Stitch Fix (SFIX) counts on order backlogs to drive Q4 revenue growth

The impact of coronavirus was so severe on Stitch Fix (NASDAQ: SFIX) as it was on the larger retail industry and the company’s stock sank to an all-time low in early March. Underscoring the management’s positive outlook for the final months of the fiscal year, the stock made a quick recovery and is currently hovering near the pre-crisis levels.

But the recovery lost steam after the unimpressive performance in the third quarter when the specialty apparel retailer slipped to a loss, hurt by muted demand and order delays due to the large-scale disruption. It is estimated that the resultant order backlogs would boost sales in the fourth quarter. Also, there are signs of supply chain constraints easing and warehouse capacity returning to normal.

Backlog

In an emailed statement, the company told AlphaStreet that it is on track to clear the backlog by the end of June, supported by the rapidly improving warehouse capacity.

“We entered Q4 with a more balanced inventory portfolio that was aligned with our top-line expectations and client preferences. In addition, deep discounting to drive sales is not a sustainable long term strategy, but our value proposition of finding the right thing for you is a sustaining strategy,” said the statement.

COVID Impact

It is natural for customers to be cautious about their discretionary spending during catastrophes like the pandemic, and clothing and apparels are usually the last priority in the shopping list. A crisis of such a scale can even cripple the digital selling capabilities of retailers like Stitch Fix. While the stakeholders are optimistic about a near-term rebound, last week’s mass layoff is indicative of the underlying pressure.

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Commenting on the rightsizing, chief executive officer Katrina Lake said, “We made a very, very difficult decision to part ways with almost 1500 stylists here in California, and yes, the intent is to move to effectively move those up lower-cost markets. So we’re offering relocation for stylists who want to take us up on that we recognize as a part-time job that not everybody will be able to do that, but stylists are still an incredibly important part of our model.”

Tech Prowess

Stitch Fix’s full-fledged digital platform gives it an edge over others who follow the brick-and-mortar model. Also, the company continues to invest in innovations such as the direct-buy facility and automation, in view of the rapid adoption of e-commerce. In the changed market scenario, a key factor that can add to customer experience is the personalization facility.

Underscoring the bullish outlook for the fourth quarter, Stitch Fix executives claim to have registered positive comparable store sales in the initial weeks of the quarter, even as the authorities lift the virus-induced shutdown.

Cautious Outlook

Yet, for the business to return to the pre-crisis levels, the supply chain constraints should end and distribution channels should fully open. On the other hand, margins might come under pressure from a possible spike in marketing expenses when the market opens, after a period of low spending. Going forward, most of the promotional activity will be centered around the next phase of the launch of the much-hyped direct-buy service.

It is not sure to what extent the use of influencers for marketing – the company recently launched a new tie-up with Katie Sturino – would help in attracting new customers. Meanwhile, pushing the excess inventory and making it available to customers can be a challenging task. In a broader perspective, the large-scale capacity reduction across the industry during the shutdown might ease the inventory issue.

“It has obviously been an incredibly challenging time for most players in the broader apparel industry. In a matter of weeks, we saw a rapid and dramatic change in consumer behavior with people spending more time than ever at home, limiting their immediate needs for workwear and the latest trend and having very limited access to apparel and stores.”

Katrina Lake, chief executive officer of Stitch Fix

Sharing its views on Katie Sturino, Stitch Fix told AlphaStreet that the partnership would be another step towards unlocking personal styling for everyone, complementing the continuing portfolio expansion and the recently introduced offerings in curated styling such as Trending For You.

Reports Loss

In the third quarter, Stitch Fix slipped to a loss of $0.33 per share, hurt by a marked increase in expenses and a 9% decline in revenues to about $382 million. While the number of clients moved up year-over-year, there was a sequential decline. The results also missed the Street view.

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Investors might find the company’s stock attractive due to the positive price target and modest valuation, while analysts are divided in their recommendations. After recovering from the pandemic-driven slump, the shares this week traded close to the levels seen at the beginning of the year. In the past twelve months, they lost about 22%.