Katrina Lake, CEO of Stitch Fix: “Customer buy-in to our offering is here to stay”

Point correction (NASDAQ: SFIX) shares fell after the company reported its second quarter fiscal 2021 results. While sales and earnings were only slightly below expectations, the biggest problem was the downgrade of the outlook management’s short term, just three months after the company released a bullish outlook for 2021. The rapid change in tone scared off investors who had identified Stitch Fix as a story of accelerated growth.

In the earnings callCEO Katrina Lake and her team said they remain confident in the company’s long-term prospects, but a few surprising developments have combined to push Stitch Fix off the path they envisioned in early December 2020.

Image source: Getty Images.

What went wrong

[R]The result for the quarter was impacted both by the increase in cycle times for fixes […] as well as weaker than expected direct purchase performance during the holiday season.
– Chief Financial Officer Dan Jedda

Sales reached $ 504.1 million, just below the range previously issued by management. The main driver of this error was overwhelmed shipping lines, which took longer to deliver packages (or “fixes”) to customers. The delay pushed some expected revenue out of the quarter.

There were also other nasty surprises. The male segment was weaker than expected as this division takes longer to recover from the COVID-19 crisis. Stitch Fix also noticed a slowdown in direct purchases in December, likely due to a shift towards gifts rather than personal purchases. “We learned more over the holiday season about the seasonality of direct shopping,” Lake said.

The good news

We’re seeing strong new customer acquisition trends, healthy autoship retention levels, and increased customer engagement with direct purchase.
– Jeddah

The good news is that Stitch Fix continues to gain market share and is seeing healthy levels of customer satisfaction and engagement. In fact, the 351,000 new customers added in the first half of fiscal 2021 have already surpassed the full year results for fiscal 2020. The level of growth in first patch shipments in the women category has also peaked in five. years in the second trimester.

Management is equally excited about the broader industry trends that imply booming e-commerce growth to come. Customers should still enthusiastically shop for clothing online after the pandemic is over, and Stitch Fix can capitalize on this preference by utilizing its large customer base, coupled with a vast pipeline of user experience upgrades.

“Customer buy-in to our offering is here to stay,” said Lake, before adding: “[O]Our model of personalized discovery and radical convenience positions us well to capture more than our fair share. “

Look ahead

With these moving parts in mind, we believe it is prudent to adjust our revenue outlook for the year.
— Lake

The short-term outlook is not as bright as management indicated last December. Slower adoption of the direct buy option, longer delivery times, and lower growth in the men’s segment all combined to convince management to cut back on the aggressive predictions previously issued by the company. Sales are now should grow up 18% to 20% in fiscal 2021, down from the previous range of 20% to 25%.

None of this means that Stitch Fix has lost its long-term growth potential, but it does suggest that management lacks a clear picture of how buyers are reacting to different selling conditions. Three months ago, this uncertainty sparked a high share price rally as it seemed that growth was accelerating. Now the surprise has passed into the other way.

The main takeaway for investors should be to expect this type of volatility in a growth stocks, especially one who is pioneering a new sales model. Ideally, the learning of the management team will help them avoid amplifying these fluctuations by significantly changing the short-term outlook.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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