On a call with analysts Tuesday afternoon, Stitch Fix CEO Elizabeth Spaulding described unanticipated difficulties in the shift toward the retailer's Freestyle direct e-commerce, away from subscription boxes. In the quarter ended Oct. 30, net revenue rose 19% year over year to $581.2 million, according to a company press release.
The company went deeper into the red in the quarter, with a net loss of $1.8 million, compared to $9.5 million in net income last year and a $0.18 million loss in 2019. Given the hiccups with Freestyle, Stitch Fix lowered its guidance for near-term growth, in the current quarter and through the fiscal year.
Spaulding also said the retailer's chief product officer is leaving, and the search is on for a replacement. Sharon Chiarella, formerly vice president of community shopping at Amazon, just took the job in March.
Stitch Fix's new emphasis on more traditional retail solved one problem but introduced a host of others.
Its "Fix" subscription service, which employs algorithms and human stylists to curate boxes based on customers' answers to a quiz and their past purchases and returns, has proven to have severe limits. But Spaulding described a situation where Freestyle is cannibalizing the Fix business, as many "new" Freestyle customers are simply buying off the site rather than ponying up the styling fees for their boxes, and there was a lower-than-expected conversion from Fix clients in Q1.
Eventually, Freestyle could drive more than $350 million in revenue over the next five years, according to Wells Fargo analysts. But they also warned that "it could become more cannibalistic over time."
Stitch Fix's Q1 revenue and margins beat Wall Street expectations, but investors found it difficult to ignore its struggles, sending its share price to new lows Wednesday morning. Despite high demand for clothing in the wider market, for example, growth in Stitch Fix's active client base has slowed this year and that will likely continue throughout the current quarter, executives said on Tuesday. The apparel e-retailer's active client base grew 11% year over year to 4.18 million, but the company expects growth could turn negative in the second quarter.
"The core 'Fix' business is underwhelming (a 'niche' offering with diminishing returns as it grows) and the 'Freestyle' service has better long-term prospects, but the transition from one business model to the next is proving to be messy," Wedbush analysts Tom Nikic and Ezra Weener said in emailed comments.
Spaulding said the company has realized it has more to learn when it comes to Freestyle. "We will be implementing new systems, and we are building new workflows," she said. "All of this learning of new motions is in service of building a great customer experience, and we will need to optimize these. We do not anticipate a linear journey."
That disappointed some analysts. "We came away appreciating that while Freestyle has been under development for the past 1-2 years, it is still in its infancy/'learning phase' and requires a meaningful multi-year tech overhaul to support the operations and algorithms across business lines," MKM Partners Managing Director Roxanne Meyer said in emailed comments. "Additionally, it is expected to take several quarters to lessen the friction that may be deterring new customers from joining the platform, something we would have expected to have been well tested."
It's another way of saying that Stitch Fix has more to learn about apparel retail, in that its Freestyle offer isn't much different than an online department store. Meanwhile, Chiarella's departure "doesn't necessarily give us confidence in the product strategy/ direction," Meyer said.
Like most apparel retailers, Stitch Fix is grappling with supply chain troubles that are disrupting its inventory. But solving that won't solve all its problems, Wells Fargo analysts warned. In fact, many traditional apparel retailers have an advantage that Stitch Fix doesn't: physical stores.
"Essentially, if apparel demand starts shifting back to physical stores, then [Stitch Fix] wouldn't necessarily see a significant improvement in trends," the Wells Fargo team led by Ike Boruchow said. "In other words, the key question here is 'If the business was weak when consumers were unable/unwilling to go to physical stores, why would it be better when consumers are willing to go back to stores?' As a result, we think there is meaningful uncertainty about [Stitch Fix's] recovery prospects post-COVID."