Stitch Fix, Inc. — Q2 FY2023 Form 10-Q
Business context and reporting period: Stitch Fix provides personalized apparel shopping through Fix shipments and Freestyle direct purchases. The quarter ended January 28, 2023; comparisons are with the quarter ended January 29, 2022. The six-month period covers the first half of FY2023.
Key financial metrics
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net revenue | $412.1M | $516.7M | $867.7M | $1,098.0M |
| Gross profit / margin | $169.1M / 41.0% | $232.8M / 45.1% | $360.9M / 41.6% | $505.7M / 46.1% |
| Operating loss | $66.7M | $30.7M | $121.8M | $32.5M |
| Net loss | $65.6M | $30.9M | $121.5M | $32.7M |
| Diluted loss per share | $0.58 | $0.28 | $1.07 | $0.30 |
| Adjusted EBITDA (non-GAAP) | $3.8M | $10.1M | $(3.6)M | $48.3M |
Q2 gross margin declined 410 basis points year over year; first-half gross margin declined 450 basis points. Higher product and transportation costs drove the declines, partly offset in Q2 by lower inventory write-downs and clearance expense. SG&A was $235.8M in Q2, down 10.5% year over year, but rose to 57.2% of revenue from 51.0% as revenue fell and restructuring costs were recorded.
Cash flow and liquidity: First-half operating cash flow was $11.1M, versus $124.9M a year earlier; free cash flow (non-GAAP) was $(0.8)M versus $94.0M. Capital expenditures were $11.9M. Cash and cash equivalents were $139.0M at January 28, 2023, with investments of $84.9M. No revolving-credit borrowings were outstanding; $79.1M of capacity remained after letters of credit. The company reported compliance with its financial covenants. It stated available liquidity should cover working capital and capital expenditure needs for at least the next 12 months and beyond.
Debt and balance sheet: The filing reports no outstanding borrowings under the $100M revolving facility. Total liabilities were $405.3M and stockholders’ equity was $255.3M. Inventory fell to $158.9M from $197.3M at July 30, 2022.
Material changes versus the prior comparable period
- Q2 revenue declined 20.2% and first-half revenue declined 21.0% year over year. Active clients fell 11.1% to 3.574M; revenue per active client declined 6.0% to $516.
- Q2 net loss more than doubled year over year; first-half net loss increased to $121.5M from $32.7M. The first-half comparison also reflects weaker revenue and lower operating leverage.
- Operating cash flow fell substantially, from $124.9M to $11.1M for the six-month period. Management cited, among other factors, lower inventory receipts, tax refunds, and reduced accounts payable and accrued liabilities.
- Advertising expense was $21.0M in Q2 versus $38.8M, and $65.6M for the first half versus $93.7M, as the company pulled back on marketing.
Outlook, management commentary, risks and unusual items
- Management said client-acquisition challenges continued and expected them to have a negative compounding effect on revenue for the remainder of FY2023. It also expects client spending pressure to persist amid the economic backdrop and retail discounting. No numeric revenue or earnings guidance was provided in the supplied filing text.
- The company plans to reduce marketing spend for the rest of FY2023 and expects FY2023 SG&A to decrease year over year following cost-reduction measures. It continued evaluating operating costs and real estate rationalization.
- January 2023 restructuring eliminated about 6% of the then-current workforce, including about 20% of salaried positions, and closed the Salt Lake City fulfillment center. Q2 restructuring charges totaled $34.6M, including $15.6M severance, $16.9M office-space impairment, and $1.8M accelerated depreciation. Most related cash severance payments were expected by the end of the quarter ending April 29, 2023.
- CEO Elizabeth Spaulding stepped down effective January 5, 2023; founder and Executive Chair Katrina Lake became interim CEO. Subsequent to quarter-end, CFO Dan Jedda gave notice of resignation effective April 3, 2023, and David Aufderhaar was appointed CFO from that date.
- Key risks include weaker discretionary spending, client acquisition and retention, inventory and merchandise costs, competition, fulfillment and shipping disruptions, inflation, and the ability to return to profitability. The company also disclosed a securities class action filed in August 2022 concerning alleged statements about Freestyle; management said it did not believe currently disclosed legal matters would materially affect results, financial position, or cash flows.
- The company had $120.0M remaining under its share repurchase authorization and made no repurchases in Q2. Credit-agreement covenants restrict, among other matters, stock repurchases and require minimum free cash flow and an adjusted current ratio.
Important facts for investors to verify
- Whether active-client and revenue-per-client declines stabilize, and whether Freestyle and Fix improve client acquisition, conversion, and retention.
- Whether management’s cost reductions and lower marketing spend can improve profitability without further weakening revenue or client engagement.
- How quickly gross margin recovers from product and transportation cost pressures, discounting, and inventory-related effects.
- Cash burn, future operating cash flow, covenant headroom, and the availability and terms of the revolving credit facility.
- Execution and cash costs of the restructuring, fulfillment-network changes, and CEO/CFO transitions; monitor developments in the Freestyle-related securities litigation.