Stitch Fix, Inc. — FY2020 Form 10-K
Business context and reporting period. Stitch Fix provides personalized apparel, shoes, and accessories through stylist-curated shipments (“Fixes”) and direct-buy purchases, using data science alongside human styling. It operates in the United States and United Kingdom. This 10-K reports the 52-week fiscal year ended August 1, 2020; FY2019 had 53 weeks. The filing also reports fourth-quarter results.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $1,711.7 million | $1,577.6 million |
| Gross profit / gross margin | $754.2 million / 44.1% | $703.1 million / 44.6% |
| SG&A | $805.9 million | $679.6 million |
| Operating income (loss) | ($51.7 million) | $23.5 million |
| Net income (loss) | ($67.1 million) | $36.9 million |
| Operating cash flow / free cash flow | $42.9 million / $12.7 million | $78.6 million / $47.8 million |
| Adjusted EBITDA (non-GAAP) / adjusted EBITDA excluding stock compensation (non-GAAP) | ($29.1 million) / $38.4 million | $39.6 million / $74.8 million |
- Revenue rose 8.5% year over year, or 10.7% after adjusting for FY2019’s extra week. Active clients increased 8.8% to 3.522 million.
- Net revenue per active client was $486 versus $488; excluding the extra FY2019 week, it increased 1.5% from $479.
- SG&A rose 18.6% and reached 47.1% of revenue, compared with 43.1%, reflecting higher compensation and benefits, stock-based compensation, and advertising. Advertising expense was $167.8 million, up from $152.1 million.
- Q4 revenue was $443.4 million and gross margin was 44.9%. Q4 net loss was $44.5 million, including a $31.1 million income-tax provision; the quarter included a $43.2 million valuation allowance on deferred tax assets.
Liquidity, capital, and balance sheet
- At August 1, 2020, cash and cash equivalents were $143.5 million and investments were $238.1 million, including $143.0 million of short-term investments. Working capital was $254.2 million.
- The company had no borrowings outstanding on its $90 million revolving credit facility. The agreement, entered into in June 2020, matures June 2, 2021, is secured by substantially all company assets, and includes financial covenants. The company reported covenant compliance at year-end and said available liquidity was expected to cover working capital and capital spending needs for at least 12 months.
- Operating lease liabilities totaled approximately $164.5 million on the balance sheet. Contractual commitments included $196.2 million of operating lease payments and $372.1 million of purchase obligations, mostly inventory and fabric commitments. The $16.7 million of unrecognized tax benefits was excluded from the commitments table because settlement timing could not be reliably estimated.
Material changes and unusual items
- COVID-19-related fulfillment-center closures and reduced capacity delayed shipments and returns, created a Fix backlog, challenged inventory management, and weighed on revenue and gross margin in Q3. Gross margin fell to 40.8% in Q3 before returning to 44.9% in Q4 as capacity and inventory conditions improved.
- The company reduced marketing during Q3 when fulfillment capacity was constrained, contributing to weaker new-client acquisition and potentially affecting subsequent demand. It reported strong auto-ship retention and growth in first Fix shipments in Q4.
- Revenue growth remained positive, but the company swung from FY2019 net income to an FY2020 net loss. The tax valuation allowance was a significant noncash contributor to the loss; stock-based compensation also increased substantially to $67.5 million from $35.3 million.
- In June 2020, Stitch Fix announced a restructuring to eliminate substantially all California-based stylist positions and hire stylists in other regions. It recognized $4.8 million of termination-benefit charges and expected additional restructuring-related charges primarily through Q1 FY2021.
- Management said it could not reasonably estimate COVID-19’s longer-term effects. It expressed confidence in the business model and liquidity, but provided no numerical revenue, earnings, or margin guidance in the filing.
Risks, contingencies, and controls
- Key risks include renewed pandemic disruption, fulfillment staffing and capacity, weaker discretionary spending, changing apparel demand, inventory forecasting and write-offs, customer acquisition and retention, competition, vendor and shipping disruption, cybersecurity and privacy compliance, and international expansion.
- Pending matters include consolidated securities litigation alleging misleading statements about client growth and television advertising, related derivative actions stayed pending the securities case, and an August 2020 California wage-and-hour representative action concerning non-exempt stylists. The company said it believes the claims lack merit and intends to defend them; it did not believe existing matters would have a material financial impact, while noting litigation outcomes are uncertain.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Management reported that previously identified material weaknesses had been remediated as of August 1, 2020.
Important facts for investors to verify
- Whether fulfillment operations, shipment times, and inventory reserves normalized after Q3, and whether pandemic-related disruptions or demand changes recur.
- Whether client growth translates into higher revenue per client and sustainable margins, particularly as direct-buy offerings and marketing investments expand.
- The drivers of the FY2020 loss and the continuing effects of the deferred-tax valuation allowance, stock-based compensation, and restructuring costs.
- Liquidity and covenant headroom under the secured revolving facility, including its June 2021 maturity, alongside substantial lease and purchase commitments.
- Developments and potential financial exposure in the securities and stylist wage-and-hour cases, and any material changes in privacy, cybersecurity, or tax risks.