Stitch Fix, Inc. — Q1 FY2023 10-Q
Reporting period: Three months ended October 29, 2022. Stitch Fix offers personalized apparel through Fix shipments and direct-purchase Freestyle. The comparable period is the three months ended October 30, 2021.
Key financial results
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $455.6 million | $581.2 million | Down 21.6% |
| Gross profit / margin | $191.8 million / 42.1% | $272.9 million / 47.0% | Margin down 4.9 percentage points |
| SG&A | $246.9 million | $274.8 million | Down 10.1%; rose to 54.2% of revenue from 47.3% |
| Operating loss | $55.1 million | $1.9 million | Loss widened |
| Net loss / diluted loss per share | $55.9 million / $0.50 | $1.8 million / $0.02 | Loss widened |
| Adjusted EBITDA | $(7.4) million | $38.2 million | Down $45.6 million |
| Operating cash flow / free cash flow | $(10.0) million / $(16.2) million | $141.7 million / $125.3 million | Both turned negative |
Gross margin pressure primarily reflected higher clearance rates, product costs, and transportation costs. Adjusted EBITDA and free cash flow are non-GAAP measures.
Financial position and liquidity
- At October 29, cash and cash equivalents were $113.3 million and investments were $95.4 million, totaling $208.8 million. Cash and cash equivalents declined $17.6 million from fiscal year-end.
- Inventory was $220.2 million, up from $197.3 million at July 30, 2022.
- No revolving-credit borrowings were outstanding; available borrowing capacity was $82.2 million after letters of credit. The company reported compliance with its financial covenants.
- Total liabilities were $449.9 million, including $178.0 million of operating lease liabilities. The filing reported no outstanding revolving borrowings.
- Management said existing cash, investments, and available credit were expected to cover working-capital and capital-expenditure needs for at least the next 12 months and beyond.
Material changes and operating trends
- Active clients fell 11.3% year over year to 3.709 million. Management attributed the decline largely to higher lapsed clients, which it believes reflect the macroeconomic environment.
- Revenue fell primarily with the smaller active-client base and lower merchandise sales. Net revenue per active client, measured over the preceding four quarters, was approximately flat at $525 versus $524, although management observed lower recent spending.
- SG&A declined in dollars but increased as a share of revenue; management cited compensation and benefits, including stock-based compensation, as a percentage of lower revenue.
- Operating cash flow swung from $141.7 million provided to $10.0 million used. The prior-year inflow included substantial working-capital effects; this quarter’s cash use reflected the net loss and a $23.8 million increase in inventory, partly offset by $26.6 million of income-tax refunds.
Outlook, risks, and unusual items
- Management said client-acquisition challenges were continuing and expected them to have a negative compounding effect on FY2023 revenue. It also expected ongoing pressure on client spending amid economic uncertainty and retail discounting.
- The company planned to reduce marketing spend for the remainder of FY2023, prioritize investments with near-term positive returns, and continued evaluating costs, including its real-estate footprint. It expected inventory levels to normalize in the second half of FY2023 as supply-chain delays eased.
- The June 2022 restructuring reduced salaried positions by approximately 15% (about 4% of total roles). Q1 included $0.9 million of additional restructuring charges and $5.3 million of retention bonuses, together $6.2 million in costs excluded from adjusted EBITDA.
- Available-for-sale investments had $2.1 million of unrealized losses, which the company attributed to rising interest rates rather than issuer credit concerns; it reported no expected credit-loss provision.
- A securities class action filed August 26, 2022 alleges misleading statements about Freestyle between December 2020 and December 2021 and seeks unspecified damages. Separately, the Ninth Circuit affirmed dismissal of an earlier securities class action on October 19, 2022.
- Key risks include weak client acquisition and engagement, discretionary-spending pressure, inventory and margin management, marketing effectiveness, inflation and freight costs, fulfillment and shipping disruptions, and privacy, cybersecurity, and litigation exposure. Management reported disclosure controls were effective as of quarter-end.
- The filing provides no clear numerical revenue, profit, or cash-flow guidance for FY2023.
Important facts for investors to verify
- Whether active-client losses stabilize and Freestyle and Fix offerings improve client acquisition and retention.
- Whether revenue, gross margin, and client spending recover, and whether clearance, merchandise, and transportation costs ease.
- Whether planned marketing reductions and other cost actions improve operating performance without further weakening client growth.
- Whether inventory normalizes in the second half of FY2023 and cash use remains manageable against the company’s liquidity and credit covenants.
- Developments in the Freestyle-related securities lawsuit, along with execution of restructuring and retention efforts.