Stitch Fix, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Fiscal second quarter ended January 29, 2022; comparative quarter ended January 30, 2021. Six-month results are for the periods ended on those dates. Stitch Fix sells personalized clothing through Fix shipments and direct-buy Freestyle.
Financial and operating results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net revenue | $516.7m | $504.1m | $1,098.0m | $994.5m |
| Gross profit / margin | $232.8m / 45.1% | $216.3m / 42.9% | $505.7m / 46.1% | $435.8m / 43.8% |
| Operating loss | $(30.7)m | $(40.4)m | $(32.5)m | $(59.9)m |
| Net loss | $(30.9)m | $(21.0)m | $(32.7)m | $(11.5)m |
| Diluted loss per share | $(0.28) | $(0.20) | $(0.30) | $(0.11) |
| Adjusted EBITDA (non-GAAP) | $10.1m | $(8.9)m | $48.3m | $(2.1)m |
Q2 revenue grew 2.5% year over year; six-month revenue grew 10.4%. Gross margin increased 2.1 percentage points in Q2 and 2.2 points for the six months, driven mainly by shipping-cost leverage from higher average order values and improved product margins, partly offset by higher clearance rates. SG&A was $263.5m in Q2, up 2.7%, and $538.3m for six months, up 8.6%. Higher compensation, stock-based compensation and warehouse wages contributed to the increase. Q2 net loss widened despite a smaller operating loss, in part because the prior-year quarter included a substantial income-tax benefit.
Active clients were 4.019m, up 3.8% year over year but down from 4.180m at October 30, 2021. Net revenue per active client was $549, up 17.6% year over year. Advertising expense was $35.3m for Q2 and $86.0m for six months, below the respective prior-year amounts of $42.0m and $93.4m.
Cash, liquidity and capital
At January 29, 2022, cash and cash equivalents were $193.9m and available-for-sale investments were $155.2m ($73.1m short-term and $82.2m long-term). Current assets were $531.5m and current liabilities $276.6m. Total liabilities were $437.2m, including operating lease liabilities; the filing reports no borrowings under its credit facility.
For the six months, operating cash flow was $124.9m, versus $5.7m a year earlier. Free cash flow, as defined by the company (operating cash flow less property and equipment purchases), was $94.0m versus $(8.2)m. The improvement reflected non-cash charges and working-capital movements, including a $47.0m increase in accounts payable and accrued liabilities and a $28.1m inventory-related cash benefit, which the company linked largely to reduced receipts amid supply-chain delays. Capital expenditures were $30.9m, compared with $13.9m.
The $100m revolving credit facility, terminating May 31, 2024, was undrawn; the company reported compliance with its financial covenants. Management said available cash, investments and borrowing capacity should cover working capital and capital expenditures for at least 12 months. In January, the board authorized up to $150m of Class A share repurchases, with no expiration date. By quarter-end, 682,184 shares had been repurchased for approximately $11.0m; $139.0m remained authorized.
Outlook, commentary and risks
Management expected full-year FY2022 revenue growth to be flat to slightly negative year over year, attributing the outlook primarily to difficulty acquiring new clients in the first half and the resulting effect on second-half comparisons. The filing does not provide a clear numerical outlook for profit or cash flow.
Management cited weaker-than-expected new-client conversion, reduced marketing while Freestyle and onboarding were refined, global supply-chain delays that constrained inventory receipts, and fulfillment-center staffing challenges. COVID-19 and the Omicron variant affected fulfillment capacity; higher wages, freight, merchandise and raw-material costs, inflation, shipping delays and changing consumer demand remain risks. The new Salt Lake City fulfillment center began operating in FY2022; an additional 300,000-square-foot expansion commenced in January 2022.
The company changed inventory costing from specific identification to FIFO effective August 1, 2021; it reported no material effect and did not restate prior periods. The filing also describes a securities class action dismissed by the district court in October 2021, with plaintiffs’ appeal filed in October 2021; related derivative actions remain stayed pending that appeal. Management did not believe currently known litigation or tax matters would materially affect results, financial position or cash flows.
Most important facts for investors to verify
- Whether new-client conversion, acquisition and active-client trends improve, and whether revenue meets management’s flat-to-slightly-down full-year expectation.
- Whether gross-margin improvement persists as inventory availability, clearance activity, freight costs and merchandise mix change.
- How much of operating cash flow and free cash flow reflects sustainable operations versus working-capital timing and supply-related inventory reductions.
- Whether fulfillment-center staffing, capacity and supply-chain constraints affect service, sales or costs, including at the expanded Salt Lake City facility.
- Future stock-repurchase pace and funding, remaining liquidity, and continued compliance with credit-agreement covenants.
- Stock-based compensation’s ongoing expense and potential dilution; the company reported $64.7m of stock-based compensation for the six months and $305.9m of unrecognized compensation expense.