fulfill orders from those locations, and it had a backlog of shipments. By the end of March, its warehouse capacity fell by nearly 70%, with its backlog doubling week over week in the last 2 weeks of March.

At the end of March, it reopened the previously closed facilities, and employees could work on an opt-in basis. Throughout April, more employees opted in, although it still had fewer employees working compared with before the pandemic. As its fiscal Q3 ended, its facilities were at about 66% capacity and as of the time of the release, the facilities  are approaching full capacity, Lake said.

“With this capacity, we’re tracking to eliminate our Fix backlog by the end of June, putting us in more of a position to play offense in the coming quarters,” Lake said.

For example, to help ease demand on its fulfillment center during the quarter, Stitch Fix pulled back on customer acquisition marketing. It also turned off a feature that allows shoppers to order their next shipment right after checkout. This typically comprises nearly 25% of its manual (or not automatic) Stitch Fix box revenue. After Q3, it turned on this feature and increased up its marketing spend.

Stitch Fix encouraged by non-box revenue

After a pilot test in previous quarters, Stitch Fix deployed a feature in Q3 allowing customers to purchase single items from its ecommerce site—much like traditional ecommerce—and not require shoppers to purchase a box subscription. The retailer calls this “Direct Buy.”

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Stitch Fix hopes this channel will help acquire new customers—as the barrier to entry is lower than signing up for an entire box—plus re-engage lapsed box subscribers or push consumers who have not made a purchase but have completed a style profile over the edge to buy.

Within its fiscal third quarter, revenue from the Direct Buy channel tripled quarter over quarter, president Elizabeth Spaulding said without providing an exact figure. 13% of its female customers have purchased via Direct Buy in May, up from 5% in February.

Direct Buy shoppers deliver incremental revenue to Stitch Fix, Lake said without revealing specifics.

“In summary, we’ve been very pleased to see the resilience of our auto-ship and Direct Buy clients, and we’re encouraged more broadly by the fact that week-over-week demand trends improved every week in April and continue to strengthen in Q4,” Lake said.

For its fiscal third quarter ended May 2, Stitch Fix reported:

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  • Net revenue of $371.7 million, a 9.1% decrease from $408.9 million in the year-ago quarter
  • Net loss of $33.9 million compared with a net income of $7.0 million

For the nine months ended May 2, Stitch Fix reported:

  • Net revenue of $1.27 billion, a 10.4% increase from $1.15 billion in the year-ago period
  • Net loss of $22.7 million compared with a net income of $29.7 million

Percentage changes may not align exactly with dollar figures due to rounding.

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