Stitch Fix, Inc. — Form 10-Q Summary
Reporting period: Third fiscal quarter ended April 27, 2019; comparisons are with the quarter ended April 28, 2018. The nine-month period also ended April 27, 2019. Fiscal 2019 has 53 weeks.
Business context
Stitch Fix provides personalized apparel, shoes, and accessories through stylist-selected shipments supported by data science. In May 2019, after the reporting period, it launched its service in the United Kingdom.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Revenue | $408.9 million | $316.7 million | $1,145.4 million | $908.2 million |
| Gross profit | $184.4 million | $138.2 million | $512.8 million | $394.6 million |
| Gross margin | 45.1% | 43.6% | 44.8% | 43.4% |
| SG&A | $189.0 million | $128.5 million | $491.0 million | $359.7 million |
| Operating income (loss) | $(4.6) million | $9.8 million | $21.7 million | $34.9 million |
| Net income | $7.0 million | $9.5 million | $29.7 million | $26.6 million |
| Diluted EPS | $0.07 | $0.09 | $0.29 | $0.15 |
- Quarterly revenue increased 29.1%; management attributed growth to 16.6% more active clients year over year (3.133 million) and higher revenue per active client. Nine-month revenue increased 26.1%.
- Quarterly gross margin improved 1.5 percentage points, which the company attributed primarily to lower clearance and shrink expenses. SG&A rose 47.1% in the quarter, faster than revenue, reflecting increased compensation, stock-based compensation, advertising, and UK-launch investment.
- Quarterly operating results shifted from profit to loss. Net income remained positive despite a pre-tax loss, principally because of a $9.8 million income tax benefit. The filing attributes the effective tax rate to several factors, including stock-based compensation deductions, credits, foreign operations, nondeductible expenses, and state taxes.
- For the nine months, operating income fell 37.7% while net income increased 11.6%. Prior-year comparisons include a $10.7 million preferred-stock warrant remeasurement and a $4.7 million Tax Act deferred-tax charge; the warrants were converted at the IPO and are no longer outstanding.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $75.2 million, versus $61.5 million a year earlier. Capital expenditures were $24.5 million, producing reported free cash flow of $50.7 million, compared with $49.5 million.
- Investing cash outflow was $233.8 million, mainly reflecting purchases of available-for-sale securities and $24.5 million of property and equipment. Financing cash inflow was $4.9 million; the prior-year period included IPO proceeds.
- At April 27, 2019, the company had $143.8 million cash and cash equivalents, $12.9 million restricted cash, and $210.7 million investments, including $147.8 million short-term investments. Management said existing cash and operating cash flows should cover working capital and capital expenditure needs for at least 12 months.
- No borrowings or debt balance are reported in the presented balance sheet. Total current assets were $442.6 million and current liabilities were $189.1 million.
Outlook, risks, and unusual items
- No specific financial guidance was provided. Management expected continued significant marketing spending and further investment in personnel, technology, inventory, fulfillment, and international expansion; it cautioned that these investments may not be cost-effective or produce expected growth.
- Management cited inventory forecasting and fashion-demand shifts, client acquisition and retention, competition, execution of the UK launch, and the possibility of slower revenue growth or future unprofitability as business risks.
- The company expanded its Dallas fulfillment-center arrangement, adding approximately 174,000 square feet and extending the lease to June 2024, with about $10.0 million in minimum lease payments. The Leicester fulfillment-center lease component carries about $11.1 million in minimum payments over five years; the logistics contract can be terminated after two years with six months’ notice.
- Four putative securities class actions allege misleading statements about active-client growth and television-advertising strategy in 2018; a related derivative action is stayed. The company said it did not believe existing litigation or tax matters would have a material impact, but outcomes are uncertain.
- Disclosure controls were deemed ineffective as of April 27, 2019 because a previously identified material weakness in controls over access, program changes, and computer operations for financial systems had not been fully remediated. Management stated that the financial statements fairly present results under GAAP.
Important facts for investors to verify
- Whether active-client growth and revenue per client continue to support revenue growth, and whether acquisition spending generates attractive returns.
- Whether SG&A growth moderates enough to restore operating profitability, particularly after the substantial increase in advertising and stock-based compensation.
- The drivers and repeatability of the quarterly tax benefit, and the comparability of reported earnings across periods.
- Progress and costs of the UK launch, fulfillment expansion, and related lease commitments.
- Remediation and independent assessment of the material weakness, and developments in the securities litigation.