San Francisco-based Stitch Fix Inc. managed to pull in a bit more revenue than expected in the second fiscal quarter of 2022, but the subtle win was easily muted by its inability to grow active clients, as the company slashed its full-year outlook and shares careened on Tuesday.
Net revenue of $516.7 million beat expectations of $514.8 million and delivered 3 percent year-over-year growth, compared to the $504.1 million it raked in at this time last year. But analysts anticipated more losses, and indeed the company reported a net loss of nearly $31 million, at 28 cents per share, exceeding $21 million in the year-ago quarter.
Revenue per active client hit $549, its third consecutive quarter above $500, the company noted, marking an 18 percent year-over-year jump. In a statement, Elizabeth Spaulding, Stitch Fix’s chief executive officer, credited “higher average order values in our Fix business and the incrementality Freestyle provides to our existing clients.”
The company’s fortunes appear to hinge on the interplay between these two ends of the business.
Stitch Fix made a mark in online fashion styling and e-commerce with “Fix” subscriptions, but the company broadened the model to include Freestyle, a direct-buy option that allows shoppers to purchase single items. The new service has proven popular, with revenue increasing 29 percent over last year, but hopes that it would bring new customers in across the platform haven’t panned out.
With active clients numbering slightly more than 4 million, a 4 percent growth over the second quarter of 2021, the company continues to “experience challenges with onboarding and conversion of clients, which are not where we want them to be,” Spaulding admitted.
But she expressed confidence in the company’s long-term strategy, which is to stay “resolutely focused on building and enhancing the overall client experience for Fix and Freestyle with an emphasis on growing active clients.”
In the nearer term, the struggle looks likely to continue.
For the third quarter, Stitch Fix projected that net revenue will drop 10 to 7 percent year-over-year, estimating a range of $485 million to $500 million — far below expectations of $560.5 million. For its full-year guidance, the picture resembles more of a plateau, possibly even a minor descent, than a climb, assuming its active clients numbers stay flat. Analysts projected full-year revenue to be up 8.1 percent.
Shares plunged to $9.02, a drop of 18 percent.
On the earnings call, chief financial officer Dan Jedda explained that the company is focusing on fit, discovery and customer feedback as ways to strengthen the business, and he doubled down on prioritizing Freestyle. “On discovery, outfit inspiration is a meaningful differentiator for Stitch Fix,” he said. “Therefore, we recently scaled our stylist-generated outfits to be a higher percentage of what clients can browse in Freestyle.” Style Shuffle, the platform’s styling game, offers valuable insights, he said, with 9.5 billion ratings.
“We continue to deeply believe in Freestyle and appreciate everyone’s patience as we evolve it to be the growth engine we expect,” he added.
Whether it fuels active client growth remains to be seen, and it may take a leap of faith, considering these concerns mounted in the company’s previous first-quarter results as well.
In terms of what’s different this time, Spaulding explained that the company has learned more since December, including an adjustment for the website “on redirecting that traffic to a Fix-first onboarding flow,” she said. “We believe that we created friction when we introduced Freestyle to the landing page, given the intent of the majority of those clients coming to our site was for a Fix.
“We’re learning a lot right now about what those expectations are,” she added.
That’s leading to improvements to the landing pages, new incentives, marketing channels and better onboarding. As it is, new Stitch Fix subscribers complete a questionnaire, so the platform knows how to personalize selections.
“We require quite a bit of information to personalize and we think there are ways to progressively get that information over time,” Spaulding said.