Stitch Fix, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended August 3, 2019 (53 weeks); fiscal 2018 had 52 weeks. The filing also reports fourth-quarter results for the quarter ended August 3, 2019. Amounts below are U.S. dollars.
Business context
Stitch Fix sells personalized apparel, shoes, and accessories through stylist-curated shipments (“Fixes”), supported by data science and client feedback. It had 3.236 million active clients at year-end, up 18.0%. During FY2019 it launched in the UK and introduced direct-buy functionality in the U.S.
Financial and operating results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $1,577.6 million | $1,226.5 million |
| Gross profit / margin | $703.1 million / 44.6% | $536.0 million / 43.7% |
| Operating income / margin | $23.5 million / 1.5% | $43.0 million / 3.5% |
| Net income | $36.9 million | $44.9 million |
| Adjusted EBITDA | $39.6 million | $53.6 million |
| Operating cash flow | $78.6 million | $72.2 million |
| Free cash flow | $47.8 million | $55.6 million |
FY2019 diluted EPS was $0.36, versus $0.34 in FY2018. Revenue grew 28.6%; the filing attributes growth to more active clients and higher revenue per active client. The extra fiscal week contributed to FY2019 results, and the filing does not quantify its effect separately.
Fourth quarter: Revenue was $432.1 million, operating income was $1.8 million, and net income was $7.2 million. In Q4 FY2018, these were $318.3 million, $8.1 million, and $18.3 million, respectively. FY2019’s fourth quarter included the additional fiscal week.
Liquidity and balance sheet: At August 3, 2019, cash and cash equivalents were $170.9 million, investments were $196.6 million, working capital was $299.8 million, and total assets were $616.1 million. Total liabilities were $220.1 million and stockholders’ equity was $396.0 million. No borrowings are shown in the presented balance sheet. The company said cash balances and operating cash flow should cover working capital and capital expenditure needs for at least 12 months.
Changes, outlook, and notable matters
- Gross margin improved 0.9 percentage points, which management attributed mainly to lower clearance expense and reduced shrink.
- SG&A rose 37.9% to $679.6 million, increasing from 40.2% to 43.1% of revenue. Drivers included higher compensation and stock-based compensation, advertising, and UK launch costs. Advertising expense increased to $152.1 million from $102.1 million.
- Profitability declined despite revenue growth: operating income fell 45.4%, adjusted EBITDA fell to $39.6 million, and net income decreased by $8.0 million. FY2018 included a $10.7 million noncash warrant remeasurement gain; FY2019 benefited from a $6.1 million income-tax benefit.
- Management expected to continue substantial investment in marketing, personnel, technology, inventory, fulfillment, and international expansion; it cautioned that spending may not be cost-effective and revenue growth may slow. No specific FY2020 revenue or earnings guidance is provided in the supplied filing text.
- Inventory was $118.2 million, net of a $25.5 million total inventory reserve; the auditor identified the $18 million excess and slow-moving inventory reserve as a critical audit matter.
- Material weakness in internal control over financial reporting remained at year-end, tied to oversight of certain outsourced IT providers and related control and monitoring deficiencies. Management’s controls were deemed ineffective and the auditor issued an adverse ICFR opinion, while giving an unqualified opinion on the financial statements. Remediation was ongoing for FY2020.
- The company faced consolidated securities class actions alleging misleading statements about active-client growth and television advertising, plus a related stayed derivative action. It disputed the claims. The filing said it did not believe pending litigation or tax matters would currently have a material impact, but outcomes are uncertain.
- Key risks include client acquisition and retention, competition, inventory and trend forecasting, tariffs on goods including those made in China, data security and privacy regulation, labor and fulfillment operations, international expansion, and the material weakness in controls.
Important facts for investors to verify
- Whether client growth, client spending, and revenue per active client remain strong, and how direct-buy and UK operations contribute.
- Whether SG&A and marketing growth can be controlled while sustaining revenue growth and operating margins.
- Inventory aging, reserve adequacy, clearance activity, and the effect of merchandise mix on gross margin.
- Progress and independent validation of remediation for the outsourced-IT-related material weakness.
- Developments in the securities litigation, tariff exposure, and $11.0 million of unrecognized tax benefits.
- Cash deployment and obligations: $215.2 million of open inventory purchase commitments due within one year and $179.8 million of operating lease obligations.