Stitch Fix, Inc. — Q1 Fiscal 2022 Form 10-Q
Reporting period: Three months ended October 30, 2021; comparisons are with the three months ended October 31, 2020, unless noted. Stitch Fix sells personalized apparel through Fix shipments and Freestyle direct purchases.
Financial and operating performance
| Metric | Q1 FY2022 | Prior-year quarter |
|---|---|---|
| Net revenue | $581.2 million | $490.4 million |
| Gross profit / gross margin | $272.9 million / 47.0% | $219.5 million / 44.7% |
| SG&A | $274.8 million / 47.3% of revenue | $239.0 million / 48.7% |
| Operating income (loss) | $(1.9) million | $(19.5) million |
| Net income (loss) | $(1.8) million | $9.5 million |
| Adjusted EBITDA | $38.2 million | $6.9 million |
| Operating cash flow / free cash flow | $141.7 million / $125.3 million | $57.4 million / $51.4 million |
Revenue rose 18.5% year over year. Active clients increased 11.1% to 4.18 million; net revenue per active client rose 12.2% to $524. Gross margin improved by more than 220 basis points, which management attributed mainly to better product margins and shipping optimization, partly offset by higher clearance rates. SG&A increased in dollars, primarily with higher compensation and benefits, including warehouse wage increases; its share of revenue declined.
The prior-year quarter’s net income included a $28.1 million income tax benefit, largely related to CARES Act net operating loss carryback provisions. The current quarter recorded a $0.2 million tax provision despite a pretax loss, mainly because of a full valuation allowance on federal and state deferred tax assets.
Liquidity, debt, and cash flow
At October 30, 2021, cash and cash equivalents were $249.7 million and investments were $150.9 million, including $62.4 million of short-term investments. The company had no borrowings under its $100 million revolving credit facility and reported compliance with its financial covenants. The facility matures May 31, 2024; the agreement allows the company to request an additional facility of up to $150 million, subject to lender approval.
Operating cash flow was supported by a $71.5 million increase in accounts payable and accrued liabilities and a $30.8 million cash benefit from lower inventory, which management linked partly to supply-chain delays and timing of payments. Capital expenditures were $16.4 million. The company stated that cash, investments, and available borrowing should cover working capital and capital expenditure needs for at least the next 12 months.
Material changes, outlook, and risks
- Management reported lower-than-expected inventory receipts due largely to global supply-chain delays. COVID-19 cases and hiring challenges also constrained fulfillment-center capacity; rising warehouse wages increased costs.
- A new procure-to-pay and inventory system was implemented, and the inventory costing method changed from specific identification to FIFO effective August 1, 2021. The change had no material effect on inventory or cost of goods sold, and prior periods were not restated. The company disclosed technical issues after the system upgrade that affected purchase-order and payment transmission, receipt, and reconciliation with vendors.
- Management expects expenses to increase as it invests in marketing, personnel, technology, inventory, and fulfillment infrastructure; it cautioned that revenue growth may slow and profitability is not assured. No specific numeric financial guidance for future periods is provided in the supplied filing text.
- Management cited continuing uncertainty from COVID-19 and variants, supply and freight disruptions, inventory and shipping risks, fulfillment staffing and wage pressures, changing consumer demand, and the possibility that clients return to brick-and-mortar shopping. It also warned that higher merchandise, freight, or raw-material costs may not be fully offset by price increases.
- Elizabeth Spaulding became CEO on August 1, 2021, while founder Katrina Lake became Executive Chairperson. The company identified managing this leadership transition as a risk.
- A securities class action was dismissed on October 1, 2021; plaintiffs filed a notice of appeal on October 29. Two related derivative actions remain stayed. Management stated it did not believe the disclosed legal or tax matters would materially affect results, financial position, or cash flows.
- Stock-based compensation was $32.3 million, up from $19.9 million. Unrecognized compensation expense was $309.1 million, expected to be recognized over an estimated weighted-average 2.1 years.
Important facts for investors to verify
- Whether inventory receipts and fulfillment capacity recover, and whether supply delays affect future sales, returns, or gross margins.
- How much of operating cash flow reflects sustainable operations versus working-capital timing, particularly changes in payables, accrued liabilities, and inventory.
- Whether higher compensation, freight, and merchandise costs or increased investment pressure operating profitability.
- Progress and effects of the procure-to-pay system changes, including resolution of vendor purchase-order and payment issues.
- Developments in the securities litigation appeal and any resulting financial exposure.
- Future share dilution and compensation expense from equity awards; Class B shares carry ten votes per share compared with one vote for Class A.