Stitch Fix To Replace CEO And Cut 20% Of Workforce

Key Takeaways

• After peaking at roughly $96 per share in January of 2021, Stitch Fix is struggling. The share price has plummeted to around $4.
• Stitch Fix is the most recent publicly traded company to announce layoffs, and it will eliminate 20% of its workforce. This is on top of layoffs from June 2022, where 15% of the salaried workforce was let go.
• As consumers focus on saving money by cutting out subscription services, it will be challenging for the fashion brand to bounce back as they look for a new CEO.

It seems like we can’t go a day without hearing about job cuts as companies pivot to match the lowered demand caused by the current economic climate. Stitch Fix is the most recent company to announce layoffs as the company struggles to adjust to shifts in consumer spending habits.

The subscription-based online personal shopping service has recently been in a downward spiral after being a pandemic success story. It is making some drastic changes to attempt to turn its business around.

We’ll look at the layoffs and changes at Stitch Fix to see how this news could impact investors.

Stitch Fix to Replace Its CEO

Elizabeth Spaulding will be stepping down from her position as the CEO of Stitch Fix. Katrina Lake is back as the CEO after stepping down from the position just 17 months ago.

Lake founded Stitch Fix as a business school student at Harvard in 2011. She was the youngest woman to take a company public at the time, and it was one of the few companies to show a profit upon entering the market.

With a B.A. in Economics from Stanford University and an M.B.A. from Harvard University, Lake will stay in the position of interim CEO for about six months or until a replacement is found. She will also lead the search for the next CEO to take the company into the future.

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In a press release from January 5, 2023, the online personal styling service shared the email from Lake confirming the changes and how affected employees would be supported. The memo also noted that the company would close its Salt Lake City distribution center.

Spaulding was only the CEO of the online personal styling service since August 2021, but there were many issues during her time in this position. As the company’s leader, Spaulding shifted from human stylists to data-based science algorithms.

Many stylists were quick to comment on Glassdoor about the concerns over how the algorithm made basic mistakes and couldn’t replace the human touch that’s needed for fashion. In even worse news, only 39% of the respondents on the site approved of Spaulding as a CEO. With no previous experience in fashion or retail, it’s evident that she wasn’t the right fit for this position.

The news of Spaulding stepping down and the workforce reduction led to the share price going up 9% on January 5. However, this slight increase doesn’t come close to offsetting the troubling fact that the company has seen the share price drop 97% in two years.

Stitch Fix to Cut 20% of Its Workforce

Along with replacing its CEO, the company will be cutting about 20% of its workforce. According to the internal memo sent out to staff, here’s what those impacted can expect:

• At least 12 weeks of severance pay, depending on the employee’s tenure with the company.
• Healthcare support through April 2023 and mental health support until the end of April 2023. These services include self-help tools, counseling, and legal and financial services.
• Career support to help those who have lost their jobs find new roles.

The Second Round of Layoffs

This 20% workforce reduction of salaried employees is on top of the 15% cut in June last year.

When the company released its financial results for the quarter ending on April 30, 2022, it was revealed that the online fashion brand lost 200,000 active clients. The net loss shot up to $78 million, an increase from the loss of $18.8 million the previous year.

Stitch Fix responded by laying off 15% of its salaried employees, which equated to about 330 people.

How Is Stitch Fix Performing Financially?

When the company went public in 2017, it had a market valuation of more than $1.6 billion. The market cap is currently at $444.34 million, with a closing stock price of $4.01 on January 10, 2023.

The Stitch Fix stock peaked in January 2021 at about $96 per share. It is currently down about 79% from one year ago.

On December 6, 2022, Stitch Fix announced its financial results for the first quarter of the fiscal year 2023. Here are some of the notable financial figures:

• Net revenue was down 22% year over year to $455.6 million.
• Active clients dropped to 3,709,000, with 471,000 users opting out of the service last year.
• There was a net loss of $55.9 million.

This news was seen as unfavorable since it provided further evidence that the online shopping brand struggled to adjust to the post-pandemic climate.

Is This a Good Time to Invest in Stitch Fix?

The recent cost-cutting news indicates that the company is taking the necessary steps to turn the business around. However, the theme of macroeconomic tailwinds can’t be ignored if you are considering investing in Stitch Fix.

Here are a few other factors to consider before investing in the company.

Consumers Are Looking to Save Money

It’s not a secret that consumers are shifting their spending habits. However, a study conducted just last year confirmed this. Kearney, a consulting firm, discovered that 40% of consumers felt they had too many subscription services.

With streaming platforms, meal delivery services, and more, people increased their subscription spending during the pandemic. With soaring inflation and fears of a pending recession, consumers are now looking to cut back on their monthly spending.

The Freestyle Product Hasn’t Been Successful

The Fix product is a box of clothing sent to users who then decide what they want to keep and what they want to return. In the fall of 2021, Stitch Fix launched the Freestyle product to reach a broader market.

Instead of offering a subscription service in the form of a box that consumers would receive, the Freestyle service was supposed to let shoppers choose clothing based on style, fit, and budget.

The company then changed the direction of this new revenue stream by limiting it to those who had ordered a Fix. Ultimately, this offering has struggled to gain traction.

Revenue Growth is Needed

While cutting back is essential, it will be worthwhile to see if the company can focus on revenue growth by bringing new customers into the current business model.

With active clients dropping 11% year-over-year, this is a sign that the company needs to focus on investing in attracting new customers to increase its revenue.

How Should You Be Investing?

We’ve seen some dramatic implosions of companies that were running high during the pandemic era coming down to all-time lows. It’s difficult to know if the cutbacks will help them become more profitable or if consumer spending habits have shifted too much.

Knowing how to invest your money right now can be challenging. Fortunately, Q.ai takes the guesswork out of investing. Q.ai uses artificial intelligence to scour the markets for the best investments for varying risk tolerances and economic situations. Then, it bundles them into Investment Kits that make investing simple, strategic and fun.

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Bottom Line

As news of layoffs continues to dominate the headlines, it’s essential to factor in this information when deciding how to invest your money. Stitch Fix was a pandemic darling that is now struggling as consumer spending habits have shifted with fears of a possible recession.

We will continue to monitor and see if the company can bounce back or if we’re at the point where consumers aren’t willing to sign up for additional subscriptions.

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