Stitch Fix, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended October 31, 2020; comparable period ended November 2, 2019. Stitch Fix provides personalized apparel, footwear, and accessories through stylist-selected “Fix” shipments and direct-buy shopping.
Financial and operating performance
| Metric | Q1 FY2021 | Prior-year period |
|---|---|---|
| Net revenue | $490.4 million | $444.8 million |
| Gross profit / gross margin | $219.5 million / 44.7% | $201.3 million / 45.3% |
| SG&A | $239.0 million; 48.7% of revenue | $201.1 million; 45.3% of revenue |
| Operating income (loss) | $(19.5) million | $0.2 million |
| Net income (loss) | $9.5 million | $(0.2) million |
| Adjusted EBITDA | $6.9 million | $17.3 million |
| Operating cash flow / free cash flow | $57.4 million / $51.4 million | $27.5 million / $20.0 million |
- Revenue grew 10.3% year over year, primarily alongside 10.2% growth in active clients, to 3.763 million. Net revenue per active client fell 3.7%, to $467 from $485.
- Gross margin declined 60 basis points, mainly due to higher shipping costs from a greater direct-buy mix and higher carrier rates; lower inventory reserves and clearance rates partly offset the pressure.
- SG&A increased 18.8%, reflecting higher compensation, stock-based compensation, headcount, and marketing. Advertising spend was $51.4 million versus $50.7 million.
- Net income included a $28.1 million income-tax benefit, primarily related to CARES Act net operating loss carryback provisions. The company reported an operating loss; the tax benefit drove the reported net profit.
- Cash and cash equivalents were $200.3 million; available-for-sale investments totaled $229.6 million, including $188.0 million short term. Current assets were $597.4 million and current liabilities $295.1 million.
- No borrowings were outstanding under the $90 million revolving credit facility at quarter-end. The facility matures June 2, 2021, is secured by substantially all company assets, and includes financial covenants; the company reported compliance.
Material changes and management commentary
- Operating cash flow rose year over year, supported in part by a $76.8 million increase in accounts payable and accrued liabilities from business activity and payment timing. Increased inventory purchases and higher federal tax receivables partly offset that benefit.
- Management said fulfillment centers had returned to higher capacity after COVID-19-related closures and constraints in fiscal 2020. It reported continued growth in new-client demand and strong auto-ship retention, while noting the pandemic’s continuing uncertainty.
- Management expects to increase marketing spending during the remainder of FY2021 to pursue market share, and expects further investment in personnel, technology, inventory, and fulfillment infrastructure. The filing provides no specific revenue or earnings guidance.
- In November 2020, the company agreed to lease approximately 700,000 square feet for a Salt Lake City fulfillment center. The lease is expected to begin in late FY2021 or early FY2022, expire in 2030, and entail approximately $33.1 million in fixed operating lease costs over its term.
Risks, contingencies, and unusual items
- COVID-19 could still disrupt fulfillment capacity, supply chains, staffing, consumer demand, and cash flows. Management stated that available cash, investments, and potential revolver borrowings were expected to cover working-capital and capital-expenditure needs for at least 12 months.
- Other principal risks include discretionary consumer demand, client retention and acquisition costs, inventory forecasting and markdown/write-off exposure, shipping costs and carrier dependence, competition, cybersecurity and privacy compliance, and international expansion.
- A federal securities class action concerning alleged statements about client growth and television advertising remained pending: the court dismissed the prior complaint but allowed amendment, and the lead plaintiff filed an amended complaint in November 2020. Related derivative cases were stayed. The company said it did not believe pending matters would materially affect results, financial position, or cash flows.
- A California wage-and-hour representative action was settled, with court approval in November 2020. The company also disclosed a California styling-team restructuring, with $4.8 million of termination-benefit charges recognized during FY2020 and $0.4 million remaining accrued at quarter-end.
- The filing disclosed that President and COO Mike Smith intended to resign; it also noted Dan Jedda’s appointment as CFO in December 2020. The period-end disclosure controls were assessed as effective.
Key facts for investors to verify
- Whether revenue and active-client growth translate into improved revenue per client, margins, and operating profitability.
- How much of reported net income depends on the CARES Act tax benefit, and whether core operating performance improves from the quarterly operating loss and lower adjusted EBITDA.
- Whether higher shipping expense, marketing, compensation, and stock-based compensation continue to pressure margins and cash generation.
- Whether cash conversion remains strong when accounts-payable and accrued-liability timing effects normalize, and whether the June 2021 revolver maturity is extended or replaced.
- Progress, costs, and capacity effects of the Salt Lake City fulfillment-center lease, as well as developments in the securities litigation and management transition.