Stitch Fix shares crater more than 35% as sales miss and outlook disappoints

Key Points
  • Stitch Fix reported second-quarter sales for fiscal 2020 that missed analysts' estimates.
  • It issued a disappointing outlook for the full year.
  • The company has been hit by a more promotional environment in the U.S.
Katrina Lake, CEO of Stitch Fix
Adam Jeffery | CNBC

Stitch Fix shares tumbled Monday as investors fled the personal styling service, which issued a bleak outlook and reported quarterly sales that missed analysts' expectations, calling its current business model for ordering women's, men's and children's apparel on a fixed basis into question.

The San Francisco-based company said it witnessed "heightened promotional activity across retail" during the holidays. And so Stitch Fix's current customers are spending less per order, on average, resulting in lower order values than the company had projected.

The company expressed confidence in the new direct buy feature that it launched last year, which it expects will help ease pressure on margins. This option allows customers to browse and buy individual items, outside of receiving a set "fix" in a box. The company has said these are incremental sales and are not cannibalizing its existing business.

"As we continue to evolve our personalization capabilities, we're confident in our ability to capture additional market share," CEO Katrina Lake said.

Stitch Fix shares were last down about 35% in after-hours trading on the news, after tanking as much as 43%.

Amid a broader market selloff, Stitch Fix shares closed Monday down more than 6%. The stock is down more than 18% over the past 12 months. The company has a market cap of about $2.2 billion.

Here's how Stitch Fix did during the second quarter of fiscal 2020 compared with what analysts were expecting, based on Refinitiv data:

  • Earnings per share: 11 cents vs. 6 cents expected
  • Revenue: $451.8 million vs. $452.5 million expected

Net income during the quarter ended Feb. 1 fell to $11.4 million, or 11 cents per share, from $12 million, or 12 cents a share, a year ago. Analysts had been calling for earnings of 6 cents a share, according to Refinitiv data.

Net revenue increased to $451.8 million from $370.3 million a year ago. That missed expectations for $452.5 million.

The clothing service reported active clients of 3.5 million, up 17% year over year, and slightly better than what analysts were anticipating.

On the heels of its disappointing second-quarter results, Stitch Fix said it now expects net revenue in fiscal 2020 to range between $1.81 billion and $1.84 billion. Analysts had been calling for $1.92 billion, according to Refinitiv data.

The company said that because of a promotional environment in the U.S., it will focus on growing its assortment of lower-priced items "to serve a broader universe of clients." It said this decision is what is hurting its outlook. It attributed some of the heightened promotions of late to a shortened 2019 holiday season, with more companies using steep discounts to move merchandise off shelves.

For its fiscal third quarter, Stitch Fix is calling for net revenue to range between $465 million and $475 million, or growth of between 14% and 16% year over year. Analysts had been calling for $506.2 million, or growth of nearly 24%.

The company, meantime, called the new global coronavirus outbreak a "fluid" situation that it is monitoring. It said it has not seen a material impact on its business to date. But it said it is "reasonable to expect ... some impact."

It also said costs to advertise on "some key digital channels" have escalated.

"We're working on both product innovation as well as experimenting into new and emerging channels to offset this, but we are applying more conservatism in the way we are thinking about our marketing spend in the second half of the year," the company explained in its letter to shareholders.

Stitch Fix said it anticipates "modestly" lessening its marketing spending through the rest of fiscal 2020.

Read the full earnings press release here.

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