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Stitch Fix stock sinks on earnings miss, layoff announcement

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Yahoo Finance Live anchors discuss disappointing third-quarter earnings for Stitch Fix and the outlook for the company.

Video Transcript

BRAD SMITH: Shares of online clothing retailer Stitch Fix, gosh, OK, they are lower by about 14% here this morning after reporting earnings last night and announcing that they will lay off 15% of its salaried staff, which is around 330 employees. There were a lot of things to call out within this. CEO Elizabeth Spaulding said that we know we're in a tough macroeconomic time period and want to prepare for future growth and profitability here.

They also noted that the active clients declined 5% year over year, 3% on a sequential basis there, and they ended the quarter at 3.9 million. But just to kind of put that in perspective, those clients declining 200,000 year over year.

BRIAN SOZZI: I'm just clutching this cup because I think it's going to prevent me from really going off the rails on this Stitch Fix quarter because we have been extremely critical of Stitch Fix the past year, as we should have. First, active clients down 5%, when you're having a whole-- when you're having many people, in fact, go back to the office and buy occasion-based apparel. That is a huge, huge red flag. We heard-- we just saw a strong quarter out of Nordstrom, and even Macy's, too, selling wear to work and going out clothing. And here is Stitch Fix really not playing in this recovery at all.

And if I take a step back here, using the terminology of our very own Brian Cheung, I have to wonder-- and I haven't said this before, but I am wondering if Stitch Fix is even around five years from now. And I think it's a big concern. When you're not playing in a consumer recovery, like we're seeing right now, and you're an online business, the market is essentially telling you, you really have no reason to even exist.

JULIE HYMAN: Well, the problem is the company is trying to pivot to a new freestyle model, which analysts seem to be fairly positive on. The problem is, is that they made that pivot perhaps too late. Not enough people are signing up for it. So it's a model where, before, they would send you a box, you would figure out what you would want to keep. Now, using their algorithm, they pull from a number of different brands and figure out what you might like the best. So you have, like, a customized store, if you will, online. But then there's not enough people who are signing up for the thing, so that's the problem.

BRIAN SOZZI: And now on top of this, you have a 15% workforce reduction. And I've been watching the LinkedIn posts from now former Stitch Fix employees on LinkedIn. It's terrible to see this stuff. Now you're going to have a cultural problem at the company. When you have this mass type of layoff at a company that has been struggling, you have to wonder, how do you rally back? And can you rally back?

BRAD SMITH: Well, on the topic of freestyle and where that rally might even begin, to your point, it would have to start with where they're able to give some of their customers more optionality. Freestyle, that actually grew 13% year over year, that revenue line of the business.

JULIE HYMAN: Right.

BRAD SMITH: And then the freestyle revenue specifically from dresses grew more than 75% year over year, five times the rate of growth of dresses and fixes. So you kind of look at the environment that we're in right now and where people are going back into some of those social functions. It might not all be purchasing from Stitch Fix for the office as much as it is for something that I brought up to my chagrin many times over the course of this week, which is the wedding season--

JULIE HYMAN: Weddings.

BRAD SMITH: --and how much people are going--

JULIE HYMAN: Well--

BRAD SMITH: --to these events and purchasing for them specifically.

JULIE HYMAN: But or, or they're not purchasing for those events, but rather renting.