Stitch Fix Inflates Net Income 602% With Accounting Change, Quarter Worse Than Advertised
Fashion firm’s results were actually worse than the 23.9% plunge in the stock price suggests.
December 8, 2021
With user growth slowing, shares of Stitch Fix (SFIX), a styling and apparel company, plunged nearly 24% after the company slashed full year guidance. The company’s profitability was actually worse than the headline numbers let on. Though StitchFix failed to mention it in its news release or earnings call, the company changed a key accounting policy that allowed it to report a higher net income than it otherwise might.
In its latest 10-Q (Q4 FY21), StitchFix revealed it implemented a new inventory management process and system during the quarter. In doing so, the company changed its inventory costing method from last-in-first-out (LIFO) to first-in-first-out (FIFO) method.
Changing to FIFO— especially during a period of rising costs— can increase a company’s profitability since older inventory acquired at a lower cost is used to value cost-of-goods-sold (COGS) on the income statement. In its latest filing, Stitch Fix suggested the change did not have much of an impact on its financial results:
“This change in accounting principle did not have a material effect on inventory, net or cost of goods sold for all periods presented; therefore, prior comparative financial statements have not been restated.”
Our analysis indicates the change did have a significant impact on the company’s financial results— reducing COGS and inflating profitability. Over the past six years, StitchFix’s COGS as a percentage of revenue has remained remarkably consistent:
In the latest quarter, StitchFix’s COGS as a percentage of revenue dropped approximately 216 basis points from the prior year quarter:
-In the 3 months ending 10/30/2020: 55.2%
-In the 3 months ending 10/30/2021: 53.04%
The accounting change added approximately $12.5 million to StitchFix’s gross margin, or 4.58%. It also lifted the company’s net income (loss)— after adjusting for taxes— by approximately $11 million, or 602% as the company reported a $1.8 million net loss.
The timing of the change is no coincidence. StitchFix’s inventory costs include merchandise costs and expenses for inbound freight and shipping to and from customers. The accounting shift coincides with significant spikes in apparel and freight costs.
The change was not disclosed until after the market closed following the 23.9% plunge in StitchFix’s share price. If the decline did not take into account StitchFix’s accounting change, expect more downside when StitchFix runs out of older inventory and newer, more expensive inventory, pressures margins.
Related: POSH, RENT, M, KSS, CPRI, VFC, LULU
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