Still Some Loose Ends at Stitch Fix

By guest author Laura Forman from Wall Street Journal

Warehouse closures have prevented Stitch Fix clients from getting their fix, even as demand has grown.

Stitch Fix is working to mend the hole the coronavirus has blown through its business, but things could continue to unravel.

Caption and Graph courtesy by Wall Street Journal

On Monday,  June 8, 2020, the online styling service reported fiscal third-quarter results that disappointed even Wall Street’s tempered expectations as a result of the pandemic. Sales in the quarter fell for the first time in at least 11 quarters on both an annual and sequential basis, according to FactSet. The company swung to a net loss of nearly USD 34 million—more than double analysts’ projection—driven by weak sales and coronavirus-related expenses. Stitch Fix shares fell nearly 7% after the report.

In a letter to shareholders, the company said fulfilment constraints hampered sales throughout the quarter, without which it believes it would have grown revenue year-over-year. While that may be good news for the coming fiscal fourth quarter (the company expects to return to growth for that period), it also shows just how vulnerable even an online-only business could be in a second wave of the virus. By the end of March, Stitch Fix said, its U.S. warehouse capacity had fallen by 70% and it is only now approaching full capacity. The company said it is still experiencing order backlogs that began with March warehouse closures.

While sales declined in the quarter, clients grew annually, indicating continued demand amid the pandemic. The irony here is that, even if demand persists for Stitch Fix’s service as the company anticipates, potential warehousing closures as a result of a second wave would continue to hinder near-term profitability. The third-quarter loss came despite a 25% year-over-year cut to advertising expenses, which the company plans to “ramp up in future quarters.” Cost-cutting has been top of mind for Stitch Fix for a while now: Last week the company said it would lay off 1400 of its California-based stylists and hire 2000 new stylists in lower-cost hubs. Stitch Fix’s Vice President of operations, Minesh Shah, said the move was something his team has been assessing for over a year, noting California has become “more expensive and complex” to operate in.

Positively, the pandemic continues to highlight the demand for Stitch Fix’s newer, stylist-free direct-buy option. The company said direct buy exceeded expectations in February, March and April, with revenue for the model more than tripling sequentially in the third quarter. Stitch Fix is expanding direct buy from an add-on tool for existing clients to a client-acquisition tool, opening the model to prospective new clients in June.

It is unlikely that Stitch Fix will be caught flat-footed twice. In the event of a second wave, the company should have a better game plan for limiting sales disruption. It could consider drop shipping, for example. Still, a prolonged pandemic could mean even its most-addicted clients may have to wait to get their clothing fix come fall.