Stitch Fix, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter 2020, the three months ended November 2, 2019. Stitch Fix provides personalized apparel shipments (“Fixes”) and direct-purchase options. The prior comparable quarter ended October 27, 2018.
Financial performance and liquidity
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net revenue | $444.8 million | $366.2 million |
| Gross profit / margin | $201.3 million / 45.3% | $165.2 million / 45.1% |
| SG&A | $201.1 million; 45.3% of revenue | $154.3 million; 42.1% of revenue |
| Operating income | $0.2 million | $10.9 million |
| Net income (loss) | $(0.2) million | $10.7 million |
| Adjusted EBITDA | $5.1 million | $14.3 million |
| Adjusted EBITDA excluding stock-based compensation | $17.3 million | $20.9 million |
| Operating cash flow / free cash flow | $27.5 million / $20.0 million | $51.0 million / $44.0 million |
Revenue grew 21.5% year over year, while active clients increased 16.6% to 3.416 million. Cash and cash equivalents were $151.8 million and investments were $236.0 million at quarter end, for combined cash and investments of approximately $387.8 million. Current assets were $485.5 million against current liabilities of $242.9 million. No borrowings or conventional debt are reported in the supplied financial statements; operating lease liabilities totaled $154.7 million.
Cash and equivalents decreased by $19.2 million from August 3, 2019. Investing activities used $46.5 million, primarily reflecting purchases of available-for-sale securities, partly offset by maturities. Inventory increased to $148.5 million from $118.2 million. The company said existing cash balances and operating cash flows should meet working capital and capital expenditure needs for at least the next 12 months.
Changes versus prior year and management commentary
- SG&A rose 30.4%, faster than revenue, reflecting higher compensation and headcount, stock-based compensation, advertising, and fulfillment-center and office expansion. Advertising spend increased to $50.7 million from $38.9 million.
- Gross margin edged up 0.2 percentage points, with improvements in merchandise costs and operating efficiency partly offset by higher inventory reserves.
- Operating income fell to near break-even and the company reported a small net loss, versus prior-year profit. Management cited growth investments; stock-based compensation expense also increased to $12.1 million from $6.6 million.
- Operating cash flow and free cash flow were lower than in the prior-year quarter. Management attributed current-period working-capital movements mainly to increased accounts payable and accrued liabilities, substantially offset by inventory purchases.
Outlook, risks, contingencies, and unusual items
- No quantified quarterly or full-year revenue or earnings guidance is provided in the supplied filing text. Management expects revenue to grow in absolute dollars, while noting the growth rate may slow; it also expects continued investment and higher expenses for marketing, personnel, operations, and infrastructure.
- The company entered a cloud-computing services agreement in November 2019 with a $23.5 million minimum commitment through October 2022.
- Adoption of the new lease standard added right-of-use assets and lease liabilities to the balance sheet. At November 2, operating lease right-of-use assets were $128.7 million; reported lease liabilities were $154.7 million.
- Disclosure controls and procedures were not effective because of a material weakness involving controls over certain outsourced IT service providers and related control activities and monitoring. Remediation was ongoing. Management nevertheless concluded the financial statements fairly present the company’s results in all material respects.
- Consolidated securities class-action litigation alleges misleading statements about active-client growth and television advertising strategy; the company filed a motion to dismiss and says it intends to defend the claims. A related derivative action is stayed. The filing says management did not believe outstanding legal or tax matters were expected to have a material impact, while noting litigation outcomes are uncertain.
- Other disclosed risks include inventory forecasting and markdown exposure, competition and client acquisition costs, international expansion and foreign exchange, tariffs on imported goods, data security and privacy compliance, and the ability to manage growth. Management reported that a hypothetical 10% interest-rate or currency-rate change would not have materially affected the quarter’s results.
Important facts for investors to verify
- Whether active-client growth and revenue per active client can continue to support revenue growth without further deterioration in operating profitability.
- Whether higher marketing, compensation, and infrastructure costs produce sufficient client acquisition, engagement, and operating returns.
- Inventory levels, reserve changes, and merchandise mix, given the inventory build and management’s disclosure of demand and trend-forecasting risk.
- Progress and testing results for remediation of the material weakness in internal controls over financial reporting.
- Potential developments in the securities litigation, the $23.5 million cloud-services commitment, and the company’s lease obligations.