4 Must-See Quotes From Stitch Fix's Earnings Call

MarketsMotley Fool

Personalized online apparel business Stitch Fix's (NASDAQ: SFIX) stock has had a tough run recently. Shares are down more than 60% since the middle of September as concerns mount about the company's long-term growth prospects. Management's slowing active client growth, in particular, spooked some investors when the company reported its fiscal first-quarter results earlier this month.

For investors interested in taking a closer look at Stitch Fix after its stock's sharp decline, management provided a helpful window into the company's business during its first-quarter earnings call. Here are some key takeaways from the call.

Continue Reading Below

Stitch Fix's revenue growth drivers

Key to understanding Stitch Fix's business are the company's key growth drivers. "Our net revenue is a function of the number of clients we serve and how well we serve them, which are reflected in our active client count and net revenue per client, respectively," said Stitch Fix CEO Mike Smith during the call. The CEO also noted that these factors ultimately "reflect our strategic decisions and action."

In Stitch Fix's first quarter, active client growth was up 22% year over year. Though this was a deceleration from 25% growth in the company's fourth quarter of fiscal 2018, Stitch Fix has benefited from two quarters in a row of growth in net revenue per client. Net revenue per active client for the 12 months ending Oct. 27 was up 2.3% year over year, management said in Stitch Fix's first-quarter shareholder letter.

Growth in revenue per active client

Going into its fiscal first quarter, management had guided for active revenue per active client to decline. The company said it expected its expansion in Men's, Plus, and Kids, as well as more aggressive price offerings, to weigh on revenue per active client. It was a surprise, therefore, when the metric was actually up meaningfully for the quarter.

Stitch Fix CFO Paul Yee explained the better-than-expected growth for the metric during the company's earnings call.

Understanding Stitch Fix's holiday marketing strategy

Though some investors may be disappointed with Stitch Fix's guidance for active clients to be "relatively flat" sequentially, this is part of a deliberate strategy, according to management. The company intentionally reduces its advertising spending as a percentage of sales as the company's clients focus on buying gifts for others over the holidays.

Yee provided further context on this strategic decision during the earnings call:

A balanced approach to growth

Management encourages investors not to read too much into quarter-to-quarter fluctuations in active-client and revenue-per-active-client growth rates. These metrics are ultimately tools, management explained, for the company to maintain its 20% to 25% year-over-year target revenue growth rate.

In addition, investors shouldn't get their hopes up for revenue growth that exceeds this long-term target range. "We think 20% to 25% growth in terms of a rate is good for our clients, allows us to be able to serve them consistently," Yee explained. Growing at this pace allows Stitch Fix to ensure its inventory lines up with its logistics while continuing to serve clients well and grow active clients.

Find out why Stitch Fix is one of the 10 best stocks to buy now

Motley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. (In fact, the newsletter they run, Motley Fool Stock Advisor, has tripled the market!*)

Tom and David just revealed their ten top stock picks for investors to buy right now. Stitch Fix is on the list -- but there are nine others you may be overlooking.

Click here to get access to the full list!

*Stock Advisor returns as of November 14, 2018

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Stitch Fix. The Motley Fool has a disclosure policy.