Stitch Fix, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended May 2, 2020; financial statements are unaudited. The company provides personalized apparel shipments (“Fixes”) and direct-buy merchandise in the U.S. and U.K.
Financial performance
| Metric | Three months ended May 2, 2020 | Year-over-year change | Nine months ended May 2, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $371.7 million | Down 9.1% | $1,268.3 million | Up 10.7% |
| Gross profit / margin | $151.6 million / 40.8% | Down from 45.1% | $555.1 million / 43.8% | Down from 44.8% |
| Operating income (loss) | $(46.1) million | Prior-year loss: $4.6 million | $(37.4) million | Prior-year income: $21.7 million |
| Net income (loss) | $(33.9) million | Prior-year income: $7.0 million | $(22.7) million | Prior-year income: $29.7 million |
| Diluted EPS | $(0.33) | Prior-year: $0.07 | $(0.22) | Prior-year: $0.29 |
| Adjusted EBITDA | $(40.3) million | Prior-year: $(0.3) million | $(20.8) million | Prior-year: $33.2 million |
| Adjusted EBITDA excluding stock-based compensation | $(20.7) million | Prior-year: $8.8 million | $26.6 million | Prior-year: $57.0 million |
For the quarter, selling, general and administrative expense rose 4.6% to $197.7 million and equaled 53.2% of revenue, versus 46.2% a year earlier. The reported gross-margin decline reflected excess inventory reserves and higher clearance activity, alongside reduced fulfillment capacity. Adjusted EBITDA measures are non-GAAP.
Cash, liquidity and obligations
- At May 2, 2020, cash and cash equivalents were $96.8 million; available-for-sale investments totaled $231.7 million, including $144.7 million short-term. The combined balance was approximately $328.5 million.
- For the nine months, operating cash flow was $(20.5) million and capital expenditures were $18.7 million, producing free cash flow of $(39.1) million. Cash, cash equivalents and restricted cash declined $74.3 million to $96.8 million.
- Inventory was $165.1 million, up from $118.2 million at fiscal year-end, reflecting purchases made ahead of expected growth and slower sales during the pandemic.
- The company reported no borrowings under the revolving credit facility entered into in June 2020, after quarter-end. It provides up to $90 million, with an option to request an additional $60 million; it is secured by substantially all company assets and includes financial covenants. The facility matures June 2, 2021, unless extended.
- Operating lease liabilities totaled $165.6 million, including $23.1 million current. A new 10-year Indiana fulfillment-center lease commenced in March 2020.
Operating changes and management commentary
- Active clients grew 9.1% year over year to 3.418 million. Revenue per active client was $498, up 6.5% year over year, though down from $501 in the prior quarter amid pandemic-related weakness.
- COVID-19 response included temporary closure of three of seven fulfillment centers, reduced warehouse capacity, safety protocols and four weeks of flexible paid time off for fulfillment-center employees. Shipment and returns delays, backlogs, and lower demand—especially in March and April—hurt revenue and margins. Management said capacity had steadily improved and warehouses were approaching full capacity by the filing date.
- Lower marketing spend during the quarter, undertaken because of limited capacity to serve customers, also weighed on client demand and acquisition. Advertising expense was $37.8 million versus $50.4 million a year earlier.
- Management said existing cash, cash equivalents, short-term investments and available revolver borrowing should cover working-capital and capital-expenditure needs for at least 12 months, while acknowledging that the pandemic’s duration and effects remain uncertain. No specific financial guidance was provided.
- On June 1, 2020, the company announced a plan to eliminate substantially all California-based styling positions. It estimated $4–$6 million of restructuring and related charges, primarily severance and benefits, expected through fiscal Q1 2021; some other costs were not estimable.
Risks, contingencies and unusual items
- COVID-19, economic uncertainty, consumer discretionary spending, fulfillment capacity, inventory demand and valuation, supply disruptions, and client acquisition and retention are significant risks. Management noted greater estimation uncertainty for inventory reserves and income taxes.
- Disclosure controls were not effective as of May 2, 2020, due to an unremediated material weakness involving oversight of certain outsourced IT service providers and related control and monitoring activities. Management said the financial statements fairly present results, and remediation efforts were ongoing.
- Consolidated securities class-action litigation and related derivative suits concerning alleged 2018 statements about active-client growth and television advertising remained pending; the motion to dismiss was under submission. The company said it intended to defend the claims and did not believe current litigation or tax matters would materially affect results or financial position.
- The CARES Act’s net-operating-loss carryback provisions contributed to the reported income-tax benefit. The company had not recorded a material long-lived asset impairment as of May 2, 2020.
Investor verification priorities
- Track fulfillment capacity, shipment backlogs, customer demand and active-client trends as pandemic conditions change.
- Assess inventory aging, reserves, clearance levels and the effect on gross margin and cash needs.
- Review liquidity and covenant headroom under the June 2020 secured revolver, including any borrowing or amendments.
- Confirm the cost, timing and operational impact of the California stylist restructuring.
- Monitor remediation and testing of the material weakness in internal controls, along with developments in the securities litigation.