Earnings   //   December 6, 2022

Stitch Fix to ramp up cost-cutting amid continued revenue struggles

Stitch Fix is dramatically stepping up its cost-cutting measures as its customer count and net revenue continue to slip.

For several quarters now, Stitch Fix has struggled to grow its client base while grappling with decades-high inflation and economic uncertainty. This time last year, Stitch Fix had close to 4.2 million active clients. That number is now a little over 3.7 million, according to the company’s latest earnings. Stitch Fix reported net revenue of $455.6 million for the first fiscal quarter of 2023, a decrease of 22% year over year.

Speaking on an earnings call on Tuesday, Stitch Fix CEO Elizabeth Spaulding announced that the company would increase its cost reduction targets for the 2023 fiscal year to $135 million, from the $40 million to $60 million mentioned two quarters ago. To help meet this goal, Stitch Fix will reduce marketing spend in the last half of the year, Spaulding explained. “We recognize we need to operate the business more efficiently and focus on areas most critical to move us forward in the current environment,” she said.

In June, Stitch Fix laid off 330 employees, or 15% of its salaried workforce, amid slowing e-commerce growth. Stitch Fix says it expects net revenue for the 2023 fiscal year to be between $1.6 billion and $1.7 billion, down from $2.1 billion in net revenue for both its 2021 and 2022 financial years.

Stitch Fix’s approach to apparel is personalized and based on customer-supplied data. It offers items from more than a thousand brands, including Nike, Under Armour and UGG. When joining Stitch Fix, customers take a style quiz, which the company says helps give stylists an idea of that person’s taste and desired price point, among other factors. A stylist will then pick out five items and mail them to the customer to try on. The customer pays for what they want to keep.

A few factors are likely behind the earnings drop, experts said. Stitch Fix doesn’t describe itself as a subscription service, because customers can order standalone boxes whenever they’d like. But, “my guess is that in the minds of a lot of their customers, it is a subscription service,” Tom Nikic, SVP of equity research at Wedbush Securities, told Modern Retail.

Right now, clothing rental subscription services are facing roadblocks as customers reassess where they are putting their dollars. “If people are feeling pressured by inflation and need to find places to tighten up their budgets, something subscription… is probably an easy thing for people to cut,” he said.

In addition, right now, people are shopping “for what they need at the moment,” Jessica Ramirez, senior research analyst for Jane Hali & Associates, told Modern Retail.  Inventory at apparel companies is “strong,” she said. “So there really isn’t necessarily a reason why the customers would want that element of surprise” that comes from a Stitch Fix box.

Towards the end of 2021, Stitch Fix switched up its business model and launched the e-commerce service Stitch Fix Freestyle. This allowed customers to purchase individual items also based on their style preferences, without needing to order a box from a Stitch Fix stylist. Stitch Fix reportedly tweaked Freestyle earlier this year and now requires potential customers to sign up for Stitch Fix and a personalized box in order to shop on Freestyle.

Compared to the core Stitch Fix service, “I think Freestyle is a better product offering,” Nikic said. “It’s got a bigger addressable market.” For Fix, customers can pick whether to purchase none, some or all of the items in their box, but unless they buy all five, “almost every transaction, you’re paying for shipping both ways,” Nikic explained. “Whereas, if Freestyle works, the economics should be favorable, because you’re not paying for as many shipments and you’re not getting stuff returned as often.”

But, as the earnings show, Freestyle has failed to boost sales and customers for Stitch Fix’s business.

Going forward, “reinvigorating the top-line is the biggest challenge, in our view,” for Stitch Fix, David Bellinger, executive director of equity research, consumer growth and e-commerce for MKM Partners, told Modern Retail in an email.

Ultimately, declining revenues and decreased ad spend “could pose a challenge in attracting new customers with Stitch Fix being ‘out-muscled’ by other online operators,” he said.