Stitch Fix last week was hit with a flurry of lawsuits alleging that the styling service made misleading statements about its growth prospects and advertising plans. The class action complaints were filed on behalf of company shareholders by the law firms of Bronstein, Gewirtz & Grossman, Gainey McKenna & Egleston, and Robbins Geller Rudman & Dowd. Robbins Geller has signed on a lead plaintiff in Greg Sawicki, while the others must find one by Dec. 10. At least two were filed in U.S. District Court for the Northern District of California.
The suits allege that Stitch Fix violated federal securities laws by making false and/or misleading statements about the strength of its active client growth, its television advertising plans and the impact of those on its profit and growth prospects, according to their press releases. Stitch Fix didn't immediately return Retail Dive's request for comment.
In June, Stitch Fix announced that in its third quarter it had grown its client base 30% to 2.7 million active customers. In its next quarterly report, released Oct. 1, the company reiterated that, saying its active client count (as of July 28) rose 25% or 548,000 to 2.7 million. At that point, executives said they would reboot their television ads after taking them down because that marketing turned to be "a more effective acquisition channel" than previously thought.
Stitch Fix, whose initial public offering was only about a year ago, wowed investors with its third-quarter report and has generally been viewed as pulling ahead of the pack in online styling box services or try-before-you-buy apparel sales.
But some investors have expressed concern all along about Stitch Fix's customer retention, and shares plummeted last month with signs in the fourth quarter that customer acquisition and retention would continue to be expensive, if not elusive. It's not just Stich Fix, though: The value of acquired customers, compared to the cost to acquire them, is proving tricky for many online retailers, but particularly subscription businesses.
Investor concerns came to a head last week with the filing of a trio of shareholder lawsuits. All three of the law firms involved in the recent class action filings allege similar charges against Stitch Fix, namely that, "(1) Stitch Fix’s sales growth prospects were not as positive as stated because active client growth had dramatically slowed; (2) defendants had ceased running a television advertising campaign for much of the fourth quarter of 2018; and (3) as a result, defendants’ statements were materially false and misleading and/or lacked a reasonable basis at all relevant times."
The allegations point to potential problems for Stitch Fix. The company's focus on television may not be enough, and it's missing an opportunity on social media, according to Jane Hali, CEO of investment research firm Jane Hali & Associates. "They have very few followers, which means they aren’t using social media effectively," she told Retail Dive in an email on Friday. "They also never give figures on retention. With all the alternatives out there, and we name a few, it is a concerning stock."
In a September note to clients, Jane Hali analysts noted that the company's "growth on Instagram has been slow. They currently have 677,000 followers compared to 659,000 in June. SFIX does use micro influencers as they have an influencer program detailed on their website."
The alternatives that Hali mentions include Amazon's Scout and Prime Wardrobe programs. Scout is a tool that logs customer apparel preferences to provide recommendations. "Amazon isn’t sending regularly scheduled boxes of clothes to customers’ homes just yet, but the Scout launch indicates that [Amazon] is honing in on the style recommendation market," according to the September Hali note.
Prime Wardrobe, meanwhile, allows customers to order three items or more with no upfront charge, and take a week to decide and pay for those they'd like to keep. That service was expanded in June to all U.S. Prime members after being previously invitation-only.