Stitch Fix on Monday reported that sequential revenue growth slowed in the second quarter and executives lowered their guidance for the year, which spooked investors in late trading and shares remained down more than 26% at press time.
The company had previously said fiscal 2020 revenue growth would reach 20.5% to 22.5%, but now expects that to land closer to 15% to 17% year over year. The apparel site's active client base grew 17% to 3.5 million, but average order values were lower during the quarter, founder-CEO Katrina Lake told analysts, according to a Motley Fool transcript.
Stitch Fix executives cited as challenges in the period a highly promotional holiday season and Brexit-fueled challenges in the U.K. where its business is newer, and said uncertainty around COVID-19, a disease caused by a member of the coronavirus family, could affect performance in coming weeks.
A promotional holiday was a challenge, and Lake told analysts that "clients spent less with us in their Fixes in the quarter on average, resulting in lower order values than we anticipated." But that's not why the company is offering more items at lower prices, according to an email sent to Retail Dive Tuesday by a Stitch Fix spokesperson.
There is "not a connection between the decision to grow our assortment of lower price product and the promotional retail environment," the spokesperson said, pointing out Lake's statement to analysts that the company is seeking to "grow our assortment of lower price products to serve a broader universe of clients [which] also impacts our guidance."
The company is also seeking to grow its business through other means. As she has previously, Lake touted the value of the company's new Shop Your Looks option, which allows customers to buy items based on their previous purchases.
That new program, which during the current quarter was rolled out to all women's and men's customers, is still being refined, she said. But she told analysts that during its beta test from October last year to January, Shop Your Looks clients spent more compared to those without the option. "And we saw in the aggregate, no reduction in the number of Fixes they ordered as they engage with our new shop offering," she said.
Stitch Fix's Q2 performance
|Net revenue||$451.8 million||+22%|
|Cost of goods sold||$249.6 million||+20.5%|
|Operating income||$8.5 million||-45%|
|Net income||$11.4 million||-4.5%|
|Active client base||3.5 million||+17%|
Source: Stitch Fix press release
Still, the new program, along with the lightened revenue guidance and evidence of shrinking margins, could be a sign that Stitch Fix has reached a saturation point, according to an emailed client note from BMO Capital Markets Managing Director Simeon Siegel. "Management flagged reasons for the slowing revenue growth but we worry the deceleration plays into investor fears," he wrote.
The company's elevated inventory levels are also a concern, as it is for other apparel retailers, and suggests that "a disconnect between sales growth and inventory growth [is going] to persist into the back half," he said.