Stitch Fix expands to the UK, faces 'slight hiccup' at home
Stitch Fix on Monday reported that fourth quarter net revenue rose 23% to $318.3 million, at the upper end of the company's guidance but "a touch" below Wall Street estimates, as Wells Fargo analysts, led by Ike Boruchow, said in a Monday note. Shares plunged more than 20% after the report Monday evening, per MarketWatch.
The company's earnings before interest, tax, depreciation and amortization also surpassed its own expectation, reaching $11.1 million as net income in the quarter reached $18.3 million, according to a company press release and executive comments during a Monday conference call transcribed by Seeking Alpha. The online box styling service's active client count (as of July 28) rose 25% or 548,000 to 2.7 million.
On Monday, Stitch Fix also said that signups are now open for customers in the United Kingdom, where it will expand by the end of fiscal 2019, its first launch overseas. The U.K. was chosen because consumers there already buy a lot of clothing online, don't expect as many discounts as consumers in the U.S. and offer opportunities for personalization, CEO Katrina Lake told analysts on Monday.
Stitch Fix is entering a new phase, with more marketing required to acquire customers and growth of its core women's business slowing.
Customer acquisition and retention for box services like Stitch Fix are proving to be slippery and expensive. "The ... cost of acquiring new customers, beyond the early base, is proving to be increasingly expensive,"said David Katz, chief marketing officer at multinational men's consumer goods company Randa Accessories, which has launched e-commerce for several companies. "Loyalty and revenue per customer, along with the cost to acquire new customers, are critical indicators for subscription platforms, and most online businesses. Hopefully the challenge in these metrics is a short-term problem."
The value of acquired customers, compared to the cost to acquire them, is turning out to be tricky for many online retailers, particularly subscription businesses. Katz told Retail Dive, in emailed comments, that stands in contrast to Amazon, which, like Facebook and Google, enjoys a "network effect," where "cost of customer acquisition actually decreases with scale, along with an increase in usage and revenues."
Stitch Fix executives on Monday also noted the success of television advertising, which turned out to be "a more effective acquisition channel" than the company first thought. And there's room for growth, according to Wells Fargo analysts, who said the company's business model and brand partnerships "provide long-term runway for the company to capture a bigger piece of the online retail industry market share."
"The company is already the leader of the subscription service apparel retail industry (we estimate more than 10x the size of its next largest competitor) with further prospects ahead. As the company continues to grow sales and active users, its total addressable market (TAM) is also expanding," the Wells Fargo analysts said.
More broadly, Stitch Fix is expanding in ways that will continue to strengthen its business, according to Jim Fosina, CEO of Fosina Marketing Group. "Its entry in women's plus sizes, men's & kids all portend to be strong foundation elements for the company," he said in an email to Retail Dive, calling the quarter's results "a slight hiccup."
"There is no sign of distress within the business model. Conversely the company is making all the moves necessary to build a stable and growing platform — product line extensions, global expansion etc.," he said. "Expect big things from this strong model of subscription economy in the quarter ahead."
Still, Stitch Fix may continue to disappoint investors who expect it to continue a more fiery upward trajectory in the near term, since word-of-mouth acquisition is being replaced by more robust marketing efforts, according to Wells Fargo.
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