Stitch Fix Experiences Deficit as Stockpiles Increase in Inventory
Stitch Fix, the popular online personal styling service, is grappling with a slowdown in revenue growth as it navigates a shrinking active client base and rising customer acquisition costs.
In a move to adapt to the changing retail landscape, Stitch Fix is testing a new service model in the UK, rolling out a "multi-inventory" model that includes vendor-managed inventory and drop shipping. This shift comes as the company boosted its inventory of comfortable clothes and activewear to meet the demand during the pandemic.
Despite these efforts, Stitch Fix reported a net loss of $21 million for the second quarter, a stark contrast to net income of $11.4 million in the same quarter last year. The company's adjusted EBITDA loss for the second quarter was $8.9 million.
The decline in active clients, which has been a steady trend, saw a 10.6% year-over-year drop. This decrease in active customers has counterbalanced gains made through higher average order values and improved revenue per active client, leading to constrained top-line growth.
Stitch Fix's gross margin declined 190 basis points to 42.9% in the second quarter, and inventory piled up as a result, with a 24% rise year over year.
The company's reliance on paid social media advertising has been impacted by platform algorithm changes and privacy regulations like Apple’s iOS 14 updates, causing soaring acquisition costs and retention issues. There is also a growing dependence on higher-margin one-time purchases rather than recurring subscriptions, which undermines sustainable revenue growth.
However, Stitch Fix's new CEO has implemented cost-cutting, brand refresh, and AI-driven personalization, improving average order value for seven consecutive quarters and increasing revenue per active client by about 3% year-over-year.
Despite these improvements, the company's turnaround efforts focus on balancing operational efficiency, enhancing customer experience, and leveraging AI to improve retention. However, net revenue growth depends critically on arresting the decline in active clients or significantly expanding market reach going forward.
Stitch Fix has resisted including brick-and-mortar in its sales model, but it is testing a program in the U.S. where customers can preview their scheduled boxes and reject items before they arrive. Interestingly, Nordstrom, like Stitch Fix, is also using a "multi-inventory" model.
In the midst of these challenges, Stitch Fix saw a record number of "first Fixes," a reflection of its rise in active clients. However, consumers' tendency to shop for others rather than themselves undermined any potential boost Stitch Fix may have seen from e-commerce during the holidays. As the pandemic gets further under control and people venture out, Stitch Fix could relinquish some of the advantages it has as a pure-play digital retailer.
[1] [2] [3] [4] [5] Source: Stitch Fix Q2 2021 Earnings Report and various news articles.
- To combat the slower revenue growth and shrinking active client base, Stitch Fix is experimenting with a new service model in the UK, featuring vendor-managed inventory and drop shipping, as the company seeks to adapt to the evolving retail industry during the pandemic.
- In an attempt to improve its financial performance, Stitch Fix's new CEO has implemented cost-cutting measures, brand refreshing, and AI-driven personalization, resulting in a 3% increase in revenue per active client over the past year.
- As Stitch Fix grapples with declining active clients and rising acquisition costs, the company's reliance on paid social media advertising has been affected by platform algorithm changes and privacy regulations like Apple’s iOS 14 updates, leading to increased advertising expenses and retention issues.
- Stitch Fix's efforts to balance operational efficiency, enhance customer experience, and leverage AI to improve retention are crucial for its turnaround, but net revenue growth ultimately hinges on either stemming the decline in active clients or significantly expanding market reach in the future.
- While Stitch Fix has been successful in attracting new customers, consumer behavior during the holidays proved to be a challenge for the company, as there was a tendency for people to shop for others rather than themselves, potentially curbing Stitch Fix's e-commerce growth during this period.
