Stitch Fix is losing customers as it competes against itself
With tough macroeconomics complicating its effort to add traditional e-commerce to its box business, Stitch Fix lost 370,000 customers in its fourth quarter, or 9% of its active client base. An active client is anyone who received a box or an item via its Freestyle apparel site in the preceding 52 weeks, and each women’s, men’s or kids account is counted, even if they’re in the same household.
The decline helped push net revenue down 16% year over year to $481.9 million. The e-retailer swung to a $96.3 million net loss in the period, from last year’s $21.5 million net incomeaccording to a company press release.
For the year, net revenue fell 1.4% to $2.1 billion, as net loss widened to $207.1 million from $8.9 million last year.
Last year’s introduction of Freestyle — the opportunity to buy directly from its website without signing up for a curated Fix box — has extended Stitch Fix’s reach into the apparel market, but has also introduced new problems.
The option has led some customers to buy less frequently via the box business, which is positioned as a styling service driven by human and algorithmic curation, for example. And the retailer has resorted to promotions in order to clear inventory, holding another sale over Labor Day, a departure from what had been a largely full-price operation. The company now anticipates holding a sale once each quarter or so, CEO Elizabeth Spaulding told analysts on Tuesday.
“We know the reason people come to Stitch Fix are different than being a promotional retailer. And those are the places we need to most differentiate, which are fit around, product discovery and human relationships,” she said. “That said, we also want to make sure we’re presenting our clients with value and benefits over time.”
The dynamics are further complicated by the consumer environment, which is leading customers to pull back on apparel purchases and seek out deals or lower-priced items, executives said. Still, net revenue per active client rose 8% year over year to $546 in Q4, per the press release.
Freestyle sales rose 21% year over year, executives said on the call. But its base remains small and its margins are lower, UBS analysts noted. The challenge for Stitch Fix is to get past its problem of the a la carte Freestyle business cannibalizing its disruptive box business, and Spaulding said the company is working to better integrate the two in order to bring Freestyle to what she said is its full potential. Style cards with suggestions on ways to wear items from the box are at “entry point” to Freestyle, she said. About 30% of Stitch Fix’s women’s clients are Freestyle customers, which is below its potential, according to Spaulding.
But that’s been the story over the last year, with evidence that Freestyle is hurting the Fix business, William Blair analysts noted in a Wednesday client note.
“This would suggest that a year in, and with more marketing and merchandising initiatives thrown into the Freestyle offering, overall penetration among its existing customer base is flat,” they said. “More broadly, this still feels like a strategy that has yet to prove whether there is a larger core Fix business, or if the company has already reached the profitable limits on that business. We still believe that there could be some meaningful, incremental improvement in conversion and traffic for core customers should the company figure out how to better integrate the Fix and Freestyle businesses.”