Stitch Fix, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended January 27, 2018; comparisons are with the periods ended January 28, 2017. Stitch Fix sells apparel, shoes and accessories through personalized “Fix” shipments selected by stylists using data-science tools. The filing is unaudited.
Financial results
| Metric | Quarter | Six months |
|---|---|---|
| Net revenue | $295.9 million; up 24.4% | $591.5 million; up 24.8% |
| Gross profit / gross margin | $127.4 million / 43.0% (44.9% prior year) | $256.4 million / 43.3% (45.8% prior year) |
| SG&A | $111.8 million; up 5.6% | $231.2 million; up 22.1% |
| Operating income / margin | $15.6 million / 5.2% | $25.2 million / 4.2% |
| Net income | $3.6 million, versus $0.2 million | $17.1 million, up 27.1% |
| Adjusted EBITDA (non-GAAP) | $18.2 million, versus $24.1 million | $30.0 million, versus $52.1 million |
Quarterly diluted EPS was $0.02; six-month diluted EPS was $0.06, versus $0.14 in the prior-year six-month period. Adjusted EBITDA excludes specified items and should be read alongside GAAP results.
- Cash flow: Six-month operating cash flow was $33.7 million, compared with $49.5 million. Capital expenditures were $8.2 million, producing company-defined free cash flow of $25.5 million, versus $38.2 million.
- Liquidity and balance sheet: At January 27, cash was $266.4 million and restricted cash was $9.1 million. Current assets were $358.1 million; current liabilities were $129.8 million; total liabilities were $145.3 million. No borrowings or debt balance are presented in the supplied financial statements.
- Inventory: $80.1 million, up from $67.6 million at July 29, 2017. The six-month cash-flow statement reflects a $19.5 million use of cash from inventory growth.
- Client growth: Active clients reached 2.508 million, up 30.6% year over year.
Changes, outlook and material items
- Revenue growth was driven primarily by the increase in active clients. Management noted that revenue growth had slowed from earlier periods and may slow further.
- Gross margin declined amid inventory investment and expansion into new categories, higher clearance and inventory shrink, merchandise costs and inventory-obsolescence reserves. Advertising expense rose to $19.8 million for the quarter and $48.0 million for six months; management expects continued significant marketing investment and higher expenses as the business expands.
- Management said existing cash and operating cash flows should cover working-capital and capital-expenditure needs for at least the next 12 months. It expects revenue to grow in absolute dollars, but did not provide specific financial guidance and cautioned that growth rates may continue to slow.
- The November 2017 IPO generated $127.1 million of net proceeds in the six-month cash-flow statement. Preferred shares converted to common stock and preferred stock warrants were exercised in connection with the IPO; warrant remeasurement is not expected to recur.
- The Tax Act reduced the federal corporate rate, with a blended 26.96% statutory rate applied for fiscal 2018. A $4.7 million charge from remeasuring deferred tax assets contributed to elevated reported tax expense; the quarterly effective tax rate was 78.9% and the six-month rate was 52.3%.
- On January 29, 2018, the company amended its headquarters lease after quarter-end. The amendment added office space and extended the existing lease; estimated future minimum payments increased from about $43.8 million to $115.3 million over ten years. Restricted cash subsequently increased by $3.7 million as additional letter-of-credit collateral.
- Disclosure controls were deemed ineffective because a previously identified material weakness in financial-system access, program-change and computer-operation controls remained under remediation. Management stated the financial statements fairly present the company’s results; the independent auditor had not attested to internal-control effectiveness.
- The filing reports no material legal proceedings and states that management did not believe existing litigation or tax matters would materially affect results, financial position or cash flows. Risks include inventory forecasting and margin pressure, client acquisition and retention, competition, data security, operational growth, and the unresolved control weakness.
Important facts for investors to verify
- Whether client and revenue growth can be sustained as growth rates slow, and whether marketing spend produces attractive client-acquisition returns.
- Whether inventory management, category expansion and shrinkage improve enough to stabilize gross margins and cash conversion.
- The persistence of operating cash flow and free cash flow relative to inventory needs, capital spending and the expanded headquarters lease obligations.
- The final tax effects of the Tax Act and any revisions to provisional deferred-tax estimates.
- Progress and independent validation of remediation of the material weakness in internal controls.
- Potential share-sale overhang after the IPO lock-up release: the filing said up to approximately 37.7 million Class A and Class B shares could become eligible for sale beginning March 14, 2018, subject to applicable restrictions.