Fashion Emergency at Stitch Fix

By guest author Elizabeth Winkler from Wall Street Journal

The clothing subscription service had its first big stumble as the number of active clients stagnated

When Stitch Fix, a subscription fashion service, had its initial public offering last November, investors were skeptical. How many people would continue to pay for constant wardrobe updates?

In its first quarters as a public company, Stitch Fix defied the sceptics and posted consistent growth, raising hopes that it could succeed where other subscription services have failed. The stock had gained 73 % this year through Monday, October 1, 2018 close. Monday’s fiscal fourth-quarter results show that the bullish thesis may be coming apart at the seams.

Stitch Fix reported earnings of 18 cents a share for the quarter, beating estimates of 6 cents a share, while revenue was just barely shy of analysts’ consensus expectations.

But, the key figure for this or any other subscription-based company is how many customers it can keep engaged. Stitch Fix missed estimates for active clients, which were expected to reach 2.8 million. Instead, that figure stagnated at 2.7 million, exactly where it had been at the end of the previous quarter, although that still is 25 % higher than a year earlier. Shares fell by one-fifth in after-hours trading.

October 1st shocker will increase pressure on the company to hit estimates in coming quarters. It has said it is growing its market with clothing for men, children and plus-size women. Analysts had expected the company to reach 3 million active clients by the fiscal first quarter, according to FactSet. On October 1, 2018, the company also announced plans to expand into the U.K. by the end of this fiscal year.

Those expansions may help, but Stitch Fix’s stagnation with its core customer—American women—is a red flag. If it misses again, investors will have good reason to believe it is going the way of Blue Apron Holdings , Birchbox, and other subscription services that soared and then lost their novelty.