Stitch Fix, Inc. — FY2018 Form 10-K
Business context and reporting period. Stitch Fix provides personalized apparel, shoes and accessories through stylist-curated shipments supported by data science. This filing covers the 52-week fiscal year ended July 28, 2018; “2018 Q4” refers to the quarter ended that date, not the full reporting period. The company reported 2.742 million active clients at fiscal year-end, up 25.0% year over year.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $1,226.5 million | $977.1 million |
| Gross profit / gross margin | $536.0 million / 43.7% | $434.4 million / 44.5% |
| Operating income / margin | $43.0 million / 3.5% | $31.6 million / 3.3% |
| Net income (loss) | $44.9 million | $(0.6) million |
| Adjusted EBITDA | $53.6 million | $60.6 million |
| Operating cash flow | $72.2 million | $38.6 million |
| Capital expenditures | $16.6 million | $17.1 million |
| Free cash flow (company-defined) | $55.6 million | $21.5 million |
FY2018 diluted EPS was $0.34; non-GAAP net income was $38.4 million. Cash and cash equivalents were $297.5 million at year-end, with working capital of $274.8 million and total assets of $481.6 million. Total liabilities were $166.5 million; the balance sheet does not list interest-bearing debt. The company reported no off-balance-sheet arrangements. The IPO generated net proceeds of approximately $129.0 million in FY2018.
Fiscal Q4. Revenue was $318.3 million versus $258.3 million in the prior-year quarter. Gross profit was $141.4 million, or 44.4% of revenue, versus $112.2 million, or 43.5%. Operating income was $8.1 million versus $0.2 million; net income was $18.3 million versus a $4.5 million loss. Q4 diluted EPS was $0.18. The quarter included a $9.4 million income-tax benefit, a material contributor to reported net income; quarterly cash flow is not provided in the filing text presented here.
Material changes versus prior comparable periods
- FY revenue grew 25.5%, slower than 33.8% growth in FY2017. Management attributed the increase mainly to 25.0% active-client growth.
- FY gross margin declined 0.8 percentage points to 43.7%, reflecting higher inventory shrink and shipping expense and expansion into new categories, partly offset by lower inventory-obsolescence reserves.
- SG&A rose 22.4% to $493.0 million, mainly due to compensation, stock-based compensation, headcount and advertising. Advertising expense increased to $102.1 million from $70.5 million.
- Net income improved substantially from FY2017’s small loss, while adjusted EBITDA declined by $7.0 million. FY2018 results included a $10.7 million gain from remeasuring preferred-stock warrants and a $6.7 million tax charge from remeasurement of deferred tax assets under the Tax Act. The warrants were extinguished in connection with the IPO.
- Operating cash flow increased to $72.2 million; the company cited higher business activity and accounts payable, partly offset by increased inventory purchases.
Outlook, risks and unusual items
- Management expects revenue to continue expanding, but cautions that growth rates may slow. It expects higher investment in marketing, personnel, technology, inventory, fulfillment and infrastructure; no specific revenue or earnings guidance is provided.
- The company launched Stitch Fix Kids in July 2018 and announced plans to enter the UK by the end of FY2019. The UK launch entails execution, vendor, staffing, regulatory and foreign-market risks; a logistics letter of intent carried a potential $5–$10 million termination payment if the company failed to perform.
- Key business risks include acquiring and retaining clients cost-effectively, competition, changing fashion preferences, inventory forecasting and write-offs, supply-chain and shipping disruption, and the ability to scale operations while protecting margins.
- Privacy and cybersecurity exposure is significant given the client data collected. The filing discusses GDPR, the forthcoming California Consumer Privacy Act and uncertainty around UK data rules.
- As of July 28, 2018, management identified a material weakness in controls over access, program changes and computer operations in accounting and proprietary systems. Disclosure controls were deemed ineffective; remediation was ongoing. The auditor did not audit internal-control effectiveness.
- FY2018 contractual obligations included $149.7 million of operating leases and $234.1 million of purchase commitments, almost all due within one year. The company stated that cash and operating cash flows should cover working-capital and capital needs for at least 12 months.
Key facts investors should verify
- Whether active-client growth and repeat purchasing sustain revenue as growth moderates and marketing spending rises.
- Whether gross margin stabilizes amid shipping costs, inventory shrink, seasonal demand shifts and newer, initially lower-margin categories.
- How adjusted EBITDA and cash generation trend relative to GAAP earnings, including the effects of stock compensation and other noncash or unusual items.
- Progress in remediating the material weakness and establishing effective financial-reporting controls.
- The cost, timing and commercial traction of the UK launch, and exposure under the logistics commitment.
- Liquidity needs against purchase commitments, lease obligations and planned growth investments; confirm whether any debt or financing obligations arise after the reporting date.