Troubles mount for Stitch Fix as Q1 revels tough terrain in apparel retail sector, mirroring industry-wide chaos.
Chill Mode: Stitch Fix's Rocky Ride to Freestyle
Elizabeth Spaulding, Stitch Fix's CEO, spilled the beans about the challenges they've been facing during a recent call, revealing the unexpected obstacles in their shift towards Freestyle direct e-commerce.
In the quarter ending October 30, the revenue jumped 19% year-over-year, reaching $581.2 million, as per the company report.
However, the company dipped into the red, reporting a net loss of $1.8 million compared to $9.5 million net income last year, and a $0.18 million loss in 2019. Foreseeing a bumpy road ahead, Stitch Fix has downgraded its near-term growth projections for the current quarter and the rest of the fiscal year.
Spaulding also announced that the Chief Product Officer is leaving, and a replacement is on the hunt. Sharon Chiarella, the Amazon's former Vice President of Community Shopping, joined the team just in March.
The Stitch Fix Tangle
Stitch Fix's shift from their subscription-based "Fix" service, which uses algorithms and human stylists to curate boxes based on customer data, to more traditional retail poses a new set of problems.
While the subscription service has shown its limitations, Freestyle appears to be eating into the Fix business as many new Freestyle users are buying directly from the site instead of subscribing to the styling service, and fewer Fix clients converted to Q1 Freestyle than expected.
Despite promising potential, Freestyle could become increasingly cannibalistic, according to Wells Fargo analysts. Stitch Fix's Q1 revenue and margins exceeded Wall Street expectations, but the struggles overshadowed the positive results. Investors reacted immediately, sending the share price to new lows the following morning.*
Regardless of the broader clothing market's demand, growth in Stitch Fix's active client base has sluggish in 2021 and is expected to decline during the second quarter.
Catch 22: Freestyle or Fix
Wedbush analysts Tom Nikic and Ezra Weener shared their thoughts on the situation, saying, "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..." They also pointed out that it would take several quarters to lessen the friction deterring new customers.
Spaulding acknowledged that the company still has a lot to learn when it comes to Freestyle, promising new systems, workflows, and optimizations to create a satisfying customer experience.*
However, analysts expressed disappointment with the company’s slow pace of learning. They also questioned the departure of Chief Product Officer Sharon Chiarella, expressing concerns about the product strategy and direction.
Like many apparel retailers, Stitch Fix is grappling with supply chain woes that are causing disruptions in their inventory. But solving these issues might not be enough to resolve all of Stitch Fix's problems, according to Wells Fargo analysts. In fact, traditional brick-and-mortar stores hold an advantage that Stitch Fix lacks: physical stores.
This scenario leaves us wondering: "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?" According to Wells Fargo, there is a significant uncertainty about Stitch Fix’s recovery prospects post-COVID.
- The shift from Stitch Fix's subscription-based service to Freestyle direct e-commerce, while holding promising potential, is proving to be challenging, with Freestyle potentially becoming increasingly cannibalistic, as suggested by Wells Fargo analysts.
- In the learning phase, Freestyle demands a substantial multi-year tech overhaul to support its operations and algorithms, as noted by analysts Tom Nikic and Ezra Weener.
- Despite the challenges, Stitch Fix's CEO, Elizabeth Spaulding, remains optimistic, promising new systems, workflows, and optimizations to create a satisfying customer experience, although analysts have expressed their disappointment with the company’s slow pace of learning.
