Stitch Fix Management Talks Advertising, Tariffs, and More

Personalized online-apparel company Stitch Fix (NASDAQ: SFIX) impressed investors last week with strong fiscal third-quarter results. Revenue surged 29% year over year, to $408.9 million, soaring past analysts' average forecast for revenue of $394.9 million. Earnings per share of $0.07 were also ahead of a consensus estimate for a loss of $0.03.

As investors digest the quarter's outstanding performance, here's a closer look at some behind-the-scenes developments including advertising, catalysts for revenue per active client, and how management is preparing for potential headwinds from a tariff war. All three of these insights come from Stitch Fix's fiscal third-quarter earnings call.

Stitch Fix bets on brand marketing

Management has been very strategic with its advertising. During the holidays, for instance, Stitch Fix opts to lower ad spend as a percentage of revenue because consumers focus on buying gifts for the holidays. But during the second half of the company's fiscal 2019, Stitch Fix is pushing the accelerator.

Ad spend during fiscal Q3 was $50.4 million, or 12.3% of revenue. This compares to $25.2 million, or 8%, of revenue in the year-ago period. Notably, $16.2 million of this ad spend was related to the company's first-ever brand campaign. Unlike its performance-based ad spend, its brand campaign is more of a long-term investment, management explained during Stitch Fix's earnings call. According to Stitch Fix CEO Katrina Lake:

2 catalysts for revenue per client

Impressively, Stitch Fix saw an acceleration in the growth rate of its revenue per active client. This metric was 8% in fiscal Q3, up from 6.1% in fiscal Q2. During the company's earnings call, Stitch Fix CFO Paul Yee explained that this strong performance is driven by two primary factors:

Personalization improved thanks to investments in inventory, as well as the success of the company's algorithmic Style Shuffle feature, which helps customers discover items they love by liking and disliking items in an app.

Stitch Fix is prepared for tariffs

Asked whether Stitch Fix factored the impact of tariffs amid the U.S.-China trade war into its guidance, Yee responded affirmatively: "I think the first thing to note on tariffs is all of the tariffs enacted to date have had a very minimal impact to our business. So our guidance does reflect any impact of tariffs in place today."

In addition, Yee said Stitch Fix is prepared to respond to a potentially worsened tariff situation in which the remaining imports from China become subject to tariffs. First, Stitch Fix's strong relationships with suppliers can help mitigate some costs, Yee said. Second, the company is already in the process of diversifying some production away from China. Third, management believes Stitch Fix's "rich data set" on its clients' behaviors can help the company test price sensitivity and consider passing on extra costs to customers through price increases.

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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.