On her first earnings call after returning to the business she founded, Stitch Fix’s interim chief executive officer Katrina Lake explained the company’s disappointing fiscal second-quarter results on Tuesday with her signature candor. To put it simply, it comes down to a “loss of focus,” she told analysts, and she intends to bring it back.
The comment appears to take aim at Freestyle, the direct-buy shopping experience that has been a priority for the company since its launch in 2021. The offering was supposed to do double duty, as a way to increase revenue up front and pull new customers into “Fixes,” the company’s term for apparel subscriptions. But that hasn’t quite panned out.
Losses have grown, jumping from $65.6 million from $30.9 million in one year, and revenue fell, with $516.7 million dropping to $412.1 million from a pool of active clients that is 11 percent smaller now than a year ago.
Now Lake is making it clear that she intends to get back to the business that built Stitch Fix in the first place.
She pointed to the fact that its founding model was built on data science, a detail that should give it a leg up on fashion and retail peers that are just cutting their teeth in artificial intelligence for the first time now. But “at the same time, I realize we haven’t met recent expectations,” she admitted. “Driving toward an ambitious vision has resulted in a loss of focus. We must now more than ever deliver on the client experience, bring focus in our marketing efforts and drive results for our shareholders.”
She nodded to a long-term play that hones in more on personalization, building on the company’s 10 years of experience in data science. The note is meaningful, because it refers to the AI and machine learning that goes into understanding customers’ tastes, preferences, sizes and expectations. While this tech helps curate Freestyle assortments for new shoppers, it’s the fundamental engine for the Fixes. Those personalized offerings, which are picked by human stylists and machines, is what enables the company to call itself an online styling service.
Lake believes the market opportunity for personalized apparel shopping is large and growing, and the company has a major advantage. But it has to remain focused, especially within an economic environment that has consumers tightening their belts, not necessarily looking for new ones. Experience will be even more, she added.
Where that leaves Freestyle is unclear. Stitch Fix representatives declined to comment, but instead pointed to an observation made by Lake, noting that “there’s no question that Freestyle adds value in ways that Fixes didn’t,” as it can fill particular gaps in the wardrobe. As the company stated in September, it still pulls in revenue, and offering merchandise at different price points makes sense when shoppers are watching their spending. That’s likely still true.
Even so, the priorities are shifting. The company’s marketing of a Freestyle-first experience admittedly “wasn’t as effective as what we had done historically in Fixes,” Lake said, “but it also actually made it harder for us to be able to be acquiring people into the Fix channel.”
In other words, the effort muddied up the water for the company’s flagship service.
“The ambitious vision we embraced for the past many months has resulted in a client experience that is less focused on our core areas of differentiation,” she continued, “and we believe that there is opportunity to drive long-term value by being really deliberate and targeted about the role of features and functionality in the Stitch Fix ecosystem.”
For instance, the company is reevaluating features like Fix Preview, which allows clients to see what’s in an upcoming Fix. Such previews can add to average order volumes in some areas, but also lead to cancellations in others. That has led Stitch Fix to experiment with removing Fix Preview for some people, which can either add to the “surprise and delight” of receiving shipments or come off as limiting the agency of clients who appreciate the feature. Telling the difference will be key.
The refocusing will happen on multiple fronts. The company has already made some tough choices, including multiple rounds of layoffs, most recently as much as 20 percent of salaried positions in January, and shutting down its Salt Lake City distribution center. The restructuring allowed for adjusted earnings of $3.8 million, a figure that actually sits at the higher end of the company’s guidance. It also touted positive free cash flow of $15.4 million, its first since the initial quarter of fiscal 2022. CPAs [cost per acquisition] was also down more than 40 percent from a year ago.
More optimizations will likely come, as Lake digs in further. She intends to examine advertising, including underused channels, and other areas, such as client retention.
But first, the company has to contend with its executive shuffle. It was already looking for a permanent replacement for previous CEO Elizabeth Spaulding. Now it adds a new chief financial officer to the mix, with Dan Jedda leaving next month apparently to join TV streaming platform Roku.
Shares fell 4 percent on Wednesday to close at $4.95.