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Stitch Fix (SFIX), a down and out online apparel and styling platform, saw no reprieve from its struggles in 4Q22 as the company posted a much worse-than-expected loss on a 16% yr/yr drop in revenue. The company also issued revenue guidance for 1Q23 and FY23 that was well below expectations, forecasting revenue of $455-$465 mln, and $1.76-$1.86 bln, respectively. The midpoint of SFIX's Q1 guidance indicates that the sales decline will accelerate to -21% next quarter.

A strong earnings report certainly wasn't anticipated due to the recent string of weak results from other apparel retailers, such as American Eagle (AEO), Zumiez (ZUMZ), Gap (GPS), and Abercrombie & Fitch (ANF). However, we were hoping to see some signs of stabilization within SFIX's business, and that didn't come to fruition in a meaningful way.

Like many clothing and accessory retailers, SFIX is feeling the sting of high inflation, both from a demand and cost standpoint. With food, housing, and energy costs accounting for an ever-increasing portion of consumers' overall budgets, some may see discontinuing a SFIX subscription as an easy way to free up money. Unfortunately, SFIX's issues extend beyond these macroeconomic headwinds.

Ever since the company launched its Freestyle service in September of 2021, it has grappled with sluggish conversion rates for new customers on the Fix side of the business. In other words, Freestyle, which allows customers to shop on SFIX's site without a subscription, has cannablized Fix sales, where customers pay to have a stylist arrange personalized outfits. Despite efforts to improve the conversion rate over the past few quarters, it's evident that the company hasn't fully resolved its problems.

• Speaking to SFIX's ongoing conversion troubles, Active Clients decreased by 9% yr/yr, following a decline of 5% in the preceding quarter. This lower active client base is the primary factor behind the company's soft revenue guidance for FY23.
• Gross margin continued to erode, sliding lower by about 260 bps from last quarter to 40.0%. The storyline is a familiar one to those following the retail sector as increased inventory levels and higher liquidations of spring and summer goods weighed on margins. Rising inflation and an increase in transportation costs applied further pressure.
• This combination of lower Active Clients and contracting margins caused adjusted EBITDA to come in worse than SFIX expected at ($31.8) mln. Last quarter, the company guided for adjusted EBITDA of ($30.0)-($25.0) mln.
• As discouraging as the demand outlook is, there is some good news to share regarding cost-cutting and profitability expectations. During the earnings conference call, SFIX noted that it's on track to exceed the high end of the $40-$60 mln in anticipated annual cost savings it projected last quarter. The company also stated that its targeting positive free cash flow and adjusted EBITDA "sometime in FY23" as it right-sizes inventory, evaluates its real estate footprint, and prioritizes investments in product and technology.

Overall, it was another dreadful quarter for SFIX, with few positive highlights. With the stock already down by a staggering 85% yr/yr, though, SFIX's troubles are already baked in. Therefore, investors are looking ahead, and the company's focus on improving profitability and driving positive cash flow in FY23 is taking center stage today.