Stitch Fix, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended January 26, 2019. Financial statements are unaudited. Stitch Fix provides personalized apparel and accessories through stylist-selected “Fix” shipments, supported by data science; it operates in the U.S. and U.K. The company reported 2.961 million active clients, up 18.1% year over year.
Financial performance
| Metric | Three months ended Jan. 26, 2019 | Year-over-year change | Six months ended Jan. 26, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $370.3 million | +25.1% | $736.5 million | +24.5% |
| Gross profit / gross margin | $163.1 million / 44.1% | Margin +1.1 percentage points | $328.3 million / 44.6% | Margin +1.3 percentage points |
| Operating income / margin | $15.4 million / 4.2% | Income −1.3%; margin −1.0 point | $26.3 million / 3.6% | Income +4.6%; margin −0.6 point |
| Net income | $12.0 million | +228.9% | $22.7 million | +32.3% |
| Diluted EPS | $0.12 | Compared with $0.02 | $0.22 | Compared with $0.06 |
| Adjusted EBITDA (non-GAAP) | $19.2 million | Compared with $18.2 million | $33.5 million | Compared with $30.0 million |
Higher revenue reflected growth in active clients and revenue per active client. Gross margin improved primarily because of lower inventory obsolescence reserves and clearance expense. SG&A rose 32.2% for the quarter and 30.6% for the six-month period; as a share of revenue, it increased to 39.9% and 41.0%, respectively, mainly due to compensation, stock-based compensation, UK-launch investments, and higher advertising. Consequently, quarterly operating income was slightly lower despite revenue growth.
Net income comparisons also reflect prior-year unusual items: the 2018 periods included gains from remeasuring preferred stock warrants and a $4.7 million Tax Act-related deferred-tax charge. The warrants converted at the IPO and no longer generate remeasurement effects. The 2019 effective tax rates were 29.7% for the quarter and 23.1% for the six months, versus 78.9% and 52.3% in the comparable 2018 periods.
Cash flow, liquidity and debt
- For the six months, operating cash flow was $57.7 million, versus $33.7 million a year earlier. Free cash flow, as defined by the company, was $45.8 million, versus $25.5 million.
- Investing cash outflow was $187.2 million, principally reflecting $186.0 million of purchases of available-for-sale securities and $11.9 million of property and equipment purchases. Financing cash outflow was $0.4 million.
- At January 26, cash and cash equivalents were $167.5 million; restricted cash was $12.9 million; short- and long-term investments totaled $176.1 million. Cash, cash equivalents and restricted cash declined $129.9 million during the six months, largely because cash was invested in securities.
- Current assets were $413.4 million and current liabilities were $177.2 million. No borrowings or debt balance appears in the provided balance sheet.
- Management stated existing cash balances and operating cash flows should be sufficient for working capital and capital expenditure needs for at least the next 12 months.
Outlook, commitments and risks
- No specific numerical earnings or revenue guidance is provided. Management expects revenue to increase in absolute dollars, while cautioning that revenue growth may slow. It expects continued significant marketing and investments in personnel, technology, inventory, fulfillment, and international expansion; these investments may not be cost-effective or generate expected growth.
- The company continued preparations for a U.K. launch planned by the end of fiscal 2019. A Leicester fulfillment-center logistics arrangement carries a five-year commitment, terminable after two years with six months’ notice, and $11.1 million in minimum lease payments. A February 2019 Dallas fulfillment-center amendment adds space and extends the lease to June 2024, with approximately $10.0 million in future minimum lease payments.
- Four related putative securities class actions and a derivative action allege misleading statements concerning active-client growth and television advertising strategy; damages sought are unspecified. The company says it does not believe current legal or tax matters would materially affect results, financial position, or cash flows, but litigation outcomes are uncertain.
- Management reported disclosure controls were not effective at period-end because a previously identified material weakness in financial-system access, program-change management, and computer operations remained unremediated. Management said the statements fairly present the company’s financial position and results; remediation is ongoing, and the independent auditor had not assessed internal-control effectiveness.
- Other material risks discussed include inventory forecasting and obsolescence, client acquisition and retention, competition, privacy and cybersecurity, fulfillment and vendor dependence, international expansion, sales-tax exposure, and potential foreign-exchange or tariff effects.
Most important facts for investors to verify
- Whether active-client growth and revenue per client persist, and whether higher marketing expense produces effective client acquisition and engagement.
- Whether gross-margin improvement from lower clearance and inventory reserves is sustainable as inventory and new categories grow.
- Progress and cost of the U.K. launch and fulfillment-center commitments, alongside planned investment needs.
- Remediation and independent validation of the material weakness in financial reporting controls.
- Developments in the securities and derivative litigation, and any resulting financial or operational exposure.
- Liquidity and operating cash generation, noting that the period’s large investing outflow principally represented purchases of securities rather than capital expenditure.