Stitch Fix, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended January 27, 2024. Stitch Fix provides personalized apparel through Fix shipments and Freestyle direct purchases. Results present the UK business as discontinued operations after the company ceased UK operations during the first quarter of fiscal 2024.
Financial performance and position
| Metric | Q2 FY2024 | Comparable prior period |
|---|---|---|
| Revenue from continuing operations | $330.4 million | $400.6 million; down 17.5% year over year |
| Gross profit / gross margin | $143.5 million / 43.4% | $163.8 million / 40.9% |
| Operating loss | $38.0 million | $63.3 million |
| Net loss from continuing operations | $35.0 million | $63.4 million |
| Net loss, including discontinued operations | $35.5 million | $65.6 million |
| Adjusted EBITDA, non-GAAP | $4.4 million | $6.3 million |
For the six months ended January 27, 2024, revenue was $695.2 million, down 17.7%; gross margin was 43.5%, versus 41.6%; operating loss was $66.7 million; and net loss from continuing operations was $61.1 million. Adjusted EBITDA was $13.1 million, compared with $4.6 million. The company’s adjusted EBITDA excludes, among other items, stock-based compensation and restructuring costs.
- Client metrics: Active clients fell 16.9% year over year to 2.805 million. Net revenue per active client was $515, down 2.8%.
- Cash flow: In the first six months, continuing-operations operating cash flow was negative $1.7 million, compared with positive $20.8 million. Free cash flow, a non-GAAP measure, was negative $9.2 million versus positive $9.4 million.
- Liquidity and debt: At January 27, cash and cash equivalents were $227.5 million and short-term investments were $2.3 million. Cash included $26.2 million held in the UK. The company reported no credit-facility borrowings; its $50 million revolving facility had $29.4 million of borrowing capacity after outstanding letters of credit. It was in compliance with financial covenants.
- Balance sheet: Total assets were $538.3 million, total liabilities $325.0 million, and stockholders’ equity $213.3 million. Operating lease liabilities totaled $139.0 million, current and long-term combined.
Material changes versus the prior comparable period
- Revenue declined primarily because of fewer active clients, reflecting challenges in client acquisition and retention.
- Gross margin improved by 250 basis points in Q2, primarily due to improved product margin and inventory health, and more favorable carrier rates.
- SG&A fell 20.0% in Q2 to $181.5 million, primarily reflecting restructuring-related reductions in compensation, stock-based compensation, and facility costs. Advertising spending increased year over year in the quarter.
- Operating cash flow weakened to a use of cash, including due to the timing of payments that reduced accounts payable and accrued liabilities.
- The company replaced its former credit agreement in December 2023 with a $50 million first-lien revolving facility maturing December 4, 2026.
Outlook, management commentary, risks, and unusual items
- Management expects acquisition and retention challenges to continue weighing on revenue through the remainder of fiscal 2024. It did not provide a specific revenue or earnings forecast in the supplied filing text.
- Management expects advertising expense to be approximately 8%–9% of revenue in Q3 FY2024 and approximately 8% for FY2024, subject to adjustment based on performance. It expects fiscal 2024 SG&A to continue decreasing versus fiscal 2023 and says existing liquidity and available borrowing should meet working-capital and capital expenditure needs for at least 12 months and beyond.
- Restructuring continued: the company recorded $8.4 million of charges in Q2 and $16.3 million in the first six months. It moved full-time stylists to a part-time-only model and expects $4–$5 million of additional cash restructuring charges over the next three fiscal quarters, plus $1–$2 million of accelerated depreciation related to the Dallas fulfillment center. Dallas is expected to cease operations in Q3 FY2024.
- The UK exit generated $9.9 million of discontinued-operations losses in the first six months, including exit costs and the release of historical foreign-currency translation losses. The company expects future UK-exit expenses to be immaterial.
- Principal risks include continued client and revenue declines, consumer discretionary spending and macroeconomic uncertainty, inventory and vendor management, fulfillment capacity during warehouse closures, marketing effectiveness, competition, cybersecurity and privacy, and litigation. A securities class action concerning statements about Freestyle remains pending; the company has moved to dismiss it. Management stated it did not believe existing legal or tax matters would materially affect results, financial position, or cash flows.
- The company reported effective disclosure controls as of quarter-end and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether active-client declines and acquisition or retention challenges persist, and how they affect revenue and revenue per active client.
- Whether gross-margin gains continue and offset the effect of lower sales, restructuring costs, and marketing spend.
- Progress and costs of the Dallas closure, stylist compensation changes, and other restructuring actions.
- Cash burn, the amount and accessibility of UK-held cash, and actual borrowing capacity under the asset-based credit facility and its covenants.
- Developments in the Freestyle-related securities litigation and any material changes in contingencies.