Stitch Fix, Inc. — Q3 Fiscal 2024 Form 10-Q
Reporting period: Three and nine months ended April 27, 2024. The fiscal year ending August 3, 2024 has 53 weeks, with the extra week in Q4. Financial results below are for continuing U.S. operations unless noted; the UK business is reported as discontinued operations after Stitch Fix ceased its UK operations in Q1 fiscal 2024.
Business context and key metrics
Stitch Fix provides personalized apparel recommendations and merchandise through stylist-curated Fix shipments and direct-buy Freestyle on its website and app. Management attributed lower revenue primarily to ongoing client acquisition, conversion, and retention challenges.
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Net revenue | $322.7 million | $383.4 million | $1,017.9 million | $1,227.8 million |
| Gross profit | $147.0 million | $163.7 million | $449.6 million | $514.7 million |
| Gross margin | 45.5% | 42.7% | 44.2% | 41.9% |
| Operating loss | $24.8 million | $20.5 million | $91.5 million | $132.3 million |
| Net loss from continuing operations | $22.0 million | $18.4 million | $83.1 million | $130.0 million |
| Total net loss, including discontinued operations | $21.3 million | $21.8 million | $92.3 million | $143.3 million |
| Adjusted EBITDA, non-GAAP | $6.7 million | $13.2 million | $19.8 million | $17.8 million |
Revenue declined 15.8% in Q3 and 17.1% for the nine-month period year over year. Active clients fell 19.9% to 2.633 million from 3.288 million. Trailing-four-quarter net revenue per active client rose 1.7% to $525 from $516. Q3 basic and diluted loss per share were both $0.18, versus $0.19 total net loss per share in the prior-year quarter.
Cash flow, liquidity, debt, and other financial matters
- Cash and investments: At April 27, 2024, cash and cash equivalents were $196.5 million and short-term investments were $48.0 million, compared with $239.4 million and $18.2 million, respectively, at July 29, 2023. Cash included $24.7 million held in the UK; remaining UK cash is expected to settle discontinued-operation liabilities before repatriation, which may be subject to taxes or local restrictions.
- Cash flow, nine months: Continuing-operations operating cash flow was $20.0 million, down from $50.7 million. Capital expenditures were $10.3 million, resulting in free cash flow of $9.7 million, versus $35.8 million in the prior-year period. Continuing-operations investing cash flow was negative $39.5 million and financing cash flow was negative $11.8 million. Total cash decreased $42.9 million to $196.5 million, including cash used by discontinued operations.
- Balance sheet: Total assets were $537.0 million and stockholders’ equity was $208.9 million. Inventory was $114.5 million, down from $130.5 million at fiscal year-end. Total liabilities were $328.1 million, including operating lease liabilities of $131.9 million; the filing reports no outstanding credit-facility borrowings.
- Credit facility: The $50.0 million revolving facility with Citibank matures December 4, 2026. At period-end, borrowing availability was $50.0 million and borrowing capacity was $29.4 million after outstanding letters of credit; no borrowings were outstanding. The company reported compliance with financial covenants.
- Margins and expenses: Q3 SG&A was $171.8 million, or 53.2% of revenue, compared with 48.0% a year earlier. Nine-month SG&A was $541.1 million, or 53.2% of revenue, versus 52.7%. The reported income-tax provision was $0.2 million for Q3 and $0.5 million for the nine months; management cited a full valuation allowance on federal and state deferred tax assets.
Material changes, outlook, and risks
- Gross margin improved by 280 basis points in Q3 and 230 basis points for the nine-month period, primarily due to improved product margins and more favorable transportation rates. Q3 improvement was partly offset by additional inventory reserves.
- SG&A fell year over year in dollars, largely reflecting restructuring-related reductions in compensation, stock-based compensation, and facilities costs. However, Q3 operating loss widened as revenue declined faster than expenses.
- Management expects client acquisition and retention challenges to continue weighing on revenue through the rest of fiscal 2024 and into fiscal 2025. It is focused on retaining clients, improving new-client conversion, and enhancing the client experience. Management also said it is assessing operating costs, real estate, and marketing discipline.
- Management expects Q4 advertising expense to be approximately 9%–10% of revenue, while retaining flexibility to adjust spending based on performance. It believes existing cash, investments, operating cash flows, and available credit will be sufficient for working capital and capital expenditures for at least the next 12 months and beyond.
- Restructuring charges were $4.8 million in Q3 and $21.2 million for the nine months, including fulfillment-center closures, organizational changes, and the move to a part-time stylist model. The company estimated a further $1.0–$1.5 million of cash restructuring charges over the next two fiscal quarters.
- Subsequent event: In Q4, the company reviewed its San Francisco headquarters lease asset due to an intended change in use. It preliminarily expects a non-cash impairment charge of $15–$20 million in the quarter ending August 3, 2024.
- Discontinued UK operations: The UK business generated a $9.2 million loss for the nine months, including $5.2 million of exit-related expenses; the filing expects future UK exit expenses to be immaterial.
- Contingencies: A securities class action concerning statements about Freestyle is awaiting a court decision on the company’s motion to dismiss. A related derivative action is stayed, and another derivative action was filed May 24, 2024. The company stated it does not believe currently disclosed litigation or tax matters, if resolved unfavorably, would materially affect results, financial position, or cash flows.
- Key risks include continued client losses and revenue declines, consumer discretionary spending and macroeconomic uncertainty, inventory and demand forecasting, marketing effectiveness, fulfillment capacity after facility closures, shipping and supply-chain costs, and execution of restructuring and other strategic changes.
Important facts for investors to verify
- Whether active-client losses stabilize and conversion, retention, and revenue trends improve, particularly given management’s warning that client challenges may affect results into fiscal 2025.
- Whether gross-margin gains persist and whether lower SG&A can offset continued revenue pressure without undermining client acquisition and experience.
- Actual cash generation, UK cash repatriation and related costs, and continued access to the credit facility while meeting its covenants.
- The final amount and timing of the expected $15–$20 million headquarters impairment and any further restructuring or facility-related costs.
- Developments in the securities and derivative litigation, and the effects of any resolution on the company’s financial position or operations.