Things have become a bit unstitched at Stitch Fix.
Amid a slumping business, Elizabeth Spaulding has relinquished her role as the company’s chief executive officer and a member of the board of directors, effective Thursday. In addition, Stitch Fix said it will cut 20 percent of its salaried positions.
Founder and former CEO Katrina Lake has been named CEO, effective Thursday, and will serve in an interim capacity for six months or until her successor is appointed, unless otherwise agreed by Lake and the board of directors.
“I look forward to stepping back in to lead the business and working closely with the board of directors to identify a successor going forward,” Lake said. “My fellow board members and I thank Elizabeth for her service to Stitch Fix, especially during the challenges of the last couple years. We wish her the best.”
Lake sent an email to the company’s employees Thursday, noting two significant changes. She said she was sharing the difficult news that they would be reducing the size of the Stitch Fix team by about 20 percent of salaried positions. In addition, it is closing its Salt Lake City distribution center, where the team will also be impacted.
“We will be losing many talented team members from across the company, and I am truly sorry,” Lake wrote.
She noted that departing employees will receive at least 12 weeks pay, which increases with tenure, and health care will be supported through April and mental wellness support up to the end of April, which also includes counseling, self help tools, legal and financial services as well as online work-life balance advice. In her email, she also noted that Spaulding will be stepping down and that she would become interim CEO.
“Despite the challenging moment we are in right now, the board and I still deeply believe in the Stitch Fix business, mission and vision. We know because of the hard work and foundation laid by this team that there is a great future available for this company and we are committed to getting the company on a path to achieve it,” Lake wrote.
Layoffs at Stitch Fix are occurring at same time as other tech companies, such as Amazon and Salesforce, which revealed plans to reduce their staffs. Amazon has revised its previously announced layoffs from 10,000 to 18,000 employees, while Salesforce said it is cutting 10 percent of the global workforce, or around 8,000 jobs.
Lake founded Stitch Fix and served as the company’s CEO from its inception in 2011 until July 31, 2021, growing it to a business with annual revenues of $1.7 billion. She has been a member of the board of directors since the company’s founding. Lake took the company public in 2017 and in doing so was the youngest woman at the time to ever take a company public.
In January 2020, the San Francisco-based Stitch Fix brought in Spaulding as president, and in August, 2021, she became CEO when Lake stepped aside to assume the post of executive chair of the company. Earlier, Spaulding had been the global head and founder of Bain & Co.’s digital practice.
“Stitch Fix continues to embark on an ambitious transformation and in the immediate term, the focus for the team is squarely on creating a leaner, more nimble organization to set the company up for a return to profitability. First as president and then as CEO, it has been a privilege to lead in an unprecedented time, and to chart the course for the future with the Stitch Fix team. It is now time for a new leader to help support the next phase,” Spaulding said. “I am proud of the new leadership team we have built, the evolution in culture we’ve created and the products we’ve shipped. More than anything, it is a privilege to serve our clients and create many delightful moments in their lives.”
The company, whose stock ended its first day of trading in 2017 at $15.15 on the Nasdaq stock exchange, closed Thursday at $3.50, up 9.37 percent from Wednesday’s close.
Stitch Fix has been challenged by higher costs for marketing, staffing, a highly competitive landscape and other issues, as well as belt tightening by consumers, who are purchasing fewer clothes.
Last month, Stitch Fix reported larger-than-expected losses and a revenue miss for the first fiscal quarter of 2023, eyeing a lower projected forecast.
The fashion company posted revenue of $455.6 million, which was not only short of the $459.4 million analysts had estimated but marked a 22 percent year-over-year decline. Its quarterly net loss clocked in at 50 cents a share, exceeding the 47 cents a share expected, with active clients of 3.7 million showing a decline of 471,000 or an 11 percent drop compared to last year, as reported.
Reached for comment Thursday, Neil Saunders, managing director of GlobalData, told WWD, “I think at Stitch Fix there is a sense that the company has lost its way and is trying to get back on track.” He said in the last quarter, there was a lot of weakness and “there are very few signs that the pressure is going to ease any time soon.”
He noted that the consumer environment has changed, apparel has been under pressure, and people are less inclined to buy into a service like Stitch Fix. “The cost of running a business is much heavier, as they are for all companies.” He noted that Spaulding didn’t cause all these issues, “but they did occur under her watch.”
He said the introduction of Freestyle (where customers can instantly buy items, rather than in a curated box), didn’t bear fruit and could have cannibalized the core service. “With Katrina coming back, the company could go back to its roots and her leadership may instill more confidence with the board and the investors,” Saunders said.
In a research note, Tom Nikic of Wedbush wrote, “We believe Ms. Spaulding was given the CEO seat to spearhead the transition of the business model away from one focused on the legacy ‘Fix’ offerings (a ‘mystery box’ sent to a consumer sight unseen), and toward a business model diversified between ‘Fix’ and the newer “Freestyle” offering (more akin to a traditional e-commerce model, with more personalization). However, the transition has been very rocky, due to both macro factors and internal missteps. During Ms. Spaulding’s time as CEO, fundamentals have deteriorated rapidly, with revenue growth decelerating for six consecutive quarters (including a sharp 22 percent decline last quarter), four straight quarter of net customer declines, an expected [calendar year 2022] adjusted EBITDA loss of over $110 million, versus a profit of $115 million in [calendar year 2021]. Given these developments, we think a change in the CEO seat makes sense.”
Nikic noted that this is the second round of layoffs for Stitch Fix in the last six months as the company let go of 15 percent of salaried employees last June, while also cutting the number of stylists on the roster. In July, it had 3,400 stylists versus 5,700 stylists a year earlier.
William Blair analyst Dylan Carden said in a research note about the CEO change, “The announcement is not surprising given Stitch Fix’s challenging performance under Spaulding’s tenure as CEO, including the company’s failed strategy around its direct business, which never seemed to get off the ground as Freestyle penetration has stalled out at around 25 percent of female customers for some time.
“The transition also comes during a critical change in strategy for the company, which now appears more focused on profitability, rather than growth at all costs,” Carden said.
He said that as discussed in the first quarter earnings call last month, marketing dollars are slated to decline as much as 50 percent in the back half of this year, “while the top-line impact from such a significant cut in marketing spending remains to be seen (and we expect to see greater volatility as a result).”
Elaine Hughes, CEO of executive search firm E.A. Hughes, a division of Solomon Page, said Spaulding has an “incredible pedigree.”
“It is confusing to me as to the resignation of Elizabeth Spaulding, unless the reason is another compelling opportunity. Katrina Lake pioneered this apparel subscription model, which parallels the concept of reoccurring revenue. The investment community is very interested in the model which is difficult to initiate in fashion. Given Elizabeth’s many years at Bain and her knowledge of the digital world, she must have made a significant contribution at Stitch Fix,” Hughes said.