Stitch Fix, Inc. — Form 10-Q Summary
Business and reporting period: Stitch Fix provides personalized apparel shopping through stylist-curated Fix shipments and its Freestyle direct-shopping service. This unaudited report covers the fiscal third quarter and nine months ended April 30, 2022; comparable periods ended May 1, 2021. Amounts below are in U.S. dollars.
Key financial and operating metrics
| Metric | Three months ended April 30, 2022 | Year-over-year change | Nine months ended April 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $492.9 million | Down 8.0% | $1,590.9 million | Up 4.0% |
| Gross profit / gross margin | $210.1 million / 42.6% | Down 14.7%; margin down 3.4 percentage points | $715.8 million / 45.0% | Up 4.9%; margin up 0.4 percentage points |
| Operating loss | $76.9 million | Compared with $24.2 million loss | $109.4 million | Compared with $84.1 million loss |
| Net loss | $78.0 million; $0.72 per diluted share | Compared with $18.8 million loss | $110.8 million; $1.02 per diluted share | Compared with $30.3 million loss |
| Adjusted EBITDA | $(36.0) million | Compared with $11.6 million | $12.3 million | Compared with $9.6 million |
Cash flow and liquidity: For the nine months, operating cash flow was $94.5 million, capital expenditures were $38.7 million, and free cash flow (a non-GAAP measure) was $55.8 million, versus negative $58.8 million a year earlier. Operating cash flow benefited substantially from an $88.0 million increase in accounts payable and accrued liabilities, attributed primarily to business activity and payment timing. Cash and equivalents were $137.7 million; short- and long-term investments totaled $145.0 million, for combined cash and investments of $282.8 million at April 30, 2022. Current assets were $533.8 million and current liabilities $317.0 million.
Debt and capital: No borrowings were outstanding on the $100 million revolving credit facility, and the company reported compliance with its financial covenants. The facility matures May 31, 2024 and is secured by substantially all company assets. The company repurchased 2.3 million shares for approximately $30.0 million during the nine months under a $150 million authorization.
Operating indicators: Active clients fell 4.9% year over year to 3.907 million. Net revenue per active client increased 15.0% to $553. Stock-based compensation was $96.3 million for the nine months, versus $73.5 million in the prior-year period.
Material changes and management commentary
- Quarterly revenue declined as active clients and merchandise sales fell. Management attributed weaker client acquisition to onboarding friction and lower site traffic, including effects from Apple’s iOS privacy changes. Higher revenue per active client, partly associated with Freestyle, partially offset the decline.
- Quarterly gross margin contracted due primarily to higher merchandise and shipping costs and inventory reserves. For the nine-month period, improved product margins and shipping-cost leverage were partly offset by higher clearance rates.
- SG&A rose 6.0% for the quarter and 7.7% for the nine months, with higher compensation and benefits, including stock-based compensation, primarily related to technology investments. SG&A reached 58.2% of quarterly revenue.
- Management expected the revenue trend to continue in fiscal Q4 and forecast full-year fiscal 2022 net revenue growth to be flat to slightly down year over year. The filing gives no more specific numerical earnings or cash-flow outlook.
- On June 9, 2022, after quarter-end, the company announced a restructuring reducing approximately 15% of salaried positions, or about 4% of total roles. It expected $15 million to $20 million of cash charges, to be recognized in fiscal Q4, and said it was also assessing other costs, including its real estate footprint.
Risks, contingencies, and unusual items
- Management cited uncertainty from COVID-19, fulfillment-center staffing and capacity, supply-chain delays, shipping and freight costs, inflation, and consumer discretionary spending. It warned that it may not be able to offset higher costs through price increases.
- Inventory demand and pricing shifts may lead to markdowns, reserves, or write-offs. The company changed its inventory costing method to FIFO effective August 1, 2021; it reported no material effect and did not restate prior periods.
- The company reported sufficient cash, investments, and available credit to meet working-capital and capital-expenditure needs for at least the next 12 months. This is management’s assessment, not a guarantee.
- A securities class action was dismissed by the district court in October 2021; plaintiffs appealed to the Ninth Circuit, with no hearing date set. Related derivative cases remained stayed pending the appeal. The company said it did not believe current litigation or tax matters would have a material adverse impact, if resolved unfavorably.
- The 2022 tax provision was affected by a full valuation allowance on federal and state deferred tax assets; the substantial prior-year tax benefit included CARES Act carryback effects and stock-compensation tax benefits.
- Management stated that disclosure controls were effective as of April 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether client acquisition, conversion, site traffic, and active-client trends stabilize, and whether Freestyle continues to lift revenue per client.
- Whether gross margins recover as merchandise, freight, inventory-reserve, and clearance pressures evolve.
- How much of reported operating cash flow reflects sustainable operations versus working-capital timing, particularly accounts payable and accrued liabilities.
- Whether the restructuring delivers expected cost savings, and whether its $15 million to $20 million charges or additional footprint actions change the outlook.
- Remaining repurchase authorization, cash deployment, liquidity, and continued compliance with credit-facility covenants amid operating losses.
- Developments in the securities-litigation appeal and any material changes in other legal, tax, supply-chain, or fulfillment risks.