Stitch Fix, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, with the quarter ended January 30, 2021. Fiscal 2021 ends July 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and operating performance
Stitch Fix provides personalized apparel shipments (“Fixes”) and direct-buy merchandise through its online platform, combining data science with human styling. The company operates in the United States and United Kingdom.
- Active clients reached 3.873 million, up 11.8% year over year.
- Net revenue per active client was $467, down 6.8% from $501. Management attributed the decline mainly to the dilutive effect of newly added clients and the prior-year pandemic-affected quarter included in the trailing-period calculation.
Financial results and liquidity
| Metric | Quarter ended Jan. 30, 2021 | Six months ended Jan. 30, 2021 |
|---|---|---|
| Net revenue | $504.1; +11.6% year over year | $994.5; +10.9% |
| Gross profit / gross margin | $216.3 / 42.9% | $435.8 / 43.8% |
| Operating loss | $(40.4) | $(59.9) |
| Net loss | $(21.0); $(0.20) per share | $(11.5); $(0.11) per share |
| Adjusted EBITDA (non-GAAP) | $(8.9) | $(2.1) |
- Gross margin fell 1.9 percentage points for the quarter and 1.2 points for the six-month period versus the comparable prior-year periods. The company cited higher carrier shipping costs, increased inventory reserves, and selected Men’s inventory marked for near-term clearance.
- SG&A rose 32.5% for the quarter to $256.7 million and 25.5% for the six months to $495.7 million. SG&A was 50.9% and 49.8% of revenue, respectively. Drivers included higher compensation and benefits, warehouse wage increases to at least $15 per hour for full-time U.S. associates, increased marketing, and COVID-related costs.
- For the first six months, operating cash flow was $5.7 million, versus $38.2 million a year earlier. Free cash flow, a non-GAAP measure, was $(8.2) million versus $26.8 million. Higher inventory purchases and a $44.2 million federal tax receivable associated with CARES Act NOL carrybacks weighed on working capital.
- At January 30, cash and cash equivalents were $140.0 million; short- and long-term investments totaled $229.4 million. Total current assets were $539.3 million and current liabilities were $274.7 million. Inventory was $182.4 million, up from $124.8 million at fiscal year-end.
- No borrowings were outstanding on the $90 million revolving credit facility, and the company reported compliance with its financial covenants. The facility was scheduled to terminate June 2, 2021, unless extended by the lenders. Lease liabilities totaled $160.1 million; the company reported no other debt borrowings.
Material changes, outlook, and risks
- Results shifted from prior-year quarterly and six-month net income of $11.4 million and $11.3 million, respectively, to losses. Revenue grew, but gross profit growth lagged revenue and SG&A increased substantially.
- The income tax benefit was $18.8 million for the quarter and $46.9 million for the six months. Management said the effective tax rates primarily reflected CARES Act NOL carryback provisions and excess stock-based compensation tax benefits, partly offset by nondeductible expenses. The tax benefit significantly reduced reported net losses.
- Management expected to increase marketing during the remainder of fiscal 2021 to pursue market share, while noting that higher-than-expected customer acquisition costs had led to lower-than-planned marketing spend in the second quarter. The filing provides no specific full-year revenue, earnings, or margin guidance.
- Management said cash, cash equivalents, short-term investments, and available facility borrowings were expected to cover working capital and capital expenditure needs for at least the next 12 months. It cautioned that COVID-19’s duration and effects on demand, fulfillment, vendors, consumer behavior, and cash generation remained uncertain.
- The company increased inventory for projected growth; it warned that missed sales projections could lead to higher reserves and write-offs. Shipping cost increases, fulfillment staffing and capacity, marketing efficiency, client spending, and apparel demand were also material risks. Severe winter weather in February 2021 temporarily closed two fulfillment centers and affected shipments.
- A lease signed for an approximately 700,000-square-foot Salt Lake City fulfillment center is expected to commence in late fiscal 2021 or early fiscal 2022, expire in 2030, and involve approximately $33.1 million of fixed lease costs over its term. The South San Francisco fulfillment center was announced for closure.
- A securities class action concerning alleged statements about client growth and television advertising remained pending after the company moved to dismiss an amended complaint; related derivative actions were stayed. The company said it did not believe currently disclosed legal matters would have a material financial impact. A California wage-and-hour representative action was settled in November 2020.
Important facts for investors to verify
- Whether active-client growth translates into stronger repeat purchasing and reverses the decline in revenue per active client.
- Whether gross margin stabilizes as shipping costs, inventory reserves, and clearance activity change.
- Whether marketing increases deliver cost-effective client acquisition, given elevated acquisition costs and the company’s planned growth investment.
- How inventory levels, operating cash flow, and free cash flow develop, including the timing and realization of CARES Act tax refunds.
- Whether the revolving credit facility was extended or replaced before its June 2, 2021 termination date.
- Progress and costs for the Salt Lake City fulfillment center, alongside fulfillment capacity, staffing, and pandemic-related disruptions.
- Developments in the securities litigation and any resulting financial exposure; the filing text does not provide a quantified loss estimate.